The Financial Conduct Authority (FCA) has unveiled details for rules which will bring Buy Now, Pay Later (BNPL) under protections currently in place for other types of loans.

The regulator said that lenders must verify that people can afford to repay BNPL loans and offer assistance if they get into financial difficulty.

BNPL borrowers will also be able to complain to the Financial Ombudsman Service if something during the repayment process goes wrong.

The new regulation will come into effect when BNPL comes under the FCA's remit on 15 July.

According to FCA data, research into unregulated BNPL found that 20 per cent of UK adults (around 10.9 million) had used it at least once in the 12 months to May 2024, up from 17 per cent (8.8 million) in 2022.

Sarah Pritchard, deputy director general of the FCA, said the new regulation aims to help consumers navigate their financial lives while supporting growth.

“We’re mainly relying on existing requirements, including the Consumer Duty, rather than proposing to make lots of new rules, supporting growth and allowing firms to innovate,” she added.

A temporary permission regime will ensure that BNPL firms follow the FCA's rules to continue operating before they are fully licensed.

The temporary permissions regime will be open for firms to register two months before the regime comes into force in July next year.

Firms will then have six months (from the date the regime comes into force) to apply for full authorisation.

The FCA also stated that a consultation is open until 26 September 2025, where BNPL lenders, consumer groups and interested parties can comment to help shape the final rules.

Hyder Jumabhoy, partner at international law firm White & Case LLP and global co-head of its Financial Institutions Industry Group, believes that compliance with these changes will bring an increase in operating costs and further squeeze margins for many BNPL providers.

“This will create pressure on BNPL firms to scale-up their compliance functions, but it could also drive a wave of consolidation in the market, especially among smaller providers,” he explained.

He added that because of this, challenger banks could become particularly active in the space, seeking to improve their consumer lending propositions by acquiring established BNPL platforms.

According to Richard Pinch, senior director of Risk at risk specialist Broadstone, increased consumer protection will place greater emphasis on a fairer treatment of borrowers, posing a challenge to BNPL lenders which will need stronger data capabilities, credit risk assessment and monitoring tools to meet the FCA’s expectations.

The expert added that the need for increased risk and compliance capabilities for BNPL providers is also linked to the extension of consumer protection under Article 75, which makes companies jointly liable with retailers for faulty or undelivered products.

“It is likely that these pressures could trigger consolidation within the market as smaller players are absorbed by those with greater capacity and finances to meet these new demands,” he said.

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