On October 17, 2024, the UK government published a draft regulation[1] consultation for BNPL, as it plans to regulate the BNPL sector. BNPL has become more popular as consumers seek an easy way of lending in recent years. The BNPL market in the UK is projected to grow from £29.85 billion ($38.76 billion) in 2024 to £47.27 billion ($61.39 billion) by 2029 with annual growth rate of 9.8%.[2] Such market growth requires regulatory backup.

The Concept of BNPL

The BNPL lending system allows a BNPL lender to pay a principal supplier on behalf of a consumer for goods purchased. The consumer, however, pays a certain amount as an initial deposit and agrees to pay up the full balance over time. Sometimes, a BNPL lender charges low or no interest, late or no payment fee. This flexible payment model has gained traction among individuals and businesses.

Regulation of BNPL

Loan stacking, disparity in service models, and the high growth of the BNPL sector, among other reasons, have raised concerns about consumer protection and the need to regulate the sector.  The UK, for instance, has declared interest in regulating the sector, although it had encountered delays since 2021 when it first made the declaration.[3]  The government intends to regulate it like other credit companies and bring it under the regulatory spheres of the Financial Conduct Authority (FCA).  This is similar to a recent update in the USA, where the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule on May 22, 2024, that requires BNPL consumers to be treated as credit card providers.[4]

Most unregulated BNPL lenders rely on the exemptions provided in the Regulated Activities Order.  On this note, the government moves to fill the regulatory gap by regulating the exemptions.

Highlights of the UK draft regulation

1. Regulation of exempted activities: Under the UK Financial Services and Market Act (Regulated Activities) Order (Regulated Activities Order), certain credit agreements are exempted form regulation. This kind of agreement termed “regulated deferred payment credit agreement” (RDPCA), will now be regulated under the draft regulation.[5]  However, it must meet the following:[6]

a. It must be a borrower-lender-supplier agreement for a fixed-sum credit;

b. The number of payments is not more than 12 months;

c. The payment is to be made within 12 months or less; and

d. The credit is secured on land, or it is free from interest or other charges.

2. Anti-avoidance measures: BNPL lenders may try to avoid regulation by taking up principal suppliers’ services, thereby having a direct relationship with the consumers against the borrower-lender-supplier relationship. These lenders may purchase from principal suppliers and relinquish such obligations from them.  Consumers may not be aware of such dealing.  The draft regulation will implement an anti-avoidance mechanism to mitigate such evasion.[7]

3. Running account exemption: The government wishes to retain the exemption under Article 60F (3) of the Regulated Activities Order, which describes payments repaid in 3 months or less.  Close monitoring will ensure firms don’t hide under this exemption while reproducing the effect of the exemptions in Article 60F (2) of the Regulated Activities Order provision.

4. Marketing: The draft regulation will amend the Financial Services and Market Act (Financial Promotions) Order 2005 (FSMA) to restrict unauthorized principal suppliers from promoting BNPL services without approval.  Principal suppliers who offer the BNPL payment option must obtain approval from FSMA authorized person to advertise the new agreement.[8]

5. Pre-contractual requirements: The draft regulation excludes the pre-contract information requirements under the Consumer Credit Act for new BNPL agreements.[9]  Alternatively, companies will have to adhere to the FCA rules regarding disclosure of information foragreements.  In addition to other pre-contractual requirements, such disclosed information must be transparent, fair, and not misleading to consumers.

6. Credit broking exclusion: activities carried on in relation to BNPL services will be excluded from credit broking which involves arranging, assisting, or introducing a customer to a lender, unless the person provides such service at the house of the customer.[10]

7. Transition regime and permission: the draft regulation puts in place transitional regime to enable affected companies adjust or amend their business models to accommodate the new regulation. To that effect, companies can apply to be issued a temporary permission if they wish to carry BNPL services under the regime before acquiring full authorization upon enacting the new regulation.[11]  In this way, FCA will closely monitor them.

The draft regulation will have two commencement dates; the initial commencement date for the purpose of enabling the FCA to make rules and other steps concerning BNPL;[12] and the regulatory commencement date for all other purposes in the draft regulation.[13] 

As new regulatory regimes emerge in the buy-now-pay-later sector, businesses must adhere to the new laws.  They can start by reviewing agreements, internal policies, and processes to ensure compliance and mitigate risks associated with non-compliance.  By taking a proactive approach, businesses can position themselves to capitalize on the opportunities presented by BNPL while safeguarding their operations and protecting their customers.

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[1] The Draft Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025 (the draft regulation).

[2] https://www.finder.com/uk/buy-now-pay-later/buy-now-pay-later-statistics

[3] https://www.gov.uk/government/publications/government-announces-intention-to-regulate-buy-now-pay-later

[4] https://www.consumerfinance.gov/rules-policy/notice-opportunities-comment/open-notices/use-of-digital-user-accounts-to-access-buy-now-pay-later-loans/

[5] Article 3 (3) (b) as cited above

[6] Section 60F (2) (a) to (d) of the Regulated Activities Order.

[7] Article 3 (3) (b) of the draft regulation.

[8] Article 5 of the draft regulation.

[9] Article 2 (3) of the draft regulation.

[10] Article 3 (2) as cited above

[11] Article 8 of the draft regulation.

[12] Article 1 (2) as cited above

[13] Article 1(3) as cited above

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