Spreading the cost – changes to Buy-Now-Pay-Later regulation

Many years after the then Conservative Government announced its commitment to changing how buy-now-pay-later (BNPL) finance, otherwise known as deferred payment credit, is regulated under financial services laws, the current Government has finally put legislation before Parliament to bring the changes into force. Once the new law take effect, fewer businesses will be able to rely on a popular exemption.

In this article, originally written for Compliance Monitor, Emma Radmore and Stephen Wilson build on our previous article and look at what the changes mean, who they will affect, and what happens next.

The current position

The current Article 60(F)(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO), was carried across from the Consumer Credit Act 1974 (CCA) regulatory regime when consumer credit activities were brought within the RAO. The exemption means that the providers of interest free credit provided under a borrower-lender-supplier agreement fall outside the scope of financial regulation provided the sums lent are paid back within 12 months and in 12 or fewer instalments.

The exemption was originally intended merely to ensure that low-risk credit agreements would fall outside the scope of regulation, particularly those arrangements offered by smaller businesses whose main business is not the provision of financial services. So, for example, a gym offering 12 equal interest free instalments to pay an annual membership fee, or a furniture retailer offering a similar option over the purchase of a new sofa. But increasingly the exemption has also been used in situations where the lender is a third party, whose main business may in fact be lending, and it is increasingly used in online sales. For the purposes of the exemption, it has not so far mattered whether the lender and the supplier are different people, or the same person.

The problems

For many consumers, BNPL is a useful product, allowing them to split payments for a new purchase into a number of regular payments at no extra costs – literally just giving them time to pay and manage those payments. But, as a consequence of the activities being unregulated, not only do the providers not require authorisation or to meet any conduct standards set by the Financial Conduct Authority (FCA), but also the providers and sellers do not have to comply with any of the requirements that remain in the CCA. And if there's a problem, borrowers do not have the right to complain to the Financial Ombudsman Service or any rights under s75 CCA.

The lack of any requirements around provision of information or to assess whether the customer can afford the purchase led to concerns that some sections of the public were not understanding the product, which could create a risk of indebtedness. And customers who use BNPL often have characteristics of vulnerability.

The desire for change resulted in s37 of the Financial Services Act 2021, and consultations in both late 2021 and early 2023, but the outgoing Government did not get round to tabling the legislation. So the current Government had to take up the cudgels again, with a consultation with draft legislation in October 2024 and now the response with the final form legislation.

The new laws

Announcing the changes, HM Treasury claimed the new rules would end the BNPL "wild-west" and would protect millions of shoppers from unaffordable borrowing and helping families keep more of their money.

While these claims are somewhat dramatic, both given the numbers of BNPL arrangements that have run their course without issue and, as we will see, the number of arrangements that will still be exempt, those affected by the changes will face new and significant regulatory burdens, and their customers will get significantly better protection.

The main change

The biggest change is that what the RAO will call "deferred payment credit" agreements (DPC agreements) offered by a third-party lender will no longer fall within Article 60(F)(2) and as a consequence the lenders will need to become authorised under FSMA in order to offer the credit.

Many consumers probably do not even notice when they sign up to their 12 months interest free credit for their new fridge whether the name on the agreement is the name of the shop they have bought the fridge from or the name of another company entirely. But now there will be that key difference, in that unless the credit is offered and provided by the genuine supplier of the goods, the agreement will be a regulated DPC agreement and subject to disclosure requirements and the need to check affordability. We say the "genuine supplier" – the Government is clear that simply transferring ownership of the fridge to a third party lender will not mean the arrangement stays exempt. But what this also means is that if a group of companies whose business is not lending or financial services makes its BNPL loans through one group company only, then those arrangements will no longer be exempt and either the group entity that offers the credit will need to seek authorisation, or the group will need to restructure the arrangements if it wishes them to stay exempt.

There will be a few exceptions, which will mean that, for instance, DPCs facilitated by employers (like season ticket loans) or registered social landlords will stay outside regulation.

What about the retailer?

The changes will also have an effect on retailers who offer DPC through third-party lenders. In principle, these retailers would need to seek authorisation as credit brokers (or potentially become appointed representatives of their lenders). However, the Government thinks this would be disproportionate, and those just broking regulated DPC on their own products will fall outside the Article 36 RAO regulated activity. The Government feels that it can control these activities merely through the financial promotion regime – any promotional documentation the retailer provides will need to have been approved by an authorised person, most likely the lender. Originally, the plan was that those selling the credit on the customers' premises (known as domestic premises suppliers) should not benefit from this exemption, but after industry pressure it has performed a late U-turn, and plans to put in place amending laws so that the exemption will apply also to these brokers from the time the originally finalised changes take effect.

What will consumers see?

As noted above, one of the concerns about DPCs being unregulated was that none of the disclosure requirements applicable to regulated credit agreements would apply, and nor would any affordability tests. However, again, the Government thought it would be disproportionate to apply the full gamut of consumer credit requirements to these types of arrangement. So, in principle, the disclosure requirements that stem from the CCA won't apply, and nor will lenders of regulated DPC need to comply with the full requirements of the FCA's CONC Sourcebook. Instead, the FCA is getting powers to make proportionate rules relating to documentation and conduct. It hasn't yet consulted on this, so we don't know exactly what the customer journey or consumer experience will be, but it will be somewhere in between nothing and fill CCA disclosure.

FCA Rules

The FCA will play a key role in this. Not only will it regulate the providers and their conduct generally, it is being given the power to make bespoke rules governing things like information requirements and affordability assessments. It will also operate a Temporary Permissions Regime (TPR), which HM Treasury will give it power to do. Similar to when mainstream consumer credit transitioned to FCA supervision, any providers of regulated DPC agreements active on the day the new law takes effect will need either to register with the FCA for a "temporary permission" to continue the activities while it goes through a full authorisation process, or stop business. Lenders in the TPR will need to apply for their authorisation within a given timescale and comply with FCA rules while in the temporary permission. If they don't apply in time, or having applied fail to meet FCA's conditions, they will have to stop their regulated DPC business. Any lender new to the market and wanting to start offering products after the date the new activities take effect will not be eligible for temporary permission

When?

The draft legislation needs the approval of both Houses of Parliament. Once it has that and takes effect, the new rules will come into effect 12 months later. This will allow the FCA to consult on, and make, its rules and to arrange for the TPR to come into operation. At the time of writing, the legislation, which was put before Parliament on 19 May 2025, has not yet completed its process. So our best guess is that the changes are likely to take effect in mid-2026, and that is when the TPR will start. In the meantime, we can expect a consultation from the FCA on the detail of its regime hopefully as soon as the final form legislation is made. Affected firms will be well advised to read the consultation carefully, so they can be prepared for the changes they will need to make in a year.

And there's more?

There is one other change to take into account. While the FCA is creating a bespoke regulatory regime for regulated DPC agreements, its thinking and rules are bound to be affected by the wider review and revamp of the CCA including the disclosure requirements for regulated credit agreements, so we may seek a bit of chicken and egg between HM Treasury's further proposals on the CCA reform and the FCA's planning of the regulated DPC agreement rules as the regulators work to make sure the regimes are consistent.