Buy Now Pay Later (BNPL) customers will gain new regulatory protections from July after the Financial Conduct Authority (FCA) confirmed the sector will move under its formal oversight.
The changes follow the Government’s decision to regulate the sector and will bring BNPL products under the FCA’s Consumer Duty framework.
Under the new rules, lenders will be required to carry out proportionate affordability checks before offering credit to customers.
Consumers will also receive clearer upfront information about agreements, including payment schedules and the consequences of missed instalments.
Customers experiencing financial difficulty will be entitled to support from lenders, who will also be required to direct borrowers to free debt advice where appropriate.
For the first time, Buy Now Pay Later users will be able to escalate complaints to the Financial Ombudsman Service if disputes cannot be resolved directly with lenders.
The FCA said the rules are expected to protect around 11 million people who currently use Buy Now Pay Later products across the UK.
The regulatory changes come as use of the payment method has expanded rapidly across the country.
Data from UK Finance shows the proportion of adults using Buy Now Pay Later increased from 14 per cent to 25 per cent in 12 months.
Affordability checks and dispute protections for Buy Now Pay Later users introduced
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The payment method is now widely available across online retail checkouts and increasingly in physical stores, allowing customers to spread payments across several instalments that are typically interest free.
However, concerns have grown about unaffordable borrowing as usage has increased.
Figures shared with ITV News showed more than £33million of Buy Now Pay Later debt was written off during the past year, representing a 73 per cent increase compared with the previous 12 months.
There’s previously been no formal regulatory protections for consumers who repeatedly use Buy Now Pay Later and struggle to repay.
Sarah Pritchard, deputy chief executive at the FCA, said: “We want the Buy Now Pay Later sector to thrive – it provides an important source of credit to many and we will continue to support firms who want to develop innovative new products.
There’s previously been no formal regulatory protections for consumers who repeatedly use Buy Now Pay Later and struggle to repay
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“But crucially, no one should be lent to if they’re unable to repay because that could worsen their financial situation.
“Now parliament has given us the powers, we’re putting in place proportionate protections for the 11 million people who use it.”
Firms offering BNPL products will need to secure FCA authorisation in order to continue operating in the UK market.
The regulator said it will provide pre-application support to help firms prepare for the new requirements.
The FCA said repeat users who cannot afford repayments currently have limited formal protection under existing arrangements.
Damien Burke, head of regulatory practice at Broadstone, said: “The Buy Now Pay Later market has expanded substantially and is now a core part of the UK consumer credit market, particularly for younger borrowers.
“Many of whom have found access to short term credit like overdrafts more expensive or harder to access since the High-Cost of Credit Review.
“FCA consumer protections were an inevitable next step for a market that has had minimal formal regulation or oversight.”
Mr Burke said applying the Consumer Duty framework is expected to improve outcomes through clearer disclosures and proportionate affordability checks.
He described the regulatory changes as a “regulatory reset” aimed at ensuring borrowers understand risks and repayment obligations for a product often marketed as a budgeting tool rather than credit.
Lenders will face implementation challenges as they adapt systems and underwriting processes while attempting to maintain the streamlined customer experience that helped drive the growth of Buy Now Pay Later services.
Debt advice charities have reported an increase in consumers seeking help with Buy Now Pay Later repayments.
Klarna is one of the biggest BNPL providers in Britain
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Research from Money Wellness found 60 per cent of customers seeking help with Buy Now Pay Later debts are classed as vulnerable.
More than half of those customers were also behind on essential household bills including council tax, gas, electricity or water payments.
Some campaigners have argued the incoming rules do not go far enough to limit borrowing risks.
Mick McAteer, from the Financial Inclusion Centre, told ITV News the regulation “won’t address the issue of making it too easy to borrow and too easy to spend.”
He said the rules would not prevent Buy Now Pay Later firms from targeting consumers through retailers and social media platforms.
A Treasury spokesperson said advertisements must already make clear that Buy Now Pay Later products represent a form of credit.