UK Edges Closer to BNPL Regulation as Consultation Kicks Off

The U.K. has launched a long-awaited consultation aimed at regulating the BNPL sector.

The eight-week consultation, which started Tuesday (Feb. 14) and was announced by the HM Treasury, comes two years after the government announced its intention to tighten rules around the use of interest-free buy now, pay later (BNPL) products and bring them into the scope of Financial Conduct Authority (FCA) regulation.

Interested parties and stakeholders have until April 11 to provide feedback on the draft legislation published alongside the consultation, which will require BNPL lenders to be approved by the FCA and carry out affordability checks to evaluate consumers’ ability to take on loans.

The proposed rules follow years of exponential BNPL growth in the U.K., with official data from the FCA showing that the use of the product nearly quadrupled to hit £2.7 billion (about $3.6 billion) in transactions in 2020. And in the years since, unregulated BNPL loans have continued to gain popularity as consumers embrace installment payments to avoid credit card debt.

In fact, in the wake of the ongoing cost-of-living crisis, the product has proved especially popular with public sector workers who are struggling with pay cuts, while offering Brits a lifeline as European consumer sentiment continued on an inflation-driven nosedive last year.

Read PYMNTS’ report: Beating Inflation with BNPL: How Merchants and Consumers are Navigating the Cost of Living Crisis

Against that backdrop, regulators have been on high market alert in a bid to protect consumers and minimize abusive practices.

For example, the FCA issued a warning to BNPL firms against misleading advertisements last August, asking industry players to ensure that “consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions.”

In February 2022, the financial regulator asked four of the country’s biggest BNPL lenders — Clearpay, Klarna, Laybuy and Openpay — to amend potentially unfair and unclear contract terms that could be harmful to consumers.

“This is in line with our strategy to act as an assertive regulator, by being proactive at the boundaries of the FCA perimeter where appropriate and has resulted in good outcomes for consumers in this sector,” the FCA said in a statement at the time.

And as regulation approaches, the FCA again Tuesday renewed its commitment to monitor the market and intervene where necessary, warning unauthorized lenders that they “have a strong incentive to treat customers fairly and prepare their business models ahead of applying for authorization.”

Industry Leaders Chime In

In a statement emailed to PYMNTS, Philip Belamant, CEO and co-founder of U.K. BNPL firm Zilch, said he welcomed the proposals aimed at strengthening regulation around interest-free BNPL credit agreements.

“Today marks a positive day — in the context of the cost-of-living crisis, it’s never been more vital for people to have access to interest-free credit, via responsible [organizations] that carry out appropriate affordability checks and enable others to do the same through reporting via the major UK Credit Reference Agencies,” Belamant said.

In an interview with PYMNTS last year, Jaidev Janardana, CEO at U.K. challenger bank and BNPL lender Zopa, also expressed optimism about the upcoming rules, which he said heralded a new era of BNPL 2.0 centered on regulation and consumer protection.

Beyond embracing the new rules, unregulated BNPL providers like Klarna seem to be jumping the curve to get into regulators and policymakers’ good books ahead of the legislation.

As PYMNTS reported in June, the Swedish BNPL giant announced that it would start providing information to U.K. credit agencies to help consumers build positive credit history, a task U.K. BNPL providers have not been required to undertake in the largely unregulated BNPL space.


For all PYMNTS EMEA coverage, subscribe to the daily EMEA Newsletter.