New FCA rules will bring BNPL under regulation from July 2026, forcing providers to balance frictionless checkouts with mandatory affordability checks
Since their introduction following the second Payment Services Directive (PSD2), buy now pay later (BNPL) products have operated outside traditional lending regulations.
The directive, which came into force in 2018, focused on payment services rather than credit provision, creating a regulatory gap that allowed BNPL providers to offer interest-free credit without the affordability assessments or formal consumer protections required for other forms of lending.
Capitalising on this gap, leading providers like Klarna and Clearpay have helped propel the market from £60m ($75m) in 2017 to over £13bn in 2024, with 11 million UK adults now using the service according to the FCA’s 2024 Financial Lives Survey.
Now, the Financial Conduct Authority (FCA) has announced BNPL providers will need to obtain authorisation and conduct affordability checks on consumers from 15 July 2026 – bringing the sector in line with other forms of consumer credit for the first time.
“Applying the Consumer Duty to BNPL should materially improve outcomes for consumers, particularly through clearer disclosures and proportionate affordability checks,” says Damien Burke, Head of Regulatory Practice at Broadstone.
“For a product that is often positioned as a budgeting tool rather than credit, this regulatory reset is important in ensuring borrowers fully understand both the risks and the repayment obligations involved.”
Under the regulation, lenders must conduct proportionate affordability assessments before offering BNPL credit and provide upfront details on payment schedules, amounts and consequences of missed payments.
The sector will also fall under the Consumer Duty framework. Lenders will be responsible for providing consumer support, including signposting to free debt advice, and offering access to the Financial Ombudsman Service for complaints.
Implementation challenge for providers
The challenge for providers will be maintaining the frictionless checkout experience that has driven BNPL’s popularity while implementing robust credit checks.
Traditional affordability assessments can slow approval processes, potentially disrupting the seamless customer journeys that have differentiated BNPL from conventional credit. Assessing creditworthiness at speed will therefore become crucial for BNPL firms.
“Innovations in predictive analytics and AI can enable real-time analysis of transaction data to support smarter decisions and approvals, without leading to increased defaults or extra friction at checkout,” says Kristaps Zips, UK CEO at payabl.
“It is vital that those operating in the BNPL space, particularly fast-growing fintechs, take the time to make sure they are fully prepared for these changes,” he adds. “Getting this right will ensure BNPL continues to develop as a safe, sustainable part of the payments and credit ecosystem.”
The challenges extend beyond providers to consumers themselves, who may find themselves unable to access what was once check-free credit.
As Alastair Douglas, TotallyMoney CEO, puts it: “The problem the government and regulator face next is what fills the BNPL gap once lending is tightened up.
“If people who’ve relied on it for so long suddenly find themselves locked out, they’ll start to look for credit elsewhere – which could push the vulnerable into the arms of unregulated and illegal lenders.”
Industry views FCA regulation as inevitable
Notwithstanding the operational challenges new regulation brings, the FCA’s new proposal, for many, represents an inevitable step in the credit line’s maturity.
As far as the FCA is concerned, its action is designed to ensure the BNPL sector thrives in a safe environment moving forward.
“[The BNPL sector] provides an important source of credit to many – and we will continue to support firms who want to develop innovative new products,” said Sarah Pritchard, Deputy Chief Executive at the FCA.
“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.”
Industry leader Klarna sees the new regulation as an indication of growth, and a shift that will raise standards across the BNPL space.
A company spokesperson says: “We’re finally in the home straight on BNPL regulation — great news for customers and great news for the industry.
“Klarna already offers regulated credit products, so we are used to operating to high regulatory standards, and we’ve applied that same approach to our BNPL products. These new rules will raise standards across the market, give consumers clearer protections like Section 75, and make BNPL even more appealing to consumers.”
