In October 2024, HM Treasury (HMT) published a consultation paper amid perceived concerns related to the “buy now, pay later” (BNPL) sector, including uninformed consumer decisions, affordability checks and levels of indebtedness.
HMT’s response to the 2024 consultation, released on 19 May 2025, marks a significant step in regulating the BNPL market and is intended to deliver additional rights and protections for the more than 10 million consumers using these services. Alongside this response to the consultation, the HMT released its proposed reforms to the 50-year old Consumer Credit Act 1974 (CCA) and a draft statutory instrument to regulate the BNPL market.
Collectively, these reforms represent a significant shift in the oversight of the BNPL market, reflecting a concerted effort by regulators to enhance protections for consumers amid the sector’s rapid growth.
HMT stated a commitment to introduce the BNPL regulation as soon as possible and plans to present the draft statutory instrument to the U.K. Parliament “shortly.”
Once the statutory instrument is made, the Financial Conduct Authority (FCA) will have 12 months to draft and finalise rules for BNPL lending. Regulation is expected to take effect around mid-2026.
What Are the Key Outcomes of the October 2024 Consultation?
Third-party lenders would fall within the scope of the new regulatory regime, as confirmed by HMT.
Namely, the draft statutory instrument introduces amendments to Article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), resulting in the classification of covered lender agreements as “regulated deferred payment credit agreements.”
Therefore, third-party lenders would be required to obtain authorisation as consumer credit lenders from the Financial Conduct Authority to continue offering BNPL products.
The FCA will provide new rules for the requirements that apply to BNPL lending. Creditworthiness assessments for customers using BNPL products will be a primary focus.
HMT plans to proceed with its proposals to disapply the disclosure requirements under the CCA for BNPL products. Instead, the FCA will draft bespoke rules to ensure that BNPL borrowers receive information that is simple, clear, and accessible.
Third-party lenders will also not be subject to the enforcement sanctions under the CCA for BNPL agreements (namely, unenforceability of agreements and disentitlement of interest). Instead, these firms would be required to operate within the FCA’s principles-based regulatory approach, and the recent HMT May 2025 releases highlight that BNPL lenders will have to comply with the FCA’s Consumer Duty, adhere to recently strengthened rules on arrears and forbearance in the Consumer Credit Sourcebook (CONC) and observe the Breathing Space (Debt Respite) Scheme, which allows debtors to get temporary protection from their creditors while they get debt advice and make a payment plan. Consumers will also have recourse to the Financial Ombudsman Service (FOS).
This reform is intended to update the regulatory framework by replacing the long-standing CCA regime with a system that more accurately reflects modern borrowing practices.
The transition to the FCA’s more flexible approach is expected to mitigate the additional compliance burden on third-party lenders and to enhance consumer protections.
Merchants offering BNPL agreements directly to consumers will continue to benefit from the exemption under Article 60F(2) RAO. However, HMT confirmed that it will maintain ongoing oversight of the merchant-provided credit sector and intervene if potential consumer harm or significant change is detected.
HMT also confirmed a number of significant changes to other regulatory controls governing consumer credit in connection with the reforms to the BNPL regime, in particular:
Credit broking: Merchants offering BNPL agreements will be exempt from FCA credit-broking authorisation, except where the activity occurs in a consumer’s home. HMT is considering extending the exemption to activity in a consumer’s home, but the current draft legislation reflects the consultation position.
Financial promotions: Financial promotions of BNPL agreements by unauthorised merchants will now need to be approved by an authorised firm. While this role would usually be fulfilled by the third-party lender, firms within the “temporary permissions regime” (TPR) can only approve their own promotions, not the financial promotions of unauthorised merchants.
HMT reiterated its intention to introduce the new TPR, which will permit unauthorised BNPL providers to continue operating while their applications for full authorisation undergo review. HMT plans to implement TPR legislation as soon as possible, with the FCA to draft and consult on its rules in due course.
What Is the Impact of These Changes?
Third-party BNPL lenders will be significantly impacted as they adapt to the new regulatory system. These companies will incur both initial and ongoing costs related to FCA authorisation, compliance with regulatory requirements, annual fees and levies, as well as expenses arising from FOS complaints and section 75 obligations under the CCA.
An HMT press release highlights that the new FCA rules should include details about BNPL affordability checks. If introduced, upfront affordability checks by third-party BNPL lenders would require a deeper dive into consumers’ finances, requiring an assessment of, at the least, income levels, basic spending and financial commitments. This would be a significant departure from current BNPL practices, and conducting these checks in real time with data-sharing technology would materially increase operational costs for BNPL lenders.
Potentially impacted lenders, if such affordability checks were introduced, would need to invest in upgrading internal systems to ensure that they can adequately conduct affordability checks on consumers.
These firms should also consider establishing working groups to oversee the authorisation process and using external counsel to assist with the process.
Covered lenders will need to monitor the development of forthcoming FCA rules to ensure timely compliance with the evolving regulatory framework.
Merchants offering third-party BNPL agreements will also need to change how they do business, and will need to review and update their marketing arrangements to comply with the revised financial promotions regime, including entering into new approver agreements with authorised firms, which will incur additional costs.
For BNPL users, the new regime is intended to support informed borrowing decisions and to strengthen consumer protections through access to the Financial Ombudsman Service and section 75 CCA refund rights. However, these enhanced protections may result in increased friction in accessing BNPL services as providers adjust to the new regulatory requirements.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
For further information, please contact:
Sebastian J. Barling, Partner, Skadden
sebastian.barling@skadden.com
