UK BNPL Sector Braces for £3bn Regulatory Reset
The buy now, pay later industry in the United Kingdom is preparing for a significant transformation as financial regulators implement sweeping new rules that could cost providers and merchants up to £3 billion collectively.
Financial Conduct Authority Implements Stricter Controls
According to projections from the Financial Conduct Authority itself, the regulatory overhaul will deliver a substantial financial blow to the rapidly expanding BNPL sector. The City watchdog is introducing proportionate creditworthiness assessments for every transaction and making service providers subject to Consumer Duty requirements.
The new regulations, which come into effect from July 15, 2026, will make it a criminal offence to enter into new agreements without proper permissions or registration. In a landmark development for the sector, consumers will also gain the right to take cases to the financial ombudsman service.
Projected Financial Impact Across the Industry
Deferred payment credit lenders, including major players like Klarna, Zilch and Clearpay, are projected to lose approximately £1.4 billion. The majority of this impact – around £929 million – is expected to come from lower transaction volumes as the new regulations take effect.
On the merchant side, online retailers across consumer sectors will face an identical £1.4 billion hit to profits. Major platforms including Amazon, ASOS and eBay are anticipated to experience significant reductions in transactions as customers face potential loan rejections or find the newly-regulated process more demanding.
The FCA stated clearly: "We expect our regulation will reduce the number of transactions carried out compared to the baseline scenario. This may lead to reduced consumption than if deferred payment credit had otherwise remained unregulated."
Implementation Challenges and Market Evolution
Damien Burke, head of regulatory practice at Broadstone, highlighted the practical challenges facing the industry: "From an industry perspective, the challenge will be implementation. Lenders will need to adapt systems, data and underwriting processes quickly, while maintaining the frictionless customer journeys that have driven BNPL's popularity."
The remaining portion of lenders' financial impact is expected to come from £243 million in lost late fees – with the FCA projecting a fall in missed payments due to enhanced checks – and approximately £204 million in compliance costs.
Industry Response and Regulatory Background
Many UK fintech firms have actively called for greater industry regulation. Zilch has held a consumer credit licence from the watchdog since April 2020 and became the first BNPL firm to report to credit reference agencies in 2023.
A spokesperson for London-based Clearpay commented: "Clearpay has always called for fit-for-purpose regulation that ensures consumer protection, provides much-needed innovation in consumer credit and supports the UK's thriving FinTech sector."
Klarna, which has lobbied for greater regulation on the BNPL sector, obtained an FCA electronic money institution licence last year as it diversified beyond traditional BNPL offerings. The Swedish fintech has set its sights on becoming a digital bank, though it has faced substantial costs in pursuing this ambition.
A Klarna spokesperson stated: "We're finally in the home straight on BNPL regulation. These new rules will raise standards across the market, give consumers clearer protections like Section 75 and make BNPL even more appealing to consumers."
Protecting Consumers While Supporting Innovation
The FCA emphasised that its new rules represent a proportionate approach designed to ensure BNPL remains accessible while promoting sustainable lending practices.
Sarah Pritchard, deputy chief executive at the FCA, explained: "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. But crucially, no-one should be lent to if they're unable to repay because that could worsen their financial situation."
Pritchard added: "Now Parliament has given us the powers, we're putting in place proportionate protections for the 11 million people who use it."
The regulatory changes come after former City minister Emma Reynolds described the previous situation as operating "like a wild west – leaving customers exposed." The BNPL market has expanded dramatically in recent years, reaching £13 billion in the last year after standing at just £60 million in 2017, now representing approximately 10 percent of all UK e-commerce.
