FCA proposes stricter BNPL rules amid debt concerns

By Vriti Gothi

The UK’s Financial Conduct Authority (FCA) has unveiled a series of new proposals aimed at tightening regulation of the country’s fast-growing Buy Now Pay Later (BNPL) market, as policymakers look to address mounting concerns over consumer debt and affordability.

The proposed rules would see BNPL lenders required to carry out mandatory affordability checks to ensure that borrowers are able to repay loans without falling into financial distress. Lenders would also need to offer tailored support for customers who find themselves struggling with repayments. The FCA’s consultation signals a clear intention to bring the sector closer in line with traditional consumer credit rules, amid fears that easy access to deferred payment services is leading some consumers into unsustainable borrowing.

The UK BNPL market has surged in popularity over recent years, fuelled by changing consumer spending habits and a growing preference for flexible, interest-free payment options at checkout. However, this rapid growth has also raised red flags among regulators and consumer advocacy groups, who argue that the current light-touch regulation leaves consumers exposed to potential harm.

Hyder Jumabhoy, Partner at international law firm White & Case LLP and Global Co-head of its Financial Institutions Industry Group, commented on the likely impact of the FCA’s latest move.

He said, “The FCA’s tightening of regulations around the BNPL sector in the UK will subject lenders to more robust consumer protection and tougher credit check requirements. Alongside the rise in interest rates pushing up the cost of capital to providers, compliance with these changes is likely to increase operating costs and squeeze margins further for many BNPL providers. This will create pressure on BNPL firms to scale up their compliance functions, but it could also drive a wave of consolidation in the market, especially among smaller providers. Challenger banks could be particularly active in this space, seeking to enhance their consumer lending propositions by acquiring BNPL platforms with established merchant networks and user bases.”

For many BNPL providers, the added compliance burden comes at a challenging time. Rising interest rates have already increased the cost of funding for short-term credit products, eroding the margins of BNPL firms that often operate with thin profit lines and rely on scale to generate returns. Tighter rules could further squeeze profitability, forcing providers to rethink their business models or explore strategic partnerships to share costs and expand their customer base.

Industry observers suggest that increased regulatory scrutiny could create new opportunities for larger, well-capitalised fintechs and traditional banks to consolidate market share. Challenger banks, in particular, are expected to play an active role in snapping up smaller BNPL players, using acquisitions to bolster their consumer lending capabilities and tap into ready-made merchant relationships.

While the FCA’s proposals are still at the consultation stage, they mark a significant step towards modernising regulation for digital credit products and ensuring that innovation does not come at the expense of consumer welfare. The final rules, once implemented, are likely to reshape the competitive dynamics of the UK’s BNPL market and set a precedent for regulators in other jurisdictions grappling with similar challenges.

As the sector braces for greater oversight, many believe that stronger regulation could ultimately strengthen consumer trust and encourage more responsible lending practices across the board. For BNPL firms, however, the months ahead will be crucial as they prepare to adapt to a more tightly regulated environment and balance compliance demands with growth ambitions.