UK brings £7bn BNPL market under FCA credit rules
Mandatory affordability checks and credit card-style protections under new FCA rules will reshape the UK's £7bn Buy Now Pay Later market, potentially locking out up to 30% of current users.
The UK’s Buy Now Pay Later sector formally enters the regulated credit market on Wednesday. Lenders including Klarna and Clearpay must now hold Financial Conduct Authority authorisation to operate, bringing a £7bn industry previously criticised as an unregulated Wild West under the same broad rules as banks and credit card providers.
For lenders, the most consequential operational shift is the requirement to run instant, automated affordability checks on every transaction. Shoppers who fail these tests will have their purchases blocked at the checkout. Kate Pender, chief executive of Fair4All Finance, estimated that the conservative checks designed by individual lenders could reject 10% to 30% of existing BNPL users.
The scale of the potential drop-off is notable given the low historical default rates in the sector. According to Experian, more than 100 million BNPL transactions were made by 8.5 million customers in 2025, driving over £7bn in spending. The credit reference agency noted that 98.5% of those balances were repaid on time. Pender warned that nearly half of the users expected to be rejected under the new regime have never missed a BNPL payment.
The regulatory tightening carries secondary risks for the broader consumer credit ecosystem. Pender cautioned that denying credit does not eliminate the demand for it, predicting that loan sharks would be "thrilled at the prospect" of absorbing younger demographics and those with past repayment issues. Furthermore, some retailers' in-house BNPL products will fall outside the new regulatory perimeter, potentially creating an unregulated safety valve for declined transactions.
Alongside the compliance burden, lenders face new financial liabilities. Providers are now subject to Section 75 protections, meaning they must fund refunds and compensation for faulty goods costing more than £100. The Financial Ombudsman Service also gains jurisdiction, with expectations to handle around 2,000 complaints by the end of March. Lenders must additionally provide clear upfront information on missed payments and direct struggling borrowers to free debt advice.
Major providers have positioned themselves ahead of the curve. A Klarna spokesman noted that the FCA rules largely formalise existing internal practices, stating the company already runs affordability checks, reports to credit reference agencies, and shows costs upfront. The company, which pegs its average customer age at 38, framed interest-free BNPL as a lower-cost alternative to revolving credit, adding that robust regulation strengthens consumer confidence.
