Buy-now-pay-later regulations are coming to the UK. Here’s what to expect.

Buy-now-pay-later (BNPL) is in its “wild west” era—as a relatively new product category, regulations have been slow to keep up with the exploding popularity. Chew on this:

• The global BNPL market is worth $7.63 billion and projected to reach $38.57 billion by 2030.

• There are over 360 million BNPL users worldwide, a figure expected to more than double in the next five years.

• Over 50% of consumers have used a BNPL service.

While you can’t argue with the convenience, there are also justifiable concerns around hidden fees, high interest rates and the risk of individuals accumulating excessive debt if BNPL isn’t used as intended.But regulators are beginning to step in, especially in the U.K., where the Financial Conduct Authority (FCA) previously proposed BNPL regulations to protect vulnerable customers.

Compliance has always been a major topic at Glassbox—our platform was initially built for teams with high-volume, data sensitive environments and complex regulatory requirements to manage.

Andrew Stacy, our Digital Conduct Risk and Compliance Director, believes BNPL regulations are imminent in the UK. 

We asked him to break things down in more detail—specifically, what changes could mean for firms and retailers, and how companies can prepare. He also shared his expert insights on what regulators will be specifically looking to address, based on his prior experience leading Glassbox's consultation to help inform the FCA's initial Consumer Duty standard in 2021.

What’s the current state of BNPL regulations in the UK?

BNPL is still in its infancy and does not yet constitute a regulated activity. But the speed at which it has grown (globally, not just in the UK) coupled with the recent increases in interest rates has caused regulators to look seriously at the potential risks of the product and the FCA has been consulting on draft legislation to regulate this activity and ensure the protection of consumers. The government committed to regulating BNPL in 2021 as a matter of priority, but work has stalled.

The FCA has already exercised its powers under the Consumer Rights Act which prompted some BNPL providers to change their terms and conditions and came with a warning that firms must comply with consumer protection requirements – whether they are a BNPL provider or a retailer offering a third party BNPL option. And the message is clear, BNPL will be subject to regulation by the FCA.

What are regulators specifically concerned about or looking to address?

In 2023, Citizens Advice reported that 28% of UK adults (15.1 million people) were likely to use BNPL over the festive season, and that proportion rises to 56% for parents with primary school-aged children. Citizens Advice also warned that many consumers were already facing tough financial situations, and were now “at risk of being exposed to unmanageable levels of debt and even bailiff action. This is because BNPL lending does not require any affordability checks, unlike other credit options.”

One major problem is that customers are building up debt without necessarily understanding the terms. This is compounded by the lack of affordability checks. The same Citizens Advice report found that:

• 21% of BNPL users have missed or made a late payment in the last twelve months

• 29% of BNPL users who were due to make a payment in the last month borrowed money to repay their installments

Dame Clare Moriarty, Chief Executive of Citizens Advice, said: "The number of people turning to Buy Now Pay Later, and falling into debt as a result, underlines the urgent need for regulation. With so many households already on the financial ropes, BNPL borrowing for extra Christmas costs risks delivering the knockout blow.”

This is why regulators in the UK (and globally) are looking carefully at BNPL.

What will regulations mean for firms and retailers who provide BNPL options?

When BNPL becomes fully regulated by the FCA, firms (and retailers offering a third party BNPL option) will be required to meet the relevant conduct requirements which could include Financial Promotions, Complaints and the new Consumer Duty. And for firms relying on digital distribution channels, this means that they will require additional capabilities, data and insights to meet their new regulatory obligations.

What specific challenges should UK firms and retailers prepare to address?

Perhaps most important in this new set of requirements is the Consumer Duty which presents a number of practical challenges for firms to address – especially on digital channels. Essentially firms will need to acquire new technology-based capabilities for their digital channels, including:

• Record keeping – Firms must be able to demonstrate and evidence ‘good’ consumer outcomes, such as customer understanding, particularly where the firm has tested and enhanced communication. This will require firms to be able to record and replay individual sessions and leverage behavioral insights.

• Session monitoring – Firms need to look out for customers who may be struggling or showing signs of vulnerability and be alerted to individual sessions which may require some form of intervention. Technology can monitor customer sessions and enable firms to offer real-time intervention and support – such as offering a web chat. Artificial intelligence (AI) and machine learning (ML) algorithms can be applied to session recordings, alerting firms to any signs that a customer may be struggling or acting erratically. Automated monitoring and session recording will assist firms’ first and second-line customer support teams to understand the customer journey and ensure that they are presenting information appropriately while acting and responding in a manner expected by the regulator.

• Past business reviews – Firms will need to be able to review and investigate specific tranches of business as and when they become aware of retrospective issues or are requested to do so by the regulator.

• Complaints Root cause analysis – Firms will need to be alerted to, and investigate, areas where consumers have made a complaint or left feedback via Voice of the Customer (VoC). Retaining important sessions enables firms to establish exactly what happened, why (content, process, technology, user actions, etc.), fix the problem, test the solution and find other customers impacted.

• Outcome testing, Board reporting – Firms can export data and insights from recorded sessions and complaints to test and evidence good outcomes or issues for inclusion in Board reports and dashboards to evidence good outcomes.

The FCA’s Finalised Guidance to the Consumer Duty Regulations details new sources of data which firms should consider using to evidence and test outcomes. Technology enables firms to support customers throughout their digital journeys and have the means to prove compliance with regulations, including BNPL.