'Buy now, pay later' reform to pave the way for major consumer credit overhaul in UK

On 19 May, HM Treasury (HMT) published its long-awaited response to the consultation on "buy now, pay later" (BNPL) reform, together with final legislation. On the same day, it also published its consultation on reforming the consumer credit regime. There are parallels between the two sets of proposals.

BNPL reform

HMT is pressing ahead with bringing certain kinds of BNPL finance into its regulatory perimeter. Specifically, BNPL offered by standalone BNPL providers will be brought within the regulatory remit of the Financial Conduct Authority (FCA), meaning that BNPL lenders that are currently unregulated will need to become regulated by the FCA to offer their products.

Once regulated, FCA rules will apply. BNPL lenders will need to conduct creditworthiness and affordability assessments and borrowers will benefit from increased protections, such as the ability to complain to the Financial Ombudsman Service and purchase protection (see our Insight). 

During the consultation process, HMT received feedback from many quarters that large parts of the current Consumer Credit Act 1974 (CCA) (for example, relating to pre-contract disclosure, the form and contents of credit agreements and post-contractual notices and statements) were not fit for purpose for BNPL lending, not least because they were designed for longer term loans provided in a non-digital age. As expected, HMT noted these concerns and the implementing legislation will disapply these areas of the CCA. Instead, the FCA is tasked with drafting bespoke rules for BNPL lending which are more proportionate and better suited to deliver good customer outcomes.

CCA reform

HMT is taking a phased approach to consulting on wider consumer credit reform, as there is a great deal of complexity to cover. Phase 1 outlines the government's overall vision for a reformed regime, as well as its approach to information requirements, sanctions and criminal offences.

Interestingly, on these topics, HMT appears to have been emboldened by its approach to BNPL. It proposes, as a first step, largely to follow its approach to BNPL reform and repeal most of the CCA contractual and information requirements so that the FCA can replace them with rules. This is all part of the government's plan to "bring forward a simpler, more agile regime that puts consumers at its heart".

Central to the changes proposed in HMT's Phase 1 consultation are the following:

• Repeal of information requirements: it is proposed that prescriptive information requirements relating to the content of agreements, pre-contractual information and post-contractual notices (including the hugely unwieldy statutory arrears notices) will be repealed. In doing so, draconian unenforceability and disentitlement sanctions for (often trivial) non-compliance with prescriptive CCA requirements will fall away. HMT believes that the FCA’s supervisory and enforcement powers (alongside those of the Financial Ombudsman's Service) provide sufficient deterrence and consumer protection.
• Repeal of criminal offences: HMT is considering removing the CCA criminal offences as there have been very few convictions under them and arguably they are now unnecessary when the FCA's supervisory and enforcement toolkit is taken into account. HMT is mindful, however, that some may have a deterrent effect (for example, the offence of promoting credit to minors and the offence of door-to-door promotion of loans). The FCA would be unable to recreate criminal sanctions in its rules and is therefore seeking stakeholder views on whether some offences should be retained in legislation.

Next steps

In relation to BNPL, HMT laid draft legislation before Parliament on 19 May. It will now be debated in both Houses. It is expected that the FCA is likely to consult on its rules applying to BNPL lending at the same time. These rules will come into force 12 months after the statutory instrument is made. BNPL products are expected to enter regulation around mid-2026.

In the interim, the FCA will create a temporary permissions regime (TPR) to allow current BNPL lenders to continue to operate while seeking authorisation under the new regime. Firms in the TPR will be exempt from the Senior Managers and Certification Regimes, will be able to approve their own financial promotions to be used by merchants but will not be able to approve a merchant's own marketing materials.

In relation to CCA reform, the Phase 1 consultation is open until 21 July 2025. HMT is expected to publish a further consultation on Phase 2 later in the year which will address other consumer rights and protections and also the regulatory perimeter (in other words, the scope of regulation of consumer and small business credit and hire). The government plans to complete both phases of the policy work prior to implementation of any changes, so we will not see the next steps following Phase 2 until 2026 at the earliest.

Osborne Clarke comment

There have been only a few minor changes made to the BNPL legislation since HMT consulted on it last year, the main one being that the senior managers and certification regime will not apply until the BNPL lender becomes fully authorised, which will be welcome news. Affected firms have known this legislation is coming and are already doing what they can to prepare. Now they will be concerned to see the FCA's proposed rules for BNPL products as soon as possible. It is only once firms understand the detailed rules that they will be able to make the necessary adjustments to their products and processes in time for implementation.

HMT's proposed approach in its Phase 1 consultation on consumer credit reform is likely to be universally welcomed by lenders, brokers, borrowers and professional advisers. Many will be relieved that HMT recognises that the current CCA regime is not fit for purpose in today's world, and that it has had the courage to be bold, proposing to repeal the vast majority of information requirements and criminal sanctions. This approach will hand the FCA a blank sheet of paper, which will put a great deal of pressure on it to create consistent, flexible and proportionate rules for consumer and small-business lending, hire and pawn-broking which can deliver good customer outcomes.

Given the likely delay in CCA reform being implemented, the new framework for BNPL will no doubt be a helpful test space (or maybe blueprint) for the FCA when considering how best to frame new rules for consumer lending more generally.

Phase 2 of the reform is likely to be more tricky owing to its more sensitive subject matter. For example:

• the extent to which business lending should be within the consumer credit framework is likely to be hotly debated; and
• consumer groups have been clear in feedback to previous consultations on reform that it is important to retain legislative purchase protection under section 75 CCA for consumers. However, there are also persuasive arguments that section 75 risks stifling innovation and that a halfway-house solution is required. How this can be achieved, especially when it is unlikely that it can be done by FCA rules, remains to be seen.

Megan Gibbons, trainee solicitor at Osborne Clarke, assisted in preparing this Insight