Insights ¦ Consultation Paper CP25/23 Deferred Payment Credit (unregulated Buy Now Pay Later): Proposed approach to regulation

Key Take Aways

• The FCA is consulting on regulation for Deferred Payment Credit (DPC), also known as unregulated Buy Now Pay Later (BNPL); regulation will commence from July 2026.

• DPC products are interest-free, repayable in 12 or fewer instalments within 12 months, and currently operate outside FCA regulation, posing consumer protection risks.

• The proposed regulatory regime aims to improve consumer information, assessment of creditworthiness, and treatment during financial difficulty, relying on existing high-level standards and the Consumer Duty.

• The market has experienced rapid growth, expanding from £0.06bn in 2017 to over £13bn in 2024, with approximately 20% of UK adults having used DPC in the previous year.

• The FCA plans to introduce a temporary permissions regime (TPR) allowing unauthorised firms to operate until full authorisation, with specific gateways and compliance deadlines.

• The regulation aims to reduce consumer harm such as unaffordable borrowing, late fees, and debt spirals, while supporting sustainable economic growth and competition.

• A core element involves clear pre-contractual information, tailored for digital channels, including key product data and additional details to support informed decision-making.

• During the customer journey, firms will be required to provide timely, clear information on missed payments and enforce fair treatment of consumers in arrears.

• Creditworthiness assessments will be proportionate, with obligations on firms to consider consumer vulnerabilities, current debts, and affordability, potentially reducing unaffordable credit extensions.

• Data collection measures include mandatory transaction-level reporting (Product Sales Data) and supervisory data returns, aiming to enhance FCA market oversight.

• Industry costs primarily relate to compliance, data reporting, and communication reforms, with estimated total costs to firms over ten years of approximately £2.7bn versus benefits exceeding £2.4bn, largely stemming from consumer benefit.

• The proposed regime seeks a balanced approach—strengthening consumer protections without hampering innovation or market growth—through outcomes-based regulation and tailored requirements.

Key Statistics

• Market size increased from £0.06bn in 2017 to over £13bn in 2024.

• 20% of UK adults (approx. 10.9 million) used DPC in the 12 months prior to May 2024.

• 23% of DPC users in 2024 were unaware that they could be charged late fees; 11% did not expect their credit report to be impacted.

• 55% of borrowers use DPC to help with budgeting; 5% use it because they cannot access other credit.

• Over 3 million consumers missed payments in 2024, with 700,000 debt collection proceedings initiated.

• Academic evidence suggests BNPL increases consumer spending by 6–10%, with transaction volume growth forecasted to level at around £25bn annually in five years.

• FCA estimates suggest regulation will lead to a reduction in annual industry profits from over £400m to approximately £200m.

• Estimated costs over ten years for firms total around £2.7bn, compared to consumer benefits valued at £2.4bn.

• 18–27% decline in merchant transactions projected over a decade, with merchant revenue losses averaging £5bn.

• FCA regulators expect to monitor impacts via consumer understanding, missed payments, and debt levels with ongoing data collection.

• Around 24 firms are estimated to be impacted, with 16 authorised and eight unauthorised, under the proposed transitional corporate regime.

• The FCA anticipates total net costs of approximately £331m to £3.6bn over ten years, with benefits likely exceeding costs after considering unquantified impacts.

Key Discussion Points

• The necessity of proportionate regulation introducing transparency and fair treatment for DPC consumers while fostering innovation.

• The importance of tailored pre-contract disclosures suited to digital and fast-paced customer journeys.

• The role of creditworthiness assessments in mitigating unaffordable lending and how they balance consumer access with risk management.

• The transitional framework for unauthorised firms, including licensing gateways and compliance deadlines.

• The use of data reporting (Product Sales Data) as a crucial oversight tool to enable proactive supervision for FCA.

• The strategic approach to balancing consumer protection, market growth, and international competitiveness.

• The risks of market concentration and the potential impacts of regulation on firm entry, expansion, and market dynamics.

• The comprehensive costs associated with compliance, data collection, and consumer communication reforms over ten years.

• The unquantified but significant benefits of reduced debt spirals, improved financial resilience, and better treatment during hardship.

• The critical role of dispute resolution enhancements, especially the FCA’s expanding jurisdiction to include DPC activities.

• The importance of embedding the Consumer Duty across all regulatory requirements, ensuring firms act in the best interests of consumers.

• The ongoing review mechanisms proposed for monitoring the real-world effectiveness of the regulation and market responses.

Document Description

This article is an extensive government consultation report outlining the FCA’s proposed regulatory framework for Deferred Payment Credit (DPC), commonly referred to as unregulated Buy Now Pay Later (BNPL). It details the rationale for regulation, market growth, consumer risks, proposed standards, data collection requirements, transitional arrangements for firms, and the anticipated economic impacts. The article aims to inform industry stakeholders and senior managers about the new rules designed to enhance consumer protections, ensure sustainable market growth, and support effective competition within the evolving landscape of short-term non-interest-bearing credit products.