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

Key Take Aways

1. The FCA is establishing a proportionate regulatory framework for Deferred Payment Credit (DPC), currently known as Buy Now Pay Later (BNPL), bringing it into the FCA’s regulatory perimeter from July 2026.
2. The regime relies on expanding existing high-level standards, including the Consumer Duty, alongside bespoke rules to address current gaps posed by legislation and market practices.
3. A core focus is providing consumers with clear, timely, and effective information before, during, and after a DPC agreement to support informed decision-making and responsible borrowing.
4. FCA proposes to apply existing rules on creditworthiness, mandating proportionate assessments to safeguard consumers from unaffordable lending, especially those exhibiting characteristics of vulnerability.
5. Dispute resolution will be reinforced, with FCA rules extending to complaints handling and referrals to the Financial Ombudsman Service for regulated DPC activities.
6. Implementation will include a Temporary Permissions Regime (TPR), allowing unauthorised firms to operate temporarily while their applications for full authorisation are processed.
7. Data reporting requirements are central, with FCA proposing to introduce Product Sales Data (PSD) for transaction-level reporting on DPC as part of ongoing supervision, subject to specific phasing.
8. The consultation foresees material costs for firms, primarily in compliance, data collection, and operational adaptations, with an estimated total net cost of over £2.7 billion over ten years.
9. Anticipated consumer benefits include reductions in late fees, improved understanding of product risks, and enhanced protections in financial difficulty; many benefits are estimated but unquantified benefits such as increased financial resilience are significant.
10. Market growth is projected to level at around £25 billion annually over the next five years under a central scenario, with market maturity indicators suggesting diversification and further expansion in retail sectors.
11. The proposed regulation is designed to balance containment of harms with supporting economic growth, aiming to maintain wide access to DPC products in a sustainable and responsible manner.
12. FCA intends to actively monitor the impact and compliance of the regime, ensuring transparency and effective measurement of outcomes such as consumer understanding, affordability, and dispute resolution efficacy.

Key Statistics

• Market size grew from £0.06bn in 2017 to over £13bn in 2024.
• 20% of UK adults (approximately 10.9 million) used DPC in the 12 months prior to May 2024.
• 89% of DPC users found it ‘very easy’ or ‘fairly easy’ to keep track of repayments; those owing over £500 saw this drop to 78%.
• DPC transactions are predominantly in the clothing, fashion, and footwear sector (51%), declining from 66% in 2022.
• Around 1% of transactions led to debt collection events, estimated at 25 million over ten years.
• The average transaction value is approximately £88, with consumers borrowing typically £168 across multiple items monthly.
• 55% of borrowers cited budgeting as the main reason for use; 11% use DPC because they believe it won’t impact their credit score.
• Up to 18% of transactions might fail creditworthiness assessments, potentially reducing revenues by around £1.7 billion over a decade.
• Over £35 million in late fees were earned by firms in 2024, with late fee revenues constituting about 0.3% of net transaction value.
• The FCA expects to impose costs of around £2.7 billion over ten years, mainly from compliance activities and procedural changes.
• FCA projects a net benefit to consumers of £1.4 billion through reduced late fees, better understanding, and reduced indebtedness.
• Projected transaction levels could level off at approximately £25 billion annually within five years, subject to market growth rates.

Key Discussion Points

• The need for a tailored yet proportionate regulatory approach that balances consumer protection with market innovation.
• The importance of providing consumers with clear, accessible information at all customer journey stages to promote responsible borrowing.
• Applying existing rules on creditworthiness, coupled with high-level standards such as the Consumer Duty, to mitigate risks associated with unaffordable credit.
• The role of FCA’s dispute resolution mechanism, extending Financial Ombudsman coverage to all regulated DPC activities, for enhanced consumer trust.
• The phased implementation via a Temporary Permissions Regime to enable market continuity while processing full authorisations.
• Significant costs associated with compliance, data reporting, and system adjustments, with a focus on transaction-level supervision.
• The impact of proposed regulation on market growth, with a projected stabilisation at around £25 billion per annum, enabling sustainable expansion.
• The anticipated benefits of reduced late fees, improved consumer understanding, and better support in financial difficulty, despite many unquantified benefits.
• The potential for regulation to foster greater trust and confidence, encouraging responsible use and market stability.
• Risks of market concentration due to high barriers to entry, and the importance of strong standards to support competitive dynamics.
• The strategy aims to protect vulnerable consumers, particularly those exhibiting characteristics of financial distress, through enhanced creditworthiness assessments and supportive measures.
• Active FCA monitoring including consumer understanding, dispute resolution outcomes, affordability metrics, and market behaviour to evaluate and refine the regime.

Document Description

This article articulates the FCA’s consultation on a comprehensive, proportionate regulatory approach to Deferred Payment Credit (DPC) products—popularly known as Buy Now Pay Later (BNPL). It details the regulatory framework proposed for market participants from July 2026, encompassing rules on information disclosure, creditworthiness assessments, dispute resolution, and data collection. The document addresses the market context, potential harms, economic impacts, costs, and benefits outlined through detailed analysis and stakeholder engagement. It provides clarity on transitional arrangements, compliance expectations, and the FCA’s strategic objectives aimed at safeguarding consumers, fostering competition, and supporting sustainable economic growth.