HM Treasury has announced that Buy Now, Pay Later (BNPL) will come under the regulation of the Financial Conduct Authority (FCA) from 2026.

The government department said that new legislation will allow the regulator to apply rules on affordability, meaning that BNPL companies like Klarna and Clearpay will have to ensure that users of its services can afford repayments.

The announcement follows years of uncertainty about when BNPL regulation would be brought into law.

The previous government first agreed to new legislation in 2021 after the publication of the FCA’s Woolard Review, which called for stricter boundaries on BNPL.

Under the new regulation, BNPL companies will also need to provide clear and accessible information about loan agreements in advance so that shoppers understand the full risks associated with late repayments.

The government, which has initiated a consultation on the upcoming law, said that Consumer Credit Act information disclosure rules will be disapplied so that the FCA can consult on bespoke rules that "ensure users are given this information in a way that is tailored to the online setting in which BNPL products are generally used."

As part of the move, BNPL users will be given stronger rights if issues arise with products they purchase, making it quicker and easier to get redress. This will include the application of Section 75 of the Consumer Credit Act, which allows consumers to claim refunds from their lender and access the Financial Ombudsman Service to make complaints.

"Millions of people use BNPL to manage their finances, but the previous government’s dither and delay left them unprotected," said economic secretary to the Treasury, Tulip Siddiq. "We promised to take action before the election and now we are delivering. Our approach will give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow."

The final law is expected to be laid in parliament in early 2025, with the FCA finalising the rules so they can take affect the following year.

Klarna boss Sebastian Siemiatkowski said that the organisation is looking forward to carrying on the work to put "proportionate rules" in place.

Chris Woolard, author of the 2021 Woolard Review, said that the incoming regulation would provide "long-term certainty and standards" for the market.

"Today marks a significant milestone for consumer-focused financial regulation," continued Woolard. "The proposed package of regulation would implement the recommendations of the Review and mean millions of people up and down the UK will benefit from stronger financial protection as they borrow using BNPL, especially the most vulnerable in society."

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