An overview of Buy Now, Pay Later regulation in the UK, EU, USA, Australia

The exponential growth of the e-commerce sector in recent years has fueled demand for easily accessible consumer credit. One of the fastest-growing trends in the online payment sphere has been that of Buy Now, Pay Later (BNPL) schemes. By 2027, BNPL users are expected to grow to 900 million, from 360 million in 2024.

BNPL has gained traction because of its consumer appeal, with readily available, interest-free credit helping shoppers during a time of rising living costs and lower disposable incomes. However, these credit schemes have recently come under media and broader public scrutiny, as stories emerge surrounding high fees for late payments, complex refund processes, and even poor credit scores as a result of using the payment method.

As a result of growing public opinion on the subject, governments worldwide are beginning to take notice and are now drawing up plans to more tightly regulate BNPL or incorporate it into current laws.

In this article, we'll look at how some of those countries are legislating BNPL, including the UK, where the government has recently closed a consultation into implementing changes to current regulations.

Before we dive in and compare the different approaches, let's briefly examine how BNPL differs from other forms of credit and why it currently falls outside of the scope of most countries' current laws.

It's important to understand the differences between BNPL and other popular forms of credit, to help with context and to explain why most existing legislation doesn't cover the payment method.

Buy Now, Pay Later is effectively a point-of-sale loan, typically offering an interest-free period of 14 or 30 days. If customers fail to pay within that time, interest and late payment fees increase significantly. Other repayment plans for BNPL also exist, including an option to split the total purchase price into ‘slices’, which are repaid over several months, with high interest and fees quickly adding up in the event of late repayment.

BNPL providers make money by charging merchants a fixed or percentage fee for each sale, issuing the total cost of the purchase upfront and collecting repayments themselves. BNPL schemes require a "soft credit check" at checkout but typically do not alter a consumer's credit rating.

Over 100 Buy Now, Pay Later providers currently operate worldwide, yet in virtually every country where this payment method is offered, BNPL is excluded from local laws and regulations.

In the UK, for example, zero-fee credit agreements of under 12 months have historically fallen outside of the scope of the Financial Conduct Authority. Despite most reputable BNPL providers sticking to codes of best practice, fears of a brewing financial scandal have prompted most major economies to begin drawing up plans to regulate the industry more tightly.

A few of the issues highlighted by various government consultations and think tanks include:

Let's take a look at how the UK, along with the EU, USA, Australia, and Singapore, are handling the current situation.

On 20 June 2022, the UK government laid out its official response to calls for the regulation of BNPL products following the release of the Woolard Review in 2021, which shone a light on the potential risks to consumers from BNPL loans. Despite calls from the FCA to expedite BNPL regulation, as of December 2024, the draft legislation has only progressed to the consultation stage. Initially, this was meant to be implemented by mid-2023.

As we've just highlighted, BNPL currently falls outside of Financial Conduct Authority regulations, but plans are being set in motion to include the payment method in an amended version of the Consumer Credit Act 1974, with lenders requiring FCA approval and being forced to offer affordability checks to potential customers. In addition, adverts and incentives to sign up for BNPL loans will soon be subject to the Financial Promotion Regime to ensure they aren't misleading or unfair and, finally, consumers will be able to complain to the Financial Ombudsman Service if an issue arises following a BNPL purchase.

While regulation in the UK has fallen behind the expected roadmap, the responses to the 2024 draft legislation outlined in the consultation will now be reviewed by the government, before being handed over to the FCA to finalise the legislation. If all goes well, we should expect BNPL regulation to be rolled up by 2025.

Laws have been in place since 2008 covering consumer credit and loans of EUR 200 to EUR 75,000. However, many BNPL loans fall under the minimum amount, so were not governed by this existing EU legislation.

In June 2022, the EU Council decided to revise the Consumer Credit Directive, following consultations a year earlier that hinted at what was to come. Ministers across Europe were broadly in agreement over the proposed changes.

In June 2024, an update was made to the EU Second Consumer Credit Directive (CCD II) which included BNPL providers within its scope. The EUR 200 minimum loan amount was removed, and the exemption for interest-free credit agreements with no charges, and those requiring repayment within three months with minimal fees, has been removed.

In addition, a more limited BNPL exemption now applies only to suppliers or service providers directly offering such products to consumers. This change means firms can no longer rely on third-party BNPL providers for exemption under CCD II. To qualify for the new exemption, deferred payments must be entirely free of charge, unlike the previous allowance for small fees. Only limited late payment charges allowed by national law are permitted. The repayment period has been reduced from three months to 50 days, or 14 days for non-SME suppliers selling through online stores.

However, consumer credit is also regulated at a member-state level, so various discrepancies can still be expected across the region as a whole.

The EU legislation covers many of the same topics as that of the UK. Changes to the law would ultimately force lenders to clarify terms and conditions, ensure borrowers can afford repayments and understand what they are being sold, while revising price rules and factors affecting creditworthiness.

Buy Now, Pay Later isn't officially regulated in the USA at a federal level because, as in many other countries, short-term loans and other forms of point-of-sale credit fall outside of current regulations. The Consumer Financial Protection Bureau (CFPB) issued guidelines for BNPL schemes, outlining potential consumer risks after a December 2021 consultation.

Some state laws did cover BNPL already, with several states requiring providers to register as lenders in order to offer Buy Now, Pay Later services.

In May 2024, The Consumer Financial Protection Bureau (CFPB) issued an interpretive rule that required BNPL providers to comply with certain consumer protections:

The rule, which came into effect in July 2024, clarifies that BNPL products provided through digital accounts, which are repaid in four or fewer interest-free instalments without other finance charges, fall under certain provisions of Regulation Z (Truth in Lending Act).

Following this, in September 2024, the CFPB published a compliance aid to clarify and address ambiguities in the interpretive rule after commenters expressed confusion around the definition of ‘digital user accounts’ as well as the types of loans covered.

The compliance aid explained that the rule focuses rule applies specifically to BNPL products repaid in four or fewer instalments, accessed through digital user accounts, and free from interest or finance charges.

Other BNPL products (e.g. those with finance charges or more instalments) may still fall under different provisions of Regulation Z, but were not subject to this specific interpretive rule. However, they may still be regulated differently. As a result, the regulatory landscape at both federal and state levels looks set to evolve further in the near future.

Australia doesn't currently regulate BNPL products, as the country's National Consumer Credit Protection Act 2009 and National Credit Code do not cover situations where a provider doesn't charge the consumer for credit or issues an upfront or fixed fee that's less than a specified amount.

At the start of June 2022, Minister for Financial Services, Stephen Jones, announced that BNPL schemes would eventually fall under the scope of the National Consumer Credit Protection Act. In March 2024, draft legislation on BNPL was published by the Australian Government. The Treasury Laws Amendment Bill 2024: Buy Now, Pay Later (the Amendment Bill) seeks to broaden the application of the National Consumer Credit Protection Act 2009 (Cth) (the Credit Act) and the National Credit Code (the Credit Code) to encompass the regulation of Low Cost Credit Contracts (LCCCs).

While BNPL providers will need to hold an Australian credit license and run credit checks on borrowers, the Amendment Bill explicitly classifies BNPL contracts as a type of LCCC to reflect the lower risk and cost of BNPL compared to other regulated forms of credit.

Singapore has taken action to regulate BNPL, starting in October 2022 with the announcement of the Buy Now, Pay Later (BNPL) Working Group.Formed by the Singapore FinTech Association (SFA), the Monetary Authority of Singapore (MAS), and industry players, the group launched the first phase of the BNPL Code of Conduct. In November 2023, the BNPL Code of Conduct. reached the next phase of its implementation. The legislation stipulated that from November, existing BNPL providers would need to adhere to the code, and be accredited by the end of March 2024.

In a similar vein to the legislation outlined in the UK and EU, BNPL providers will have to put safeguards in place to reduce the risk of consumer over-indebtedness, including creditworthiness assessments, transparent and fair fee structures, ethical marketing standards, options for voluntary exclusion, and support for individuals facing financial hardship.

Though we've looked at some of the solutions to BNPL regulation being presented worldwide, we found very little in the way of cross-border legislation or solutions. However, some established BNPL companies, such as Klarna, have been able to enable cross-border BNPL by joining up their various domestic markets.

Legislation regarding Buy Now, Pay Later providers is definitely coming, with many countries expecting to have new or updated laws in place by 2025. Despite the current uncertainty, the industry is broadly supportive of recent developments.