HMT confirms BNPL regulation and outlines CCA reform

What does this mean?

BNPL

HMT is taking forward proposals broadly as consulted on in its October 2024 consultation paper. 

The term BNPL refers to a type of credit which is currently exempt from consumer credit regulation under article 60F(2) of the Financial Services and Markets Act 2000: interest-free instalment credit which allows borrowers to split the cost of purchases into regular repayments within a 12-month period and in 12 or fewer instalments. 

HMT intends to bring these products, where offered by a third party lender, into the scope of regulation. It aims to reduce the risk of consumer harm, and better align the regulatory requirements of these products with other forms of consumer credit. 

Agreements provided directly by merchants (i.e. the provider of goods and services that the agreement finances) will continue to be exempt from regulation. HMT says it will closely monitor the merchant-provided credit sector. 

The FCA will consult shortly on the regime which will apply to newly-regulated BNPL products. Key aspects include:

• Information disclosure: HMT will disapply the disclosure requirements that would have otherwise applied under the CCA, and the FCA will draft bespoke rules for the sector.
• Consumer protections: Borrowers will gain access to the Financial Ombudsman Service and Section 75 protections for disputes. BNPL lenders will also have obligations under the Consumer Duty. 
• Temporary Permissions Regime (TPR): Government will legislate for a TPR, enabling firms to continue to operate while their application for full FCA authorisation is reviewed.
• Affordability assessments: The FCA will apply rules on affordability and creditworthiness checks, requiring a significantly more comprehensive approach compared to current market practices. 
• Credit broking permissions: Merchants offering BNPL will generally not need credit broking permissions.
• Financial promotions: Unauthorised merchants will need to have their promotions of BNPL products approved by an authorised person.

CCA reform

HMT is proposing significant reform of the 1974 CCA, with the aim of creating a modern, flexible regulatory environment overseen by the FCA.

The CCA applies to a range of regulated consumer credit products including personal loans, credit cards, store cards, motor finance, hire purchase, conditional sale agreements, consumer hire (leasing) agreements, overdrafts, high-cost-short-term credit, pawn and lending to small businesses. 

The Government intends to repeal many of the CCA provisions and much of the associated secondary legislation. The FCA will be responsible for recasting conduct requirements where appropriate in its Handbook, taking an outcomes and principles-based approach. The Government expects certain provisions, which are not capable of being recreated in FCA rules (as they may create third party rights and obligations), to be retained in legislation. 

The first consultation outlines the Government’s overall vision for reform, as well as its approach to information requirements, sanctions and criminal offences. A further consultation will follow on the scope of regulation, and rights and protections under the CCA.

The first consultation focuses on:

• Information requirements: The CCA contains detailed provisions relating to areas including pre- and post-contractual information, and arrears, default and forbearance. The Government proposes for the FCA to consult on how to recast these in its rules, in a way which aligns with the Consumer Duty, and is suitable for digital customer journeys. 

• Sanctions removal: The CCA contains several sanctions which apply if firms fail to comply with certain information requirements. The Government views these as no longer needed, given the FCA's supervisory and enforcement powers.

• Criminal offences revision: Some CCA provisions give rise to criminal offences. The Government is exploring whether some or all of these need to be retained. 

HMT also identifies several themes that it will consider during the consultation process, including: how the reformed regime can remove any potential barriers to the rollout of Islamic or green finance, and how to future-proof the regime for future technological developments.

What do firms need to do?

The introduction of FCA regulation for BNPL, plus wider CCA reform, will reshape consumer credit regulation. 

Unauthorised firms offering BNPL must prepare for the significant compliance, governance and cultural changes needed to meet requirements of FCA authorisation and supervision. Firms offering BNPL which are already regulated for other activities will need to apply for a variation in permissions, and make a number of policy, process and operational changes across their BNPL offering. 

BNPL lenders should particularly focus on: 

• developing robust affordability assessment and arrears management frameworks

• ensuring customer communications meet the standards of the Consumer Duty, for example by testing for understanding of BNPL as credit

• meeting wider Consumer Duty requirements, focusing on specific risks of harm such as the potential for exploiting consumer biases, which the FCA has previously highlighted as a concern in the BNPL sector

• meeting the FCA’s expectations on the treatment of vulnerable customers, and borrowers in financial difficulty. 

Consumer credit lenders should assess the impact of proposed reforms to the CCA, and begin preparing for a more principles-based regime. This will require firms to move away from rigid, prescribed formats to more flexible information rules which prioritise understandable communication tailored to consumer needs. Given the focus on modernising the regime to better suit digital channels, firms should bear the reforms in mind as they progress initiatives to improve customer journeys and invest in digital platforms and technology that allow dynamic, personalised communication and product offerings.

Lenders should also prepare for a significant transition period as the regime changes, which is likely to create dual responsibilities under the legacy CCA requirements and the incoming FCA rules, which will require careful planning and management.

Next steps

The Government says it is committed to introducing BNPL regulation as soon as possible. Once the SI is made, the FCA will have 12 months to draft, consult on, and finalise its rules for BNPL lending. BNPL products will then enter regulation in mid-2026. The FCA will publish a consultation on its proposed rules for regulating BNPL shortly. 

The CCA consultation closes on 21 July 2025. Changes to the CCA will require primary and potentially secondary legislation, as well as a detailed rulemaking process by the FCA, and appropriate transitional periods.