Klarna, Zilch, Clearpay: What does the buy now pay later crackdown mean for UK fintech?
The Treasury’s regulatory shakeup of buy now pay later services is set to reshape the UK fintech landscape and industry leaders have been left with questions.
The UK government will enact legislation that brings buy now pay later firms under the scrutiny of the Financial Conduct Authority.
This means firms such as Klarna and Clearpay will be forced to alter frameworks to meet the requirements of the City regulator.
Providers will be required to conduct thorough affordability checks before approving transactions, these can include accessing a potential consumer’s income, spending and existing financial commitment to ensure they can harness new debts.
The FCA will set rules on assessing affordability and creditworthiness, reducing the risk of unaffordable borrowing.
The watchdog will provide guidelines on how firms should resolve complaints, as well as allowing customers to take their grievances to the Financial Ombudsman services.
Consumers will also be able to access the protections of the Consumer Credit Act, including the ability to make Section 75 claims. This allows them to seek refunds from providers if something goes wrong with a purchase between £100 and £30,000.
The move was hailed as a win for customers, ending what City Minister Emma Reynolds dubbed the “wild west” of consumer exposure. Over 10m people within the UK use buy now pay later services, according to Treasury estimates.
But Janine Hirt, the chief executive of fintech’s industry body Innovate Finance, said: “We believe there is more work to be done in the way these rules may impact small business growth in the UK.”
Hirt added concern that buy now pay later business finance provided to sole traders would fall under the scope of the government’s regulation.
The Treasury’s new rules offer no distinction for traders, meaning they would be required to obtain an FCA licence in order to provide buy now pay later as a payment option.
“Specialist small business finance providers, or wholesale trade suppliers, currently offer [BNPL] but are likely to withdraw such flexible repayment options, reducing sole traders’ access to reliable trade credit products.
“Many of these traders are unlikely to go through this complex licensing process,” Hirt said.
A reduction in buy now pay later offerings would force consumers to shoulder the burden of interest with credit cards.
Consumer win now, stifle growth later?
Douglas Grant, group chief executive of Manx Financial Group, praised the reforms, saying: “Stronger regulation that ensures affordability checks and lender accountability across the board is not only overdue, but also essential for protecting consumers in a market set for continued growth.”
This comes amid Klarna’s losses for the first-quarter almost doubling to $99m after consumers failed to repay on time.
Consumer credit losses surged 17 per cent to $136m.
Ben Perks, managing director at Orchard Financial Advisers said the new regulation was “about time” with “the lack of responsible lending often sees borrowers over exposed and stuck with unaffordable payments.”
But the news spiked fears that regulation may hinder London’s growth potential.
Tony Redondo, founder at Cosmos Currency Exchange, said: “Over-regulation might choke fintech innovation, leaving low income users reliant on fewer choices and costlier loans.”
He said the impact would extend to “balancing consumer safety with market vitality remains the challenge” as systematic issues, such as housing unaffordability, fuel buy now pay later reliance.
Klarna was locked in for a New York float ahead of President Donald Trump’s erratic tariff agenda sending markets into a whirlwind.
The fintech’s lean towards the US triggered new concerns that the loose regulations and liquidity in the US would attract a fleet of UK fintech firms expected to go public in the near future.
Whilst Zilch’s chief executive, Philip Belamant, previously said a London listing would be the “right thing,” the ramping up of regulation may steer firms into following in Klarna’s footsteps.
Scathing buy now pay later review
The legislation, expected to come into force in 2026, follows a surge in the popularity of buy now pay later’s interest-free instalment offerings throughout the 2010s.
But concerns quickly mounted over the absence of regulation allowing users to accumulate debt without credit checks or clear information.
A review from the FCA in 2021 – dubbed the Woolard Review – called for urgent regulation after finding providers were offering minimal credit checks with consumers accumulating unmanageable debt.
The government accepted recommendations with consultations following in subsequent years.
The Treasury’s overhaul directly responds to the consultations in launching a new and unprecedented framework for buy now pay later providers.