Buy Now, Pay Later Faces Its Regulatory Reckoning as UK Finalizes Rules and New York Proposes Nation's First Licensing Regime
The UK's FCA will enforce full oversight of BNPL products from July 15, while New York has proposed the first comprehensive state licensing framework — filling a gap left by the CFPB's withdrawal of federal consumer protections.
Overview
The buy now, pay later industry is entering its most consequential regulatory period since the first BNPL products appeared more than a decade ago. On February 11, the UK’s Financial Conduct Authority published final rules that will bring the sector under full regulatory oversight from July 15, 2026 — classifying BNPL as “Deferred Payment Credit” subject to creditworthiness checks, disclosure requirements, and complaints handling standards. Eleven days later, New York Governor Kathy Hochul announced proposed rules that would create the first comprehensive state licensing and consumer protection framework for BNPL providers in the United States.
The twin moves arrive at a moment of federal retreat. The Consumer Financial Protection Bureau withdrew its interpretive rule that had sought to treat BNPL providers as credit card issuers under the Truth in Lending Act, and a Congressional Research Service report published on March 17 found that federal policymakers now face “a myriad of unresolved issues” in a market that has grown to an estimated $70 billion in annual U.S. transaction volume.
The UK Framework
The FCA’s Policy Statement 26/1 represents the culmination of a legislative process that began in 2021, when the government first announced its intention to regulate BNPL. Under the final rules, BNPL providers must conduct proportionate affordability assessments for every purchase — not just when a customer first opens an account. Even transactions below 50 pounds will require checks, closing a loophole that consumer advocates had identified as a significant source of over-indebtedness.
Providers will also be required to notify customers immediately when they miss a repayment, explaining the amount owed, the consequences of continued non-payment, and how to access free debt advice. Customers who are in financial difficulty must be offered forbearance and signposted to debt help services.
Perhaps the most significant consumer protection is the extension of Section 75 liability to BNPL purchases between 100 and 30,000 pounds. This provision, long available to credit card users, makes the BNPL provider jointly liable with the retailer if goods are faulty, not delivered, or misrepresented — a protection that did not previously exist for installment purchases.
BNPL providers enter the FCA’s Temporary Permissions Regime on May 15, with full regulation taking effect on July 15. Firms that fail to register will be operating illegally.
New York’s Proposed Licensing Regime
New York’s Department of Financial Services published proposed regulations on February 23 that would require all BNPL providers operating in the state to obtain a license and submit to ongoing supervision. The rules cap interest rates at 16 percent — well below the effective rates that some BNPL products carry when late fees are factored in — and limit late fees to $8 per missed payment.
The proposed framework mandates pre-transaction disclosures, underwriting before credit is extended, dispute resolution procedures, and data privacy protections. Providers including Klarna, Affirm, and Block’s Afterpay would need to comply within 180 days of the final rule’s adoption.
Governor Hochul described the regulations as “nation-leading,” and the characterization is accurate: no other U.S. state has proposed a comprehensive licensing and oversight regime specifically tailored to BNPL products. The rules are currently in a comment period, with adoption expected later this year.
The Federal Vacuum
The regulatory momentum at the state and international level stands in sharp contrast to the federal landscape. The CFPB’s interpretive rule, issued during the Biden administration, had concluded that BNPL programs constituted “digital user accounts” and that providers were effectively “card issuers” subject to Regulation Z. The Financial Technology Association challenged the rule in federal court, and Acting CFPB Director Russell Vought withdrew it in May 2025, stating that the interpretation was “procedurally defective” and applied “ill-fitting open-end credit regulations to BNPL products, which are generally structured as closed-end loans.”
The CFPB subsequently confirmed it would not issue a revised rule, leaving the federal government without any BNPL-specific consumer protection framework. The CRS report published this month laid out the consequences: without federal action, the market faces a patchwork of state-level regulations that may vary significantly in scope and enforcement, creating compliance complexity for providers and uneven protection for consumers.
A Richmond Federal Reserve economic brief published in March found that while BNPL’s impact on financial stability “appears limited at present” relative to other consumer credit products, usage patterns are shifting in ways that warrant attention. The proportion of BNPL users who reported making a late payment rose from 34 percent to 41 percent over the past year, and 25 percent of users now report using BNPL to purchase groceries — up from 14 percent a year ago — suggesting the product is increasingly being used for essential spending rather than discretionary purchases.
Industry Response
The BNPL industry’s posture varies by jurisdiction. In the UK, major providers including Klarna and Clearpay have broadly supported the principle of regulation, arguing that a clear framework will legitimize the sector and enable it to compete more effectively with traditional credit products. Klarna, which filed for an IPO in 2025 and is valued at approximately $15 billion, has positioned regulatory compliance as a competitive advantage over smaller, less well-capitalized rivals.
In the United States, the Financial Technology Association — whose members include Affirm, Klarna, and Zip — successfully challenged the CFPB’s interpretive rule but has not taken a formal position on New York’s proposed framework. The tension between welcoming regulatory clarity and opposing specific provisions, particularly the $8 late fee cap and 16 percent interest rate ceiling, is likely to shape the comment period.
Broader Fintech Context
The BNPL regulatory wave is part of a broader tightening of oversight across digital financial services. On March 11, Revolut received full approval from the Prudential Regulation Authority to launch as a licensed UK bank, ending one of the longest mobilization periods in recent regulatory history and bringing its 13 million UK customers under Financial Services Compensation Scheme protection, as reported by CNBC. The contrast is instructive: neobanks that once sought to operate outside traditional banking regulation are now competing to enter it, while BNPL providers that grew in a regulatory vacuum are being pulled into oversight frameworks they did not choose.
The European Union’s own approach adds another dimension. The revised Payment Services Directive (PSD3) and the Instant Payments Regulation are driving the bloc toward real-time euro transfers, with the first mandatory reporting deadline for payment service providers arriving in April. By November, all EU member states must make at least one fully operational European Digital Identity Wallet available to citizens and businesses — a development that could reshape how BNPL providers verify identity and assess creditworthiness across the 27-nation bloc.
What Remains Unresolved
Several fundamental questions remain open. The CRS report identified the lack of a standardized definition of BNPL across jurisdictions as a primary obstacle to coherent regulation — the UK’s “Deferred Payment Credit” classification differs meaningfully from New York’s licensing-based approach, and neither maps cleanly onto the CFPB’s withdrawn interpretation.
Whether other U.S. states follow New York’s lead will determine whether the industry faces a manageable set of regional rules or a fragmented compliance burden that could consolidate the market around the largest providers. California, Illinois, and Texas have introduced BNPL-related bills in their current legislative sessions, but none has advanced to the proposal stage that New York has reached.
The rising share of BNPL users making late payments and the shift toward essential spending also raise a question that regulators have not yet fully addressed: whether products designed for discretionary purchases can serve as responsible substitutes for emergency credit, or whether their structure — small, frequent, easily stacked obligations without centralized reporting to credit bureaus — creates risks that existing frameworks are not equipped to manage.