The Financial Conduct Authority said that even where firms were not regulated financial services providers and where buy now pay later loans did not come within its supervision jurisdiction, they “might be committing a criminal offence if they don’t have an FCA-authorised firm approve their financial promotions”.

Buy now pay later is a form of credit allowing customers to spread the cost of purchases over a number of payments without paying interest. However, where customers fail to make a payment or pay late, providers can and do impose penalty charges and interest.

UK Finance data show that one in eight people in the UK used buy now pay later  last year. Younger shoppers are more likely to use the service, with one in five 35 to 44-year olds making a purchase this way in 2021.

The figures also showed that a third of shoppers using buy now pay later credit said repayments had become “unmanageable”, fuelling concern the loans would lead many into sprilling debt.

The FCA is currently looking at how to bring the loans into its scope of regulation, which could mean buy now pay later lenders must carry out credit checks before approving payments to ensure customers are not over-indebting themselves or cannot afford to repay.

Ads must be ‘clear, fair and not misleading’

Sheldon Mills, executive director of consumers and competition at the FCA, said: “As we face a cost-of-living crisis, consumers are having to make difficult decisions about their finances and how they pay for goods and services.

“Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions. It is vital that adverts are clear, fair and not misleading.”

The FCA warning went on to say the regulator “is concerned consumers could be misled if BNPL financial promotions do not comply”.

It also confirmed it has seen financial adverts on websites and social media, “including posts by social media influencers”, which may breach FCA rules.

This includes adverts emphasising the benefits of buy now pay later products without “fair and prominent” warnings of any risks to customers, including:

• the risk of taking on debt that customers cannot afford to repay
• the consequences of missed payments
• any other adverse consequences such as the impact on the customer’s credit file
• information about when charges become payable

Proactive action needed from lenders

The FCA recently called on firms to do more to support borrowers in financial difficulty, including signposting to money guidance and debt advice.

Earlier this year, the FCA also worked with buy now pay later lenders to secure changes to potentially unfair and unclear terms in buy now pay later contracts using powers under the Consumer Rights Act.

Klarna, which has around 16 million customers in the UK, said in May it would report customer payments made on time and those paid late to credit reference agencies Experian and TransUnion.

The lender also updated its terms at checkout to include a clear warning that customers were taking on credit and could face consequences should payments be made late.