A sign is pictured at the entrance of Klarna's headquarters in Stockholm
A sign is pictured at the entrance of Klarna's headquarters in Stockholm, Sweden on May 25, 2022.

Britain's financial watchdog has told firms offering 'buy now, pay later' loans to spell out the cost of late repayments to customers as the UK cost-of-living crisis intensifies.

Companies like Klarna led the way in offering on-the-spot, interest-free, short-term loans to customers which spread repayments for buying goods like clothes over a few weeks.

Lenders make money by taking a cut from what they help retailers sell, and banks are now piling in to serve customers who would normally be unable to get a credit card or would fail strict credit checks.

BNPL loans are unregulated in Britain, but the Financial Conduct Authority has powers to intervene in how they are advertised.

The FCA told BNPL firms and the British Retail Consortium in letters published on Friday that benefits of 'buy now, pay later' were being emphasised in adverts without fair and prominent indications of any relevant risks.

Some BNPL lenders charge late payment fees, and a failure to pay can also hit consumers' credit ratings.

The watchdog said it would use criminal and regulatory enforcement powers to tackle promotions which breach its rules.

"Unauthorised firms might be committing a criminal offence if they don't have an FCA-authorised firm approve their financial promotions," the watchdog said.

So far this year, the FCA has forced 4,226 promotions to be withdrawn or amended.

Money is becoming tighter for many consumers faced with rocketing energy tariffs and 40-year high inflation pushing up food prices, making BNPL products an option in a financial squeeze.

"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," said Sheldon Mills, the FCA's executive director of consumers and competition.

Britain is to hold a public consultation on draft legislation to introduce BNPL affordability checks.

The FCA in February told BNPL operators Clearpay, Klarna, Laybuy and Openpay to change their contracts after identifying potential harm to customers. It had to use Britain's consumer rights law to do so.

Skyscrapers in The City of London financial district are seen in London
Skyscrapers in The City of London financial district are seen in London, Britain, September 14, 2020.
 FCA signage seen at their head offices in London
Signage is seen for the FCA (Financial Conduct Authority), the UK's financial regulatory body, at their head offices in London, Britain March 10, 2022.