The BNPL industry has seen huge growth in recent years, with the likes of Klarna and Affirm becoming multi-billion dollar giants, while banks are also increasingly getting in on the action.

The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion in the UK, with five million people using these products since the beginning of the coronavirus pandemic.

However, there is growing concern that consumers are taking on debt they cannot afford.

The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, states the FCA, but this also comes with "significant potential for consumer harm." The watchdog cites figures which show that more than one in ten customers of a major bank using BNPL were already in arrears.

Christopher Woolard, who is chairing a review into the unsecured credit market at the FCA, states: "Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic."

New figures published by Comparethemarket.com indicate that a fifth of Brits who used buy now, pay later (BNPL) schemes to fund their Christmas shopping are now unable to meet their repayments without taking on more debt.

The comparethemarket survey shows that 44% of Brits who used a BNPL scheme over Christmas are now concerned about their ability to repay.

Almost a third of respondents using a scheme feel BNPL made them spend more than they usually would and over two-fifths bought more extravagant gifts. A third of people using a BNPL scheme for Christmas spending did so because they could not afford the purchase upfront at the time and wanted to delay the payment, and 23% say BNPL better suits their financial needs than other forms of debt, such as a credit card.

Over a quarter were also offered a special discount if they used the scheme - as some outlets have partnerships and discounts with BNPL providers.

James Padmore, head, money, comparethemarket.com, says: "When used responsibly, Buy Now Pay Later schemes can be an effective and alternative way to spread out the payments of large purchases. It’s easy to see why it’s popular at a time like Christmas when people may be spending larger sums than usual.

"However, the ‘I’ll deal with it later’ attitude to using this type of financing may mean that some people are now really feeling the strain. Our findings show that this has unfortunately caught up with some customers who are now having to take on more debt to cover the cost of their Christmas spending."

The survey chimes with recent research from Capco which found that more than half of 18-34 year olds using BNPL have missed a payment and nearly two thirds think BNPL is making them spend more, potentially increasing their chances of getting into debt.

The FCA says the provision of debt advice will be critical to a sustainable market in the long term, especially through the recovery from coronavirus. "Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases, following the pandemic. Funding needs to be in place to help the poorest pay fees when applying for debt relief orders," states the watchdog.

Lenders will also be required to carry out affordability checks on customers and ensure the vulnerable are treated fairly.

On alternatives to high-cost credit, the FCA says it will work with the Government and Bank of England to reform the regulation of credit unions and Community Development Finance Institutions.

"More should be done to encourage mainstream lenders into this space," the regulator says. "In addition to making sure products are affordable, there should be an increased focus on lenders meeting consumers needs’ for as long as they hold the product. The FCA should review repeat lending.