The City watchdog has warned “buy now, pay later” companies for using social media stars to promote misleading adverts to their fans, despite repeated warnings over spiralling debt.

The Financial Conduct Authority said payment firms were encouraging shoppers to stagger payments when shopping online, without highlighting the risks of building debt and having a poor credit history. The multi-billion pound sector has been repeatedly hit by warnings over its advertising tactics.

In 2020 the Advertising Standards Authority, the advertising watchdog, banned four adverts run by Klarna, the Swedish payments firm, for “irresponsibly” encouraging shoppers to take on debt in a bid to “lift their mood” in the wake of lockdown.

Advertisements are commonly posted by an “influencer” on social media, a strategy aimed at younger customers. In a letter sent to industry bosses, the FCA warned it had seen adverts which encouraged impulse buying and the regulator promised to take action against firms exploiting customers during the cost of living crisis.

The regulator said some adverts were still promoting the benefits of buy now, pay later without also warning it risked causing debt, poor credit ratings and charges for late payments.

All adverts in the sector must be approved by a firm authorised by the FCA, which has changed or banned more than 4,200 promotions for breaking its rules on advertising so far this year.

The charity Citizens Advice has previously warned buy now, pay later loans could be a “slippery slope into debt” and one in 10 users had been referred to debt collectors.

Sheldon Mills of 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.”

A spokesman for Klarna, which is authorised by the FCA, said it had “actively and substantially” improved its advertising policies since the ASA rulings in 2020. It has also set up an “influencer council” in a bid to ensure its brand ambassadors abide by advertising rules.

The firm added: “Our advertising promotes responsible spending and our financial promotions already comply with the FCA rules.

“We share the concerns outlined in the FCA's letter because not all providers operate to the same high standards as Klarna. We continue to call for proportionate regulation of the sector so consumers are protected regardless of the provider they choose.”

Earlier this year the FCA intervened at Klarna and three other firms, Clearpay, Laybuy and Openpay, to improve their terms and conditions and make them “fairer and easier for consumers to understand”. The regulator said all four firms had cooperated and addressed its concerns.