By Huw Jones

LONDON (Reuters) -Britain on Tuesday set out draft legislation to regulate “buy now pay later” (BNPL) credit, saying the sector posed potential harm to consumers without thorough affordability checks.

BNPL companies are largely unregulated and typically offer on-the-spot interest-free short-term loans that spread payments for retail goods like clothing.

The sector nearly quadrupled during the pandemic in 2020 to 2.7 billion pounds ($3.28 billion).

With Britain facing a cost of living crisis, consumer groups worry cash-strapped people are getting into debt by using BNPL to buy food or pay energy bills.

The finance ministry launched a public consultation on Tuesday on legislation to regulate BNPL, giving the Financial Conduct Authority (FCA) powers to authorise operators and their activities.

The move had already been flagged for late 2022.

“People should be able to access affordable credit, but with clear protections in place,” Financial Services Minister Andrew Griffith said in a statement from the finance ministry.

BNPL agreements currently rely on minimal credit checks, with lenders not required to give key information to borrowers, and some people may end up borrowing more than they can afford to repay, the ministry said.

“Buy Now Pay Later borrowing can be like quicksand – easy to slip into and very difficult to get out of,” said Matthew Upton, director of policy at consumer group Citizens Advice.

BNPL works well for millions of people but consumers need protecting from problem debt, said StepChange, a debt advice charity.

The ministry said consumers will also be given the new right to take complaints to the Financial Ombudsman Service, part of what Jonathan Herbst, a lawyer at Norton Rose Fulbright, said was a fundamental change in approach for the sector.

Last February, the FCA told BNPL operators Clearpay, Klarna, Laybuy and Openpay to change their contracts after identifying potential harm to customers. It had to use consumer rights law pending the new legislation.

Once the FCA has been given its new powers, it will consult on detailed rules for the sector, such as mandatory affordability checks, licensing of operators, and fair marketing.

Jane Goodland, trustee of the Centre For Financial Capability, a financial education charity, said people of all ages were turning to BNPL as they struggled to meet payments due to rising inflation, showing the need for urgent regulation.

($1 = 0.8243 pounds)

(Reporting by Huw Jones. Editing by Jane Merriman and Sharon Singleton)