As previously foreshadowed, the government has released an Options Paper seeking feedback on three potential options to strengthen regulation of the buy now pay later (BNPL) sector.
Why is additional regulation being considered?
Currently, the consumer protections that apply to other forms of credit regulated under the National Consumer Credit Protection Act 2009 (Cth) (the Credit Act) do not apply to BNPL arrangements, because they fall under the exemptions available to certain types of credit in Schedule 1 to the Credit Act (the National Credit Code).
The government considers that this 'unintended regulatory gap creates the potential for consumer harm due to the absence of key protection'.
These consumer harms include for example instances of:
- vulnerable consumers accessing BNPL products, and sometimes creating multiple accounts, when they do not have sufficient income to meet their repayment obligations
- vulnerable consumers being charged high late payment or missed payment fees and falling into BNPL debt
- vulnerable consumers cutting back on essentials (eg food) to repay their BNPL debts
- consumers complaining of unsatisfactory complaint resolution/hardship support
Three reform options
To address the industry practices thought to be causing these (and other) consumer harms and following initial engagement with key stakeholders including BNPL providers, regulators and consumer groups, the Options Paper seeks feedback on three potential options for reform.
The Options Paper also makes clear that the government has an open mind on the merits of each option and remains open to considering alternatives. As such, Treasury states that 'submissions should not feel limited to commenting on only the options presented'.
The three options are summarised briefly below.
Option 1: Stronger Industry Code plus a new 'affordability test' requirement
Under the least stringent of the three options put forward, BNPL arrangements would be brought under the Credit Act, but would not be subject to the same level of regulation as other credit products.
Instead, it's suggested that the Credit Act would be amended to include a new 'bespoke affordability assessment for BNPL providers'. It's suggested that under this 'bespoke' assessment, where the lending amount is below a certain threshold, and provided that the borrower is not identified as a 'risky borrower', a BNPL provider could use a credit score check to satisfy the proposed new requirements, with no need to conduct further checks. That is, under this option there would be no requirement for BNPL providers to verify a customer's financial situation or check if the provision of credit aligned with their needs/objectives.
Importantly, there would also be no requirement for BNPL providers to maintain and Australian Credit Licence (ACL).
In addition, it's suggested that the existing (voluntary) BNPL Industry Code of Practice (launched by the Australian Financial Industry Association (AFIA) in 2021) would be strengthened in various respects. For example, it's suggested that:
- the Code could be made mandatory for all BNPL providers and enforceable by ASIC (subject to AFIA submitting the necessary application to ASIC and ASIC's approval). For context, as flagged the Code is currently voluntary and nine BNPL providers - Afterpay, Brighte, Humm, Klarna, Latitude, Openpay, Payright, Plenti and Zip - are signatories However, PayPal, the CBA and some smaller BNPL providers are not Code signatories.
- the Code could be revised to include tighter controls around certain industry practices including: use of consumer fees/charges (including default fees), refunds and chargeback processes, advertising and marketing, and product disclosure and warning disclosure requirements.
Option 2: Introducing an ACL requirement and a 'sliding unsuitability test'
Option 2 would build on Option 1 by, in addition to strengthening the Industry Code of Conduct as outlined above, introducing into the Credit Act requirements for BNPL providers to:
- hold an ACL or be a representative of a licensee, with BNPL providers required to comply with 'most general obligations' of a licensee eg internal and external dispute resolution, hardship provisions, compensation arrangements, fee caps and marketing rules.
- comply with 'modified' Responsible Lending Obligations (RLOs), or a 'sliding unsuitability test' under the Credit Act, 'scaled to the level of risk of the BNPL product or service'.
In addition, BNPL providers would be banned from increasing a consumer's spending limit without explicit instructions from the consumer requesting this.
Fee caps for charges (eg late fees) as well as new disclosure requirements would also be introduced.
Option 3: Regulation of BNPL under the Credit Act with full RLOs
Under the third option BNPL providers and the products/services they offer would be regulated as other credit products (eg credit cards) are regulated under the Credit Act. This would mean that:
- BNPL providers would be required to hold an ACL (or be an authorised representative of a licensee) and comply with all licensee obligations including (among others) the reportable situations regime and internal and external dispute resolution requirements.
- BNPL providers would also be required to check and satisfy themselves that a BNPL product/arrangement is not unsuitable for a person in accordance with existing RLOs that apply to other credit products (eg credit cards).
- In addition, BNPL providers would:
- need to allow consumers to set their own spending limit
- be banned from increasing this limit without the consumer's permission
- be banned from charging consumers fees 'relating to missed or late payments' in excess of set caps
- need to comply with new disclosure requirements
- Separately, the Options Paper suggests (consistent with Options 1 and 2) that the BNPL Industry Code could be strengthened in various respects and made enforceable through ASIC.
Other (potential) supplementary reforms
The Options Paper puts forward a number of other measures outside of amendments to the Credit Act and the Industry Code which could supplement any of the three options outlines above. These include:
- lifting consumers' 'financial capability' on the basis that:
'if consumers had a better understanding of BNPL fees and charges, debt liabilities, provider incentives, personal budgeting and alternative avenues for financial assistance (for example, the No Interest Loans Scheme), they may be less likely to experience financial stress and hardship'.
- (Assuming BNPL is brought under the Credit Act), increasing monitoring by ASIC of the BNPL sector supported by data collection to enable oversight of consumer outcomes. It's also suggested that ASIC's ASIC industry funding arrangements could be extended to enable the regulator to recover the cost of regulating BNPL from the BNPL sector.
- The lifting of the existing 'no surcharge' rules which currently prevent merchants from passing on the cost of BNPL to consumers.
The due date for submissions on the Options Paper is 23 December 2022.
Treasury flags that further targeted consultation is planned to be undertaken with key stakeholders which will help inform, in addition to formal feedback received in response to the Options Paper, the government's decision on how to proceed.
Consumer groups argue the most stringent option is the only way to address consumer harms
Consumer groups – Consumer Action Law Centre, Financial Counselling Australia, Financial Rights Legal Centre, CHOICE, and Consumer Credit Legal Centre WA – have said that of the options put forward, only Option 3 (regulating BNPL under the Credit Act in the same way as other credit products are regulated) would 'adequately address' the consumer harm caused by BNPL products. In their view, Options 1 and 2 would see the existing issues continue.
Regardless of which option is ultimately implemented, the regulation of BNPL will undoubtedly result in significant change for the industry. If you are a business or person that is involved with the BNPL regime you should consider how your business may be effected by the new regulations.
We will provide further updates as the consultation proceeds. In the meantime, if you feel any of these proposed changes could impact your business or would like assistance with making a submission, feel free to contact us.
[Sources: Treasury Consultation: Regulating Buy Now, Pay Later in Australia 21 November 2022 - 23 December 2022; Options paper]
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