Government consults on draft legislation proposing to regulate BNPL as credit

4 minute read  13.03.2024 Kate Hilder, Siobhan Doherty, Richard Batten, Ian Lockhart

A draft Bill and accompanying draft Regulations proposing to bring buy now, pay later (BNPL) products and other low cost credit contracts (LCCCs) within the scope of the Credit Act and Credit Code have been released for consultation.


Key takeouts


What's in the draft Bill?

Regulating 'Low Cost Credit Contracts' (LCCCs) as credit contracts

The objective of the proposed reformsis to bring 'low cost credit contracts' (LCCCs) – which for now would only include Buy Now, Pay Later (BNPL) contracts, but with scope for other products to be added at a future date - into the scope of the National Consumer Credit Protection Act 2009 (Cth) (Credit Act) and the National Credit Code as set out in Schedule 1 to the Credit Act (Credit Code).

For context, section 13C of the draft Bill defines a LCCC as follows:

'13C Meaning of low cost credit contract

(1) A contract is a low cost credit contract if:

(a) credit is, or may be, provided under the contract; and

(b) the contract is:

(i) a buy now pay later contract; or

(ii) a contract prescribed by the regulations for the purposes of this subparagraph; and

(c) the period during which credit is, or may be, provided under the contract is no longer than the period (if any) prescribed by the regulations for the purposes of this paragraph; and

(d) the contract satisfies any requirements prescribed by the regulations for the purposes of this paragraph that relate to fees or charges that are, or may be, payable under the contract; and

(e) the contract satisfies any other requirements prescribed by the regulations for the purposes of this paragraph'. [emphasis added]

The draft Explanatory Memorandum observes that though this definition is only proposed to apply to BNPL contracts at this time, the drafting enables 'other classes of LCCC' to (potentially) be covered in the future (such as wage advances)'.

BNPL products will be an arrangement, or a series of arrangements, under which:

'(a) a person (merchant) supplies goods or services to a retail client;

(b) a third person (BNPL provider) pays the merchant for the services; and

(c) there is a contract between the BNPL provider and the retail client for the BNPL provider to provide credit to the retail client in connection with the supply of the services'.

Proposed new obligations for BNPL providers

Broadly, it's proposed that LCCC providers (including BNPL providers) would:

Need to hold an Australian credit licence and comply with the relevant licensing requirements and licensee obligations, including obligations relating to internal and external dispute resolution, hardship, compensation arrangements and marketing.

Be subject to a 'modified version' of the existing Responsible Lending Obligations (RLOs). LCCC providers would be exempt from the requirement to undertake a preliminary assessment of unsuitability. An unsuitability assessment will still be required before the LCCC is entered into, but it's proposed that LCCC providers would have the option to conduct a modified form of the inquiries required to undertake an unsuitability assessment. 'LCCC providers [who take up this option will need to] take appropriate and proportionate steps to assess the suitability of lending' to the consumer before entering into a credit contract with a consumer or increasing a consumer's credit limit. The Government however acknowledges that this alternative may in some cases not reduce what is reasonably required ' for example, a provider was targeting a particularly risky target market or had poor product design.' (1.33, draft Explanatory Memorandum)

LCCC providers would also be required to have in place and review a written policy (unsuitability assessment policy) setting out how they assess whether a contract is unsuitable.

The steps that LCCC providers are proposed to be required to take are included in the draft Regulations.

It's also proposed that LCCC providers would have the option to comply instead with the existing RLOs in Divisions 1 to 4 of Part 3-2 of the Credit Act. The draft Explanatory Memorandum explains that this is to

'allow firms offering both LCCCs and currently regulated consumer credit products to use common responsible lending processes if they wish'.

Interest rates and charges: LCCC providers that charge interest on the provision of credit would also need to comply with mandatory disclosure obligations concerning interest rates and charges in section 17 of the Credit Code. The comparison-rate requirements in Part 10 of the Credit Code are not proposed to apply to LCCCs. On this, the draft Explanatory Memorandum comments:

'Given that a relatively small portion of Buy Now, Pay Later LCCC fees are charges to consumers (as opposed to merchants), comparison rates may be more likely to mislead consumers rather than assist them'.

It's also proposed that LCCC providers would be permitted to prompt consumers to increase their credit limit.

Proposed timing

The changes are proposed to commence on the earlier of 'a single day to be fixed by Proclamation' or six months after the Bill receives Assent.

[Source: Treasury Consultation: Buy Now Pay Later regulatory reforms 2 March 2024 - 09 April 2024]

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