The Australian Securities and Investment Commission (ASIC) has released its first review of the buy now pay later industry: Report 600 Review of buy now pay later arrangements. 

Scope of the review

The review commenced in January 2018 and examined six buy now pay later providers: Afterpay, Zippay, Certegy Ezi-Pay, Oxypay, BrightePay, and Openpay.  The review was based on independent consumer research, consultation with a range of stakeholders (including other regulatory agencies, consumer advocates and the two ASIC approved external dispute resolution schemes and the time and industry associations) and on information provided to ASIC by the providers.

Key findings

• There has been rapid growth in the industry: The number of consumers has risen from 400,000 in FY2016 to 2m in FY2018; transactions increased from 80,000 in June 2016 to 1.9m in June 2018, the number of merchants offering Zippay and Afterpay has increased 50-fold and 45-fold respectively, over two years; revenue of providers has increased from $32m in 2016 to $78m in Q2 2018.
• User-profile:  60% of users of the scheme are young (between 18-37), 2 in 5 earn under $40k and 40% are students or work part time.  More than 4 in 5 users who used the scheme in the last 12 months plan to do so again.
• In some cases, buy now pay later arrangements result in the price of goods being inflated: ASIC found that though each provider reviewed, contractually prevents merchants from charging consumers higher prices for using a buy now pay later arrangement, there was 'anecdotal evidence' that some merchants may have charged consumers 'significantly higher prices' for using the scheme including for: higher value purchases (purchases over $2000), where the price of goods is less transparent and 'negotiable' (eg solar power products) or where consumers are acquiring services. 
• The scheme appears to have influenced spending habits, with over-commitment a risk for some consumers.  According to ASIC, 55% of users spend more than they would have otherwise due to the design and speed of the sales process 'which can influence consumers to make a purchase without careful consideration of the cost'.  ASIC found the scheme can increase the amount of debt held by consumers and contribute to financial over-commitment.  For example, ASIC found that one in six users (16%) has become overdrawn, delayed another bill payment or borrowed additional money.
• Limitations of customer protections? ASIC notes that the consumer protections under the National Consumer Credit Protection Act 2009 (National Credit Act) do not apply to buy-now-pay-later arrangements (providers are not required to hold an Australian credit licence (credit licence) or to comply with the responsible lending obligations.)   This means that ASIC has limited jurisdiction to regulate conduct and to address lending risks to consumers when they use a buy now pay later arrangement.
• Extension of the (proposed) product intervention power to all credit facilities regulated under the ASIC Act? 'We consider that ASIC’s proposed product intervention power should apply to all credit facilities regulated under the Australian Securities and Investments Commission Act 2001 (ASIC Act), which includes buy now pay later arrangements. This would allow us to act quickly and effectively to address the causes of problems if we identify a significant detriment to consumers that cannot be resolved through other action' ASIC writes.

[Note: The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 proposes to enable ASIC to issue a 'product intervention order' if it is satisfied that a financial product or a credit product 'has resulted in or will, or is likely to, result in significant detriment' to consumers. The Bill has progressed to second reading stage in the House of Representatives and is yet to pass the Senate.  The Senate Economics Legislation Committee report, recommended that the Bill be passed.  Labor Senators have indicated their intention to introduce amendments to 'strengthen ASIC's remit so that conduct in the industry can be elevated, which will ensure that we have a sector that consumers can engage with and place their trust in'.  This includes extending design and distribution obligations and product intervention powers to 'all financial products specified in the ASIC Act', potentially 'amending the bill such that design and distribution obligations apply to credit products defined in the National Consumer Credit Protection Act' and amending the Bill 'so that ASIC be given standing under the design and distribution obligation regime to seek compensation on behalf of affected consumers who are non-parties to the legal proceedings'.]

Area of focus for the regulator: ASIC states that it will take regulatory action to address misconduct and monitor industry and risks to consumers.

• ASIC is 'considering the legal position' of scenarios where a merchant inflates the cost of the underlying goods if a consumer uses a buy now pay later arrangement. 'We have taken action against credit providers for attempting to avoid the National Credit Code by creating artificial business models and for engaging in credit activities without a licence' ASIC writes.
• ASIC is also 'monitoring' the issue of consumers becoming increasingly indebted due to the ability to access an alternate providers where they have missed payments.   According to ASIC, each provider reviewed takes some steps to refuse some credit applications eg if a consumer misses a scheduled repayment, five of the six providers suspend that consumer’s ability to make additional purchases until they have remedied the missed payment.  However, only one out of six providers in the review examined the income and existing debts held by consumers before providing their services.  ASIC also received reports of instances where consumers were allowed to the service despite having limited or no income and substantial existing debt.

ASIC expectations of providers: ASIC states that it expects providers to ensure that: (a) consumers adequately understand the terms of their arrangement; (b) a complaints process is visible and accessible for consumers; (c) consumers understand that they can request financial hardship assistance from their provider; and (d) merchants act consistently with guidelines supplied by the provider which limit how these arrangements may be promoted and provided to consumers.  ASIC writes that 'while we identified instances where providers could have done more, each provider demonstrated a readiness to work with ASIC by improving their practices in response to our recommendations' and that some have already implemented 'several improvements'.