Tightening BNPL regulation: BNPL products to be regulated as credit products

5 minute read 24.05.2023 Kate Hilder, Siobhan Doherty

Following consultation on potential options to strengthen BNPL consumer protections, the government has announced next steps. Our key takeaways are below

Key Takeouts

Following consultation (summarised) the government has confirmed plans to progress the second of the three potential options put forward to tighten BNPL regulation.
The Assistant Treasurer has indicated that the government plans to consult on the detail of the proposed reforms later in the year, with a view to introducing the necessary legislation into Parliament by the end of 2023. It is not clear at this stage when the changes would commence.

Tighter BNPL regulation on the way

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 Buy Now Pay Later (BNPL) arrangements, because BNPL falls under the exemptions available to certain types of credit in Schedule 1 to the Credit Act (the National Credit Code).

The government has previously commented that this:

'unintended regulatory gap creates the potential for consumer harm due to the absence of key protection'.

Following consultation (read BNPL reform: Tighter regulation of the BNPL sector on the way?) on three potential options to address this issue, Assistant Treasurer Stephen Jones has confirmed that the government plans to:

'change the law, so that buy now, pay later products are regulated as credit products'.

Importantly, this is not to say that BNPL providers and the products/services they offer, are proposed to be regulated in the same way as other credit products (eg credit cards) under the Credit Act (we discuss this in more detail below).

The Treasurer provided minimal detail around the changes, instead confirming that further consultation on the detail of the reforms is planned for later in the year.

Here's what we know about the proposed changes and timeline so far.

Regulating BNPL: Introducing an ACL requirement and a 'sliding unsuitability test'

The Assistant Treasurer confirmed that the government plans to progress the second of the three options previously put forward for consultation (read BNPL reform: Tighter regulation of the BNPL sector on the way?). The Assistant Treasurer summed up the proposed changes, briefly as follows.

Under the proposed changes, BNPL Providers would be required to:

'hold Australian Credit Licences;
comply with Responsible Lending Obligations;
meet statutory dispute resolution and hardship requirements;
comply with statutory product disclosure and other information obligations;
abide by existing restrictions on unacceptable marketing; and
meet a range of other minimum standards in relation to their conduct, and in relation to their products.
Our plan will give ASIC strong enforcement powers'.

The Options paper itself providers a little more detail on some of these points. The Options Paper suggests that BNPL providers would be required to:

hold an Australian Credit Licence (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.

Stronger industry Code?

The Options paper also flagged that under Option 2, 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, the Options Paper 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.

'Strong' ASIC enforcement

The Options Paper suggests that if BNPL were brought under the Credit Act, ASIC would increase its monitoring of the BNPL sector, supported by data collection to enable oversight of consumer outcomes.

It was also suggested that ASIC's industry funding arrangements could be extended to enable the regulator to recover the cost of regulating BNPL from the BNPL sector.

In his address, the Assistant Treasurer said that the government's 'plan will give ASIC strong enforcement powers', but provided no further detail. It's not clear whether it's envisaged that this would be supported by new data collections as flagged above and no mention was made around funding.

Why is this the government's preferred option?

As flagged, Option 2 is the second of three potential options for reform previously put forward for consultation and arguably represents the 'middle ground' in that the government proposes to extend a modified version of responsible lending obligations to BNPL products, without subjecting them to the same level of regulation as other credit products (eg credit cards) as envisioned under the third and most stringent of the three reform options.

Mr Jones emphasised that the government considers Option 2 appropriately balances increased consumer protection with the benefits that BNPL provides eg enabling access to credit for consumers who he said have 'been excluded from traditional forms of credit, and who use BNPL carefully and frugally, to smooth the impact of large expenses'.

Mr Jones said:

'We have had to find a balance. And we think we’ve done it.
Our plan maintains the benefits of BNPL that many Australians enjoy, and we must ensure that providers will have appropriate safeguards in place, and we must ensure that they operate honestly, efficiently, and fairly, in line with other regulated credit products'.

Timing

Mr Jones flagged plans to consult with industry on the specifics of the changes later in the year.
It's envisioned that legislation will be introduced into Parliament by the end of 2023.
It is not clear when the new changes (if/when) legislation would apply.

Initial response

In a statement responding to the Assistant Treasurer's announcement AFIA indicated it will continue to work collaboratively with the government on the design of the reforms.

AFIA CEO Diane Tate added that:

'It is good to see the Government acknowledge the important role of BNPL in improving financial inclusion for consumers, increasing innovation and competition, and driving opportunities for retailers'

Stronger protections welcome, but need to see more detail say consumer groups

Consumer groups (eg CHOICE, the Consumer Action Law Centre, the Financial Rights Legal Centre, Financial Counselling Australia ) have strongly advocated for BNPL to be regulated in the same way as other credit products are regulated (ie for Option 3) in light of the harms they consider BNPL causes, especially harm to consumers experiencing vulnerability.

In a statement responding to the Assistant Treasurer's announcement, consumer groups welcomed the introduction of stronger consumer protections but emphasised that they need to see more detail before it will be clear whether the changes go far enough. In particular, the statement highlights the importance of ensuring that the proposed 'modified' RLOs are fit for purpose.

CHOICE CEO, Alan Kirkland commented:

'To protect people from the unsafe lending practices we are seeing now, these changes will need to include strong requirements for BNPL providers to check that a loan is suitable, regardless of the size of the amount involved. We will be particularly concerned about how the safe lending provisions of these reforms are drafted. While the government has said these will be scalable, we should not assume that small loans are automatically safe. Many of the people who end up in financial hardship as a result of BNPL have smaller loans, often many of them.'

Financial Rights Legal Centre CEO, Karen Cox expressed disappointment that BNPL will not be 'not be treated the same as all other credit' cautioning that 'small amount, low cost credit does not equal safe or sustainable lending.'

Ms Cox also called for all of the new requirements to be enshrined in legislation, rather than in the industry Code, because 'in our experience, complaints under the BNPL Code don't lead to any real consequence or change in industry practice.'

[Source: Assistant Treasurer Stephen Jones address to the Responsible Lending & Borrowing Summit 22/05/2023]