Australian Government now seeking industry feedback for ‘Buy Now, Pay Later’ regulations

By John Bassilios

Treasury is currently seeking feedback on improving the regulation of ‘Buy Now, Pay Later’ services in Australia, which will inform the proposed future regulatory framework under the Credit Act.

In this update, we outline the regulatory challenges Treasury aims to address with the future framework, and the regulatory approaches it has proposed for feedback at this early stage.

You can read the full options paper and submit a response on the ‘Regulating Buy Now, Pay Later in Australia’ page of Treasury’s website.

What regulatory issues has Treasury identified in the BNPL sector?

Buy Now, Pay Later (BNPL) services typically do not fall under the regulatory framework established by the National Consumer Credit Protection Act 2009 (Cth) (Credit Act), either because the service does not meet the definition of ‘credit’ regulated under the Credit Act or because it falls under the exemption for interest-free continuing credit contracts. This means that BNPL products which operate within these exemptions are not subject to certain requirements under the Credit Act, including adhering to responsible lending obligations or holding an Australian Credit Licence.

This looser regulatory environment, combined with the rapid growth of the BNPL industry has led Treasury to identify potential regulatory issues leading to poor consumer outcomes. The issues Treasury has identified include:

• unaffordable lending practices and inadequate affordability assessments of consumers, as BNPL providers are exempt under the Credit Act from conducting an unsuitability test to determine consumers’ financial circumstances.
• inadequate complaints handling and hardship support procedures, which are regulated by the voluntary and unenforceable BNPL Industry Code developed by the Australian Financial Industry Association.
• excessive or disproportionate consumer fees and charges, relative to the debt and value of the BNPL credit provided.
• non-participation in Australia’s credit reporting framework, meaning that BNPL credit information may not be available to other lenders for use in credit checks.
• unsolicited selling and advertising practices, which encourage the use of BNPL for essentials such as groceries or utilities.
• frictionless sign-up to BNPL products, which exposes consumers to harms such as scamming, overselling, and financial abuse.
• inadequate reverse charging provisions on product returns for goods purchased using a BNPL service.

Treasury is seeking feedback on other potential areas of consumer harm, and evidence of contributors to consumer harm in relation to BNPL products.

What options has Treasury proposed?

Treasury has proposed three options for a new regulatory framework for BNPL services, guided by the following principles:

• improvement of consumer protection, while ensuring BNPL products remain accessible.
• flexible framework to allow new BNPL providers and financial products to enter the market.
• respect for the competitive nature of the BNPL market and the roles and interests of consumers, merchants and providers in the sector.
• consideration of existing regulatory frameworks for comparable regulated credit products.
• ensuring that regulations are practicably enforceable by regulators such as ASIC.

The three options Treasury proposes are:

Option 1: strengthening the BNPL Industry Code and bespoke affordability test

Under this option, the new regulatory framework will impose:

• specific requirements under the Credit Act for BNPL providers to check that a BNPL product is not unaffordable for a consumer; and
• a strengthened BNPL Industry Code.

Option 2: limited BNPL regulation under the Credit Act

Under this option, the new regulatory framework will impose:

• a requirement to obtain and maintain an Australian Credit License under the Credit Act;
• modified responsible lending obligations under the Credit Act to determine whether a consumer is unsuitable for BNPL credit where the obligations are scaled to the level of risk of the BNPL service;
• a prohibition on increasing consumer spending limits without instructions from the consumer;
• fee caps for charges relating to missed or late payments, combined with additional warning and disclosure requirements; and
• a strengthened BNPL Industry Code.

Option 3: full BNPL regulation under the Credit Act, including responsible lending obligations

Under this option, the new regulatory framework will impose:

• a requirement to obtain and maintain an Australian Credit License under the Credit Act;
• application of all existing licensee and responsible lending obligations under the Credit Act to BNPL credit;
• a requirement that BNPL providers allow consumers to set their own spending limit and a prohibition on increasing that limit without instruction from the consumer;
• fee caps for charges relating to missed or late payments, combined with additional warning and disclosure requirements; and
• a revised Industry Code to include provisions to address issues not appropriately considered within the scope of the Credit Act.

Treasury is now seeking feedback on whether the guiding principles are appropriate and fit for purpose for the new BNPL regulatory framework, and which of the three options is most appropriate, including whether aspects should be changed within the options.

Have your say

You can submit responses to the Treasury on the ‘Regulating Buy Now, Pay Later‘ page of its website. If you would like further information on the BNPL regulatory framework, or assistance with making a submission in response to the Treasury’s options papers, please contact us.

Our Fintech and Blockchain Lead, Partner John Bassilios (and Blockchain Australia Director) has written the Australian chapter of the Lexology Getting The Deal Through Fintech 2023 publication.