Treasury’s draft ‘Buy Now, Pay Later’ legislative package: what you need to know

By John Bassilios and Max Ding

Treasury’s draft ‘Buy Now, Pay Later’ (BNPL) legislative package introduces proposed amendments to the National Consumer Credit Protection Act 2009 and the National Credit Code. The package aims to regulate BNPL arrangements as low-cost credit contracts (LCCC), imposing fee restrictions and licensing requirements on BNPL providers. It aligns with Treasury’s proposed regulatory options and seeks to balance consumer access with enhanced protections. We unpack everything you need to know.

Overview

• On 12 March 2024, Treasury published the highly anticipated draft ‘Buy Now, Pay Later’ (BNPL) legislative package.
• The package contains a proposed Treasury Laws Amendment Bill 2024: Buy Now, Pay Later (Draft Bill), an exposure draft National Consumer Credit Protection Amendment (Low Cost Credit) Regulations 2024 (Draft Regulations), as well as the Explanatory Memorandum and the Explanatory Statement for the legislative materials.
• The Draft Bill proposes to amend the National Consumer Credit Protection Act 2009 (Credit Act) and the National Credit Code (Credit Code). It introduces a regime that regulates BNPL arrangements as a type of ‘low-cost credit contract’ (LCCC).
• The Draft Bill largely aligns with the second of the three options proposed by Treasury to regulate BNPL products, as described in Treasury’s options paper released in November2022 (our summary of the three options can be read here). In particular, the Draft Bill intends to establish a flexible and proportionate composite regulatory regime consisting of mandatory obligations, as well as opt-in provisions for LCCC providers.
• The proposed legislative reforms represent a positive step in alleviating the current challenges linked to the current generous BNPL regulatory environment. However, they are also likely to increase compliance burdens and costs for BNPL providers.

A deeper dive

The new regulatory regime aims to preserve the benefits of consumer access to LCCC products, while creating proportionate protections against the risk of consumer harm, by:

• ensuring LCCCs are a form of credit regulated under the Credit Act and are captured by the Credit Code (Objective 1);
• requiring LCCC providers to hold and maintain an Australian credit licence, and to comply with the applicable licensing requirements and licensee obligations (Objective 2);
• refining the existing Responsible Lending Obligations (RLO) regime, putting in place an opt-in RLO framework (Objective 3); and
• installing anti-avoidance protections to prevent LCCC providers from structuring their business models and credit activities to bypass regulation (Objective 4).

We discuss each of these objectives below.

Objective 1: defining LCCCs and BNPL arrangements as a new type of credit

The Draft Bill expands the scope of existing credit legislation to include BNPL arrangements by introducing ‘Schedule 1-Low cost credit contracts’ into the Credit Act. Within this schedule, proposed sections 13C and 13D define ‘LCCC’, ‘BNPL arrangement’ and ‘BNPL contract’, respectively.

Broadly:

• A ‘BNPL arrangement’ is defined as an arrangement for goods or services between a merchant and a retail client under which the BNPL provider (as a third party to the goods and services arrangement) directly or indirectly pays the merchant an amount that is some or all of the price of the goods or services, and where there is a contract between the BNPL provider and the retail client under which the BNPL provider provides credit to the retail client in relation to the transaction.
• A ‘BNPL contract’ is defined as a contract between the BNPL provider and a retail client and pursuant to a BNPL arrangement, under which the BNPL provider provides credit to the retail client in connection with a transaction between the merchant and retail client for goods or services.

Certain arrangements are excluded from the BNPL arrangement definition, including arrangements by merchants whose principal business is the supply of administration, brokerage, management, collection, recovery or other incidental services in connection with the provision of credit under credit contracts.

Relevantly, a BNPL contract will be defined as a form of LCCC,[1] provided other requirements under the proposed section 13C are also satisfied. The Draft Regulations also impose caps on fees and charges for LCCCs,[2] which must be satisfied to qualify under the definition of LCCC.

Under the Draft Regulations, LCCCs cannot charge fees (other than default fees) exceeding $200 for the first 12 months of entering into an LCCC with a consumer. Additionally, it cannot charge fees exceeding $125 for any subsequent 12-month period following the initial 12 months. Furthermore, if a BNPL provider has already entered into, or within the previous 12 months entered into, an initial LCCC with the consumer and the BNPL provider is not an ADI (eg an Australian bank), it cannot charge any fees related to the second LCCC or any subsequent LCCCs entered into concurrently with the initial LCCC or within the following 12 months.

Moreover, under the Draft Regulations, LCCCs cannot charge default fees exceeding $10 a month for an initial LCCC with a consumer and cannot (unless it’s an ADI) charge any default fees for any subsequent LCCCs it enters into with the consumer concurrently or within the next 12 months.

While the current definition of LCCC is limited to BNPL contracts, it also permits classes of LCCC,  such as wage advances to be prescribed by regulations. Consequently, these classes could potentially be governed by the Credit Act in the future.[3]

LCCCs are excluded from the current definitions of ‘short term credit contract’, ‘small amount credit contract’ and ‘medium amount credit contract’ under the Credit Act.

Objective 2: BNPL providers must hold Australian credit licenses to provide LCCCs

LCCC providers will be subject to the licensing requirements outlined in Chapter 2 of the Credit Act. They must either obtain an Australian credit licence if they don’t already hold one or apply for a variation of the authorisations under an Australian credit license they already hold to enable them to provide LCCCs in accordance with section 45 of the Credit Act. ASIC will retain the power to suspend, cancel and vary an Australian credit licence.

The licensee obligations LCCC providers must comply with include those relating to hardship, internal and external dispute resolution, marketing and compensation arrangements. The obligations concerning interest and interest rates and charges,such as mandatory disclosure requirements, will only bear on an LCCC provider if it charges interest on the provision of credit.

Not all Credit Act rules will apply:

• LCCC licensees won’t be subject to the Reference Checking and Information Shipping Protocol, which sets out reference checking and information sharing obligations for licensees and credit representatives in the mortgage industry. This has minimal application to the BNPL/LCCC business model;
• LCCC licensees won’t be subject to the Credit Code’s comparison rate provisions, which enable consumers to determine the ‘true’ cost of credit offered by credit providers to make it easier for consumers to compare different credit products available on the market. As a relatively small portion of LCCC fees are charged to consumers under BNPL arrangements, and fees are normally charged to merchants, showing comparison rates may mislead consumers rather than assist them; and
• unless they are engaging in debt collection, credit representatives of LCCC providers won’t need to meet certain requirements relating to sub-authorisation and associated reporting, credit guide provision and Australian Financial Complaints Authority membership.

Objective 3: applying RLOs on BNPL providers

LCCC licensees, including BNPL providers, will be required to elect in writing to comply with either:

• the present ‘full’ version of the RLOs under the Credit Act; or
• the new ‘modified’ RLOs for LCCCs, which allows the requirements to expressly scale according to certain risk factors.

The first option will apply if a choice isn’t made.

Like the ‘full’ version of the RLOs, the modified RLOs framework requires an LCCC provider – before entering an LCCC or increasing a consumer’s credit limit – to:

• make reasonable enquiries as to the consumer’s requirements, objectives, financial situation;
• take reasonable steps to verify the consumer’s financial situation; and
• subsequently assess whether the credit contract will be ‘unsuitable’, including an assessment of affordability and whether the credit meets the consumer’s requirements and objectives.

However, the modified framework allows the requirements to be ‘scaled’ according to particular risk factors posed to consumers.[4] For example, in determining reasonable enquiries and reasonable verification, the LCCC licensee may take account of various risk factors, including:

• the nature of the product;
• the product’s target market;
• the financial vulnerability of the relevant class of consumers; and
• the existence of, and compliance with, any policies that decrease the risk of unaffordable lending.

Importantly, if an LCCC has a credit limit of less than $2,000, a rebuttable presumption arises that the contract will meet the consumer’s requirements and objectives if the contract is entered into, as part of the broader assessment of whether a contract is unsuitable. Moreover, any increases to the credit contract will be presumed to meet the consumer’s requirements and objectives if the credit limit of the initial contract after the increase will be less than $2,000, as part of the broader assessment of whether the contract is unsuitable.

It should be noted that determining whether a consumer’s requirements and objectives are met is only one limb of a broader assessment of whether a credit contract or credit limit increase is unsuitable.  The rebuttable presumption doesn’t apply to the other limbs, which are required to be assessed as part of the broader unsuitability assessment, including whether the consumer can comply with the financial obligations under the contract (taking into account hardship), as well as other matters prescribed by regulation.

The Draft Regulations also sets out the consumer information that must be obtained by an LCCC provider in undertaking the steps outlined above.[5]

In addition, under the modified RLOs framework, LCCC providers must prepare and review a written ‘unsuitability assessment policy’ describing how they will assess whether the contract is unsuitable.[6]

Objective 4: extending anti-avoidance provisions to BNPL providers

The Draft Bill specifically extends the application of the anti-avoidance sections under the Credit Act to LCCCs. A failure to comply with these provisions will result in the same penalties as those currently enforced under the Credit Act.

What’s next?

Public comment on the draft laws closed on 9 April 2024. Treasury is now considering the submissions made and the final bill is expected to be introduced later this year.

If you would like further information on the new BNPL regulatory framework, please contact us.

This article was written with the assistance of Wilson Lee, Law Graduate

[1] See proposed subsection 13C(1)(b)(i) in the Draft Bill.
[2] See proposed section 69E in the Draft Regulations.
[3] See proposed subsection 13C(1)(b)(ii) in the Draft Bill.
[4] See paragraph 1.57 of the Explanatory Memorandum
[5] See proposed Part 3.4A in the Draft Regulations.
[6] See proposed section 28HAF in the Draft Regulations.