Regulatory Update: Progress of Proposed BNPL Reforms

Co-authored by Annabelle West, Solicitor

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Regulatory Update: Progress of Proposed BNPL Reforms

Regulatory Update: Progress of Proposed BNPL Reforms

Co-authored by Annabelle West, Solicitor

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February 10, 2023

Key points

BNPL products are set to become regulated by Treasury, with the extent of regulation to be determined by feedback received in response to the three Options proposed by Treasury.
BNPL products currently fall within one of the exemptions under the NCCP Act, and the three Options propose progressively stronger levels of regulation and corresponding obligations for BNPL providers.
Feedback received thus far has been mixed, with consumer groups supporting the strongest level of regulation to prevent potential consumer harm. Other industry participants have advocated for the less stringent Options 1 or 2 to address perceived weaknesses in the current regulatory landscape while maintaining ease of commercial practice.

Background

In November 2022, Treasury released the ‘Regulating Buy Now, Pay Later in Australia’ Options Paper (Options Paper), opening up submissions for appropriate regulation of the Buy Now, Pay Later (BNPL) sector. Treasury proposed three options for regulatory intervention, each reflecting a progressively stronger level of regulation and potential requirements for BNPL providers.

BNPL products are an alternative to traditional credit, providing consumers interest-free finance which can be used to pay for goods, services and bills (rather than providing them with cash). BNPL providers pay merchants the value of the purchase upfront, less any fees, and collect repayments from consumers in instalments. Consumers pay a low fixed fee for using the service.

Currently, BNPL is not regulated under the National Consumer Credit Protection Act (NCCP Act), as it falls within one of the exemptions. It does fall within the broader regulatory framework of the ASIC Act, Corporations Act (including DDO and Product Intervention Powers), Australian Consumer Law and Anti Money Laundering / Counter-Terrorism Financing regime. However, given the lack of NCCP regulation, BNPL providers are not required to have an Australian Credit Licence (ACL) or engage with the responsible lending regime, among other would-be requirements. The Australian Finance Industry Association (AFIA) have also issued a ‘Buy Now Pay Later Code of Practice’ (Industry Code), but this is not enforceable by ASIC and only signatories are required to be members of AFCA.

AFIA reports that BNPL contributed $14.3 billion to Australian GDP in FY21, and resulted in 99,200 jobs. On the other hand, advocates have called to make BNPL safer, noting potential and actual severe consumer harm as many consumers are turning to BNPL just to manage finances (especially as the scope of goods and services covered by BNPL broadens). ASIC research from November 2020 showed that 20% of BNPL users cut back or went without essential items in order to make payments, while 15% of people took out other loans to make a BNPL payment.

The key task for regulation of BNPL going forward, as indicated by Treasury, is to maintain the clear benefits of BNPL (as well as industry flexibility and competition) while also addressing the risk of consumer harm.

Summary: The Options

Treasury proposed three options for a new regulatory framework for BNPL, outlined in the below table.

	Framework
Option 1: Strengthening the BNPL Industry Code plus an affordability test	Amendment of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) to introduce a ‘not unaffordable’ check, allowing for scalable checking of a consumer’s ability to afford the BNPL credit (eg only conducting a risk assessment where a person is identified as a risky borrower after carrying out a credit check). This would differ from a ‘not unsuitable’ analysis and would not require the BNPL provider to check if the provision of credit aligns with a person’s needs and objectives. No requirement for an ACL. Strengthen various (unspecified) provisions of the Industry Code to effect higher standards for BNPL providers Make certain provisions in the improved Industry Code enforceable by ASIC. Possibly make the Industry Code mandatory for all BNPL providers. Voluntary participation in the credit reporting framework. ASIC could issue regulatory guidance regarding interpretation of statutory obligations.
Option 2: Limited BNPL regulation under the Credit Act, including licensing and scalable unsuitability test	Brings BNPL within the NCCP Act, applying a tailored version of the Responsible Lending Obligations (RLOs) to BNPL products, supplemented by the strengthened Industry Code outlined in Option 1. BNPL providers required to hold an ACL or be a representative of a licensee. This will require compliance with general obligations of a licensee (and more meaningful engagement with the existing credit reporting regime under the Privacy Act) including: Internal dispute resolution (IDR) and external dispute resolution (EDR) mechanisms; Hardship provisions; Compensation arrangements; Fee caps; Marketing rules. New provisions in the NCCP, calibrated to the level of risk of BNPL products and servicing, eg allowing exemptions from reference checking. Merchants offering BNPL would not need to be an authorised credit representative of the BNPL provider. Voluntary participation in the comprehensive credit reporting framework (unless the BNPL provider is a big bank). BNPL providers to make an assessment that a BNPL credit is ‘not unsuitable’ for a person. Prohibition on increasing BNPL consumer’s spending limit without explicit instructions from that consumer. Introduce requirement for fee caps for charges for missed or late payments, as well as additional warning and disclosure requirements. Strengthen the Industry Code similarly to Option 1, and make certain parts of the Industry Code enforceable by ASIC.
Option 3: Regulation of BNPL under the Credit Act	Treats BNPL products similarly to other credit products which are regulated under the Credit Act, and requires BNPL providers to comply with the regulations (including RLOs). Owing to this regulation under the Credit Act, BNPL providers would be required to check that products are ‘not unsuitable’ for a person. Requires compliance with all licensee obligations, including: Reportable situations regime; IDR and EDR; Compensation arrangements; ASIC reporting obligations; Credit Act requirements (such as information sharing, warnings, and hardship) As licensees, BNPL providers could better engage with the credit reporting regime to share and receive all credit information. Providers would not be captured under the mandatory Comprehensive Credit Reporting regime unless they are a big bank. Treasury does not expect this Option to require merchants offering BNPL to consumers to be an authorised credit representative. Prohibition on increasing BNPL consumer's spending limit without explicit instructions from that consumer, as well as a requirement that consumers be allowed to set their own spending limit. Introduce requirement for fee caps for charges for missed or late payments, as well as additional warning and disclosure requirements. Revise the Industry Code to add provisions regarding: setting industry standards; refund and chargeback processes; guidance to providers on identifying domestic violence, coercive control and financial abuse. Depending on the industry’s decision, the Industry Code could be strengthened to a higher industry standard than required by law (with ASIC’s approval).

Response from Industry and Commentary

Submissions for the Options Paper closed on Friday 23 December 2022. The options put forward by Treasury are subject to change depending on public feedback received in response to the paper.

Media reports have outlined several entities’ submissions in response to the Options Paper. These reports indicate varying levels of support for regulation under the Credit Act, as opposed to only strengthening the Industry Code. Supporters of Option 3, including consumer groups and some banks endorse full regulation similar to other credit products. Consumer groups have argued that Options 1 and 2 create a bespoke form of BNPL regulation, which will only increase regulatory complexity and allow several legal loopholes which, they argue, BNPL exploits to remain in place. Supporters of Option 2 back an approach that balances the benefits BNPL can offer consumers with perceived inadequacies in current regulatory protections. Those who favour Option 1 show support for requiring providers to adhere to the Industry Code, but some are opposed to the potential limits stronger regulation will impose on BNPL providers’ commercial practices such as optimising onboarding of customers.

Several submissions have indicated support for tailoring options further to suit the distinctive features of BNPL, or have suggested a mix of features from different options.

A final decision about the best way forward for regulation of BNPL is forthcoming. Findings of the government’s consultation process will inform the ultimate decision on the future of BNPL regulation in Australia.