Looming changes for the “buy now, pay later” market

In a bid to protect consumers, the Federal Government has released a consultation paper seeking views on options to regulate the “buy now, pay later” (BNPL) market. Currently the BNPL space is unregulated in Australia and thus not subject to responsible lending standards, despite involving financial products that offer credit. Consumer advocates argue that this regulatory gap has the potential to create harm.

The consultation paper outlines three options, of ascending interventionary levels, for the regulation of the BNPL market, ranging from bespoke affordability assessments to treating BNPL like other credit services.

It has been estimated by the Reserve Bank of Australia that approximately seven million active BNPL accounts made a total of $16 billion in transactions in the 20212022 financial year. This accounts for around a 37% increase on the previous year. Low value BNPL products that typically provide a spending limit of $2,000 are the most popular in Australia, although spending limits of up to $30,000 are available from some providers for large ticket items such as home upgrades.

Currently, the BNPL space is unregulated in Australia because it falls under the exemptions available to certain types of credit under the National Consumer Credit Protection Act 2009 (the Credit Act). Due to this exemption, BNPL products are not subject to responsible lending standards or other requirements of the Credit Act. In addition, providers do not need to hold an Australian credit licence (ACL). Perhaps due to this lack of regulation, there has been an exponential growth in the BNPL market in Australia and many other similar unregulated markets. Consumer advocates argue that this regulatory gap has the potential to create harm in the absence of key consumer protections.

Assistant Treasurer and Minister for Financial Services Stephen Jones has said that, at a minimum, the government is looking at “… putting in place some sort of credit checks to ensure that the product is affordable and suitable for the people … We don’t want to see people who are in the same situation they were in the bad old days of the credit card … where they might have had five, six, seven or eight credit cards. No one company knew that the other one had one and this person was just simply unable to pay off their debts ... And that's what we want to address.”

Some of the issues raised by various stakeholders on BNPL schemes include:

• unaffordable/inappropriate lending practices contributing to financial stress/hardship;
• poor complaints-handling processes and lack of hardship assistance;
• excessive/disproportionate consumer fees and charges (eg large default fees relative to size of debt);
• non-participation in Australia’s credit reporting framework, meaning information is not available for use in credit checks by other lenders;
• poor product disclosure practices, meaning consumers cannot make informed choices;
• unsolicited selling targeting consumers and encouraging the use of BNPL for essentials such as groceries and utilities;
• uncomplicated sign-up to BNPL products, which increases the chances of other consumer harms such as scamming, overselling and financial abuse; and
• inadequate reverse-charging provisions when goods purchased on BNPL are returned.

To resolve some of these issues, the consultation paper proposes three broad options of varying levels of regulatory intervention. Option 1 would impose a bespoke affordability assessment for BNPL providers under the Credit Act and address any other regulatory gaps in a strengthened industry code to make it fit-for-purpose. Option 2 would require BNPL providers to obtain and maintain an ACL, and in addition, would introduce modified responsible lending obligations under the Credit Act to determine unsuitability combined with a strengthened industry code. Option 3 would impose the strictest regulation, with BNPL providers needing to obtain and maintain an ACL. The existing responsible lending obligations in the Credit Act would also be applied to all BNPL credit, including requirements around reasonable inquiries into a consumer’s financial situation and taking reasonable steps to verify this information.

Submissions on the options paper are open until 23 December 2022.

Source: https://treasury.gov.au/consultation/c2022-338372 
https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/buy-now-pay-later-consultations-open