Up until now, BNPL products have not been regulated under the Credit Act and were not subject to responsible lending standards, and BNPL providers did not need to hold an Australian Credit Licence (ACL). This is all due to change now.
On 22 May 2023, Treasury announced at the Responsible Lending and Borrowing Summit in Sydney the Government’s intention to regulate the Buy Now, Pay Later (BNPL) industry under the proposed Option 2 as presented by Treasury in its BNPL consultation last November. Under this option, the services will be subject to limited regulation under the National Consumer Credit Protection Act 2009 (Credit Act), with providers required to have a credit licence, hardship requirements, and minimum standards for conduct.
On 26 May 2023, the Australian Securities and Investments Commission (ASIC) announced a stop order on Humm’s BNPL products over concerns regarding its target market determination for its products.
What is Buy Now, Pay Later (BNPL)?
BNPL provides a tweak to the traditional lay-by model by allowing consumers to pay for products in four installments while being able to use the product straight away. Provided you make the payments on time, you don’t incur interest or fees. BNPL has been received by consumers as a convenient alternative to traditional credit cards and loans. For retailers, this means no longer having to track and hold stock and payments as the responsibility passes over to the BNPL provider.
Australia has been at the forefront of the BNPL industry, with several prominent BNPL companies originating right here, like Afterpay, Zip, and Humm. These providers have gained widespread popularity domestically and internationally. Take Afterpay, which has been the absolute standout global growth story on the Australian markets over the past few years. Afterpay commenced operations in early 2015 and was listed on the ASX (ASX: APT) via an IPO raising $25 million in mid-2016 at a share price of $1. Today, it has been bought out by Square and trades at just below the $70 mark.
There has been a boom in the BNPL industry, which was expected to grow in 2023 by 20.5% to a huge US$14,241.5 million. This will be interesting to see how this plays out with the new regulations.
Background to BNPL regulation
Fuelling the rapid growth and ubiquity of BNPL products are the growth of digital platforms and blended shopping experiences, which have in turn increased calls to regulate the BNPL industry that are driven by concerns that consumers are not provided with the same protections that exist for consumer credit products under the Credit Act.
Despite this, BNPL is not entirely unregulated. Since 2021, BNPL providers have been subject to DDO under the Corporations Act 2001 by virtue of the broader credit definition under the Australian Securities and Investments Commission Act 2001 – requiring (amongst other things) providers to ensure BNPL products are distributed to an appropriately identified target market (a consumer base with objectives, financial situations, and needs that are consistent with the product’s attributes).
Treasury’s proposals for regulatory reform
In 2022, Treasury released a consultation paper on 3 proposed regulatory options.
Option 1 – Strengthening the BNPL Industry Code
This option will see the existing BNPL Industry Code expand to introduce more robust requirements for signatories and the requirement for providers to undertake an affordability test.
The key points of the proposed regulation included:
- BNPL providers NOT required to hold an Australian credit licence;
- Amending the Credit Act to impose specific obligations for BNPL providers to conduct an affordability test (with the test being proportionate to the overall value of credit being provided). It was not proposed to include requirements to verify a customer’s financial situation or check if the provision of credit aligns with the person’s needs and objectives; and
- Need for further consultation between industry and government to strengthen the BNPL Industry Code to address issues such as disclosure, dispute resolution, fees, refund and chargeback processes, marketing and advertising, scams and financial abuse, mitigation of domestic violence risks, and ensuring the compliance controls are adequate.
Option 2 – Tailored regulation under the Credit Act
Under Option 2, BNPL providers would be required to hold an Australian credit licence or be otherwise authorised. They would need to comply with most general obligations of credit licensees – including complying with a reduced set of responsible lending-like obligations to confirm that BNPL credit is not unsuitable for a person (and scaled to the level of risk of the BNPL credit).
The below legislative amendments would be supplemented by a strengthened BNPL Industry Code, with parts of the code being enforceable by ASIC.
The key points of the proposed regulation included:
- BNPL providers would be required to undertake a credit assessment that BNPL is not unsuitable for a consumer but may not need to verify financial documentation or check that BNPL credit aligns with the person’s needs and objectives;
- BNPL providers would be prohibited from increasing spending limits without customer instructions;
- Fee caps for charges relating to missed or late payments would be required, combined with additional warnings and disclosure requirements;
- Participation in the existing credit reporting framework would remain voluntary, unless the BNPL provider is a big bank; and
- Merchants would not need to be an authorised credit representative of a BNPL provider.
Option 3 – Full regulation under the Credit Act
This option would see BNPL treated similarly to all other credit products under the Credit Act and require BNPL providers to obtain an Australian credit licence and step fully into the regulatory regime for credit providers.
- BNPL providers would need to either hold an Australian credit licence or be a credit representative of a credit licensee, subject to all relevant obligations under the Credit Act including responsible lending (ie, confirming that BNPL credit is not unsuitable for a person), compensation and dispute resolution arrangements;
- A requirement that consumers be able to set their own spending limit and a prohibition on increasing this without permission;
- Fee caps for missed or late payments would be applied, combined with disclosure requirements; and
- Improved accessibility to the credit reporting regime by BNPL providers to share and receive credit information (eg, repayment history information and hardship information).
The Government announced its intention to implement Option 2 under the BNPL Consultation Paper. As above, this will broadly require BNPL providers to hold an Australian credit licence (or be otherwise authorised), comply with most general licensee obligations and have a reduced set of responsible lending-like obligations.
While Zip already has a credit licence and welcomed the change, Afterpay will need to obtain one and has expressed desires to “get the details right” about what the actual practices and credit data requirements are.
It’s expected that regulations will come into effect by the end of 2023.
Why the new regulations now?
The main reason for the new regulations is to add consumer protection.
The concern has long been that people are being given credit — and a free line of credit, at that — that they normally would not, and should not, be able to access.
Many people, especially younger demographics, have been “loan-stacking” and using one BNPL method to pay for the other. As their accounts build up over time, they may not be able to repay their loan and while interest isn’t charged (and can’t be because BNPL aren’t strictly credit products), late fees can quickly accrue.
The new regulations, therefore, help ensure vulnerable consumers cannot access short-term credit products that they cannot afford, especially in a high interest rate environment with the mounting cost of living concerns.
What do the changes mean for you?
It is not yet clear how the regulation will be structured and what steps will be required for the regulation to be implemented, but we can safely assume that BNPL providers will be required to conduct, at a minimum, credit checks.
Then, under the fully responsible lending criteria, they may also have to do affordability checks with analysis of income data and spending patterns. These checks may be “scalable”, meaning that the assessment will be less detailed for smaller amounts and more rigorous for larger amounts.
So, largely speaking you’ll have to jump through a couple more hoops to use BNPL services.
What are the downsides of the new regulations?
While the new regulations are a welcome announcement for consumer protection advocates, there is an argument that they are neglecting others, specifically those under financial strain, and that there are other methods to curb predatory lending without disempowering consumers.
The affordability, accessibility and convenience of BNPL has been claimed to help people with their financial management and purchasing decisions. By breaking down payments into smaller installments, consumers can align their purchases with their cash flow and budget more effectively. It allows them to spread out expenses and avoid the stress of paying a large amount all at once. This is especially valuable right now as people face increasing living expenses.
Additionally, while some providers may charge minimal fees for late payments, they are typically lower than the interest rates associated with credit cards and personal loans.
So, should the way you manage your finances change in response to these changes?
As with any financial regulatory changes, it’s essential to be aware of them and understand the potential impacts on your personal finances; this helps you make informed financial decisions.
If you are someone who relies on BNPL services, you may need to carefully evaluate alternative payment methods.
The changes may also be a prompt for you to better manage your debt obligations.
An appointment with a Green Associates Financial Planner is a solid starting point for any of the actions you wish to take off the back of the BNPL industry changes. We are passionate about helping you manage, protect and grow your wealth, so you can feel confident about your finances and live how you want, now and into the future. Book an appointment to get started today.
At Green Associates, all of our advisers are fully licensed and listed on the ASIC Moneysmart Financial Adviser Register. Green Associates is committed to providing the best solutions for you and your wealth-creation journey.