Buy Now Pay Later – A changing regulatory landscape

The Buy Now Pay Later (BNPL) industry has been making a lot of noise in recent times, attracting the attention of shareholders, regulators and consumer advocates alike. The industry has nevertheless remained largely unregulated to date, due in part to the proactive measures taken by BNPL providers to self-regulate under the Buy Now Pay Later Code of Practice (BNPL Code).

The final report of the Parliamentary Joint Committee Inquiry into Mobile Payment and Digital Wallet Financial Services was released on 28 October 2021 (Report). The recommendations made in the Report indicate that regulators do not have any immediate intentions to disrupt the current self-regulatory status quo. Nevertheless, the Report essentially leaves open the question of future regulatory intervention. BNPL providers can expect to remain within the focus of regulators over at least the next 12 months, particularly as they grapple with the regulation of the emerging new payments ecosystem.

Gadens provides an update on the anticipated developments over the next 12 months below.

Key Takeaways

• The Committee’s recommendations can best be summarised as a ‘wait-and-see’ approach. They recommend Australian Financial Industry Association (AFIA) continue to monitor the BNPL Code, but will ensure that the effectiveness of the Code is closely monitored over the next 12 months.
• The Committee recommend that the further inquiry be conducted within 18 months after the commencement of the BNPL Code i.e. before September 2022.
• Against the backdrop of the recommendations, key industry players, including AFIA and its BNPL members, will no doubt be focused on the BNPL Code and its currency. Should the foreshadowed second inquiry find that the BNPL Code is no longer fit for purpose, there is a real risk of regulatory intervention in the sector.

Current regulation of BNPL

The Federal Government commissioned the Report in response to the rapid growth of the digital payments, fintech, and BNPL industry in Australia and the apparent absence of any significant independent regulation of the sector.

The BNPL Code goes some way to addressing the regulatory concerns. The BNPL Code is an industry self-regulatory code developed by AFIA, together with its BNPL members, in response to reports by ASIC and the Senate Economics Reference Committee recommending the development of a Code of Practice for the BNPL industry.

The BNPL Code imposes 9 Key Commitments on its members. These include a cap on late fees and a requirement to undertake suitability assessments before providing BNPL products.

Recent amendments to the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) have also brought BNPL products within the definition of a ‘credit facility’ for the purposes of the ASIC Act. Consequently, BNPL providers are subject to the unfair contract terms, unconscionable conduct, and misleading or deceptive conduct regimes under the ASIC Act.

Despite these regulatory developments, various stakeholders and consumer advocacy groups have called for further regulation of the BNPL sector. The Report seeks to address those concerns and makes a number of key recommendations.

Recommendations of the Parliamentary Joint Committee

The Report concludes that recent changes to the payments ecosystem have uncovered gaps and inconsistencies in the current regulatory framework. The Report recommends government urgently develop proactive policy and implement legislative and regulatory change.

Specifically in relation to the BNPL sector, the Report sets out the following key recommendations:

• There be consultation with regulators on the effectiveness of payments system self-regulation with a gaps-analysis review tabled in parliament by the end of 2023 (Recommendation 4).
• AFIA should continue to monitor the effectiveness of the BNPL Code and update it when necessary (Recommendation 6).
• Consider a BNPL industry inquiry 18 months after the BNPL Code came into effect (Recommendation 13).

These recommendations reflect a cautious approach to approving the current system of self-regulation, particularly in light of the rapid growth of the relatively nascent BNPL industry.

The Committee expressed concerns that the BNPL Code may not keep pace with the changes that are occurring in the industry and may in the future find itself unfit for purpose. The Report explains that these concerns are driven by the view that self-regulation tends to be more appropriate for ‘mature industries characterised by an abundance of well-established players,’[1] and that this is not the case with BNPL.

The Committee nevertheless accepted submissions from BNPL providers that the industry is presently subject to a broad range of regulation, and that unnecessary additional regulation could stifle innovation in the developing sector.

There is real force in those submissions given the pace and nature of change in and around BNPL.

Major developments in the industry over the past year have included:

• the entry of major international players into the Australian market, such as Square (via their acquisition of Afterpay), PayPal, and in the near future Apple;
• the uptake of the BNPL model by a number of banks, including CBA and Citibank; and
• the increased availability and complexity of BNPL products across the payments landscape.

BNPL is being viewed in tandem with the developments around payment systems where players like Apple have a very significant role to play. As such, other recommendations in the Report may be seen as potentially relevant to the future of BNPL regulation in Australia, including that:

• the definition of a payments system within the Payment Systems (Regulation) Act 1988 (Cth) be expanded to encompass new and emerging payments systems and platforms (Recommendation 8); and
• there be consultation with relevant agencies to provide policy advice on the merits of regulating payment platform providers as participants in the payments ecosystem, including:
  • setting out the laws to which these providers are already subject;
  • detailing the specific regulatory gaps that exist today or may emerge in the future; and
  • providing advice on the best ways of including payment platform providers within existing payment system regulation (Recommendation 9).

The consideration and scrutiny of the payments ecosystem and the place of BNPL within it will inevitably impact the future of BNPL regulation.

Overseas developments

As the recommendations in the Report are put into effect, the development of regulation overseas is likely to be of increasing relevance to BNPL regulation in Australia. As BNPL providers increase their global businesses it is reasonable to expect that they will be looking for consistency of regulation regardless of where in the world their product is offered.

The recent UK Woolard Review[2] and UK Treasury Consultation on the regulation of BNPL[3] are of particular interest as a result.

The Woolard Review, delivered in February 2021, recommended the regulation of the BNPL industry as ‘a matter of urgency.’ It recommends bringing BNPL products within the scope of the UK Consumer Credit Act 1974 (the CCA) and the consumer protections under the UK Unfair Trading Regulations 2008 (the broad equivalent to misleading or deceptive conduct provisions under Australian law).

Notably, however, the changes fall short of classifying BNPL providers as ‘credit brokers’ under the CCA. The Treasury recognises the significant cost burdens that would be imposed on BNPL providers from such a classification, many of whom are in their early stages of development.

While there is a perception that further regulation is required to better protect consumers, the UK regulators have, like the Australian counterparts, expressed some hesitancy about the possibility of stifling innovation.

Conclusion

The emergence of the BNPL industry and consideration of how it should be regulated has been one of the most interesting developments in financial services in recent times and the Report shows that the inherently uncertain and changing BNPL landscape means it can be expected to be a focus for regulators for the foreseeable future.

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Authored by:

Edward Martin, Partner
Philip O’Brien, Senior Associate
Alistair MacLennan, Paralegal

[1] Mobile Payments and Digital Wallets Inquiry 6.137.

[2] ‘The Woolard Review – A review of change and innovation in the unsecured credit market‘, 2 February 2021.

[3] ‘Regulation of Buy-Now Pay-Later Consultation’, October 2021.