Buy Now Pay Later: Industry awaiting Issues Paper with bated breath

For better or worse, the Buy Now Pay Later (BNPL) industry has continued to make headlines since our last report. The sector’s meteoric rise has been tempered in recent months by a combination of market saturation, broader macroeconomic factors, and, most recently, a new political climate. The new Labor Government has made clear its intentions to bring the industry within the ambit of the National Credit Code.

With a Federal Government issues paper due for release in October 2022, Gadens provides an update on the current state of the industry and the anticipated changes to the BNPL regulatory landscape.

Key takeaways

• The BNPL industry faces a pivotal moment if it becomes subject to direct regulation as a credit provider after a period of self-regulation.
• The form of regulation remains to be seen but BNPL providers should brace to be subject to a regulatory regime likely involving responsible lending obligations and additional consumer remedies, among other things.
• The new regulatory regime seems likely to diminish some of the competitive advantages that BNPL providers currently benefit from.

Industry overview

BNPL continues to make an impact on the finance sector, contributing over $14 billion to the Australian GDP in FY21. These funds are derived from approximately 5.9 million active BNPL accounts in Australia, representing a twofold increase in 3 years. However, despite this rapid growth, the industry has incurred substantial financial losses due to adverse changes in market conditions. These include the introduction of BNPL products from heavyweights such as Apple and PayPal, combined with investor concerns around rising interest rates and recession fears. Adding further pressure to BNPL providers is the renewed focus of regulators and government on the industry.

Current regulation

BNPL is not currently regulated under the National Consumer Credit Protection Act 2009 (Cth) (Credit Act) and National Credit Code (Credit Code). The industry has circumvented these provisions to date as they do not charge consumers interest or other charges for using their BNPL products. This means that they do not provide ‘credit’ to which the Credit Code applies.

However, BNPL products are classed as ‘credit facilities’ under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and ‘financial products’ under the Corporations Act 2001 (Cth) (Corporations Act). Consequently, BNPL providers must comply with certain obligations on financial products issuers under the Corporations Act, including the design and distribution obligations. Additionally, BNPL providers are subject to obligations imposed by the ASIC Act, including the unfair contract terms, unconscionable conduct, and misleading or deceptive conduct regimes.

The sector is otherwise largely self-regulated. Eight BNPL providers (representing 95% of the market) are signatories to an industry code of conduct: the AFIA BNPL Code of Practice (BNPL Code). The BNPL Code is administered by the Code Compliance Committee (CCC), an independent committee of legal, consumer and industry representatives. The CCC oversees the BNPL Code, including monitoring members’ compliance and potentially imposing sanctions for non-compliance in appropriate cases.

Earlier this year, the CCC released its first annual report on industry compliance with the BNPL Code.[1]  The CCC noted that the number of complaints received from customers was relatively low, and the CCC was satisfied with the overall levels of compliance amongst subscribing members.

However, concerns have been raised by various stakeholders, including consumer advocate groups and government, that the current practice of self-regulation does not go far enough to ensure consumer protection. These concerns mainly centre around the lack of credit checks or other financial suitability assessments prior to customers entering into BNPL contracts, and the related risk of customers incurring debts to multiple BNPL providers while servicing traditional loans. These calls appear to have found favour with the new Financial Services Minister Stephen Jones.

Impending regulation

Regulatory reform of the BNPL industry is now firmly in view. The Federal Government has announced it will release an issues paper in October 2022 outlining the proposed legislative reforms of the sector. This announcement follows earlier statements by the incoming Labor government of its intention to implement major changes to rules governing BNPL.

Minister Jones has stated unequivocally the position that BNPL should be regulated as credit and that the model of self-regulation is insufficient. However, what form the regulation of BNPL will take remains to be seen. BNPL providers may take some comfort from Minister Jones’ statements that, while BNPL will likely be brought within the ambit of the Credit Code and Credit Act, it may not be regulated in the exact same way as other credit products. This suggests there could be some form of limited application of credit regulation to BNPL products, such that they will not be subject to the full gamut of obligations on credit providers under the Credit Act and Credit Code.

What to expect

BNPL providers should nevertheless brace to be subject to some form of the following obligations on credit providers:

• responsible lending obligations, including assessing consumers’ suitability for credit products, making reasonable inquiries and taking reasonable steps to verify the information obtained;
• restrictions on enforcement action and court proceedings;
• mandatory membership of an external dispute resolution scheme;
• additional consumer remedies for unjust contracts or unsuitable loans; and
• potential civil and criminal penalties under the jurisdiction of ASIC.

Compliance with the Credit Code and Credit Act is likely to impose an additional administrative burden on BNPL providers. To date, the BNPL sector has enjoyed a distinct competitive advantage over other credit providers in that it has not been subject to the same regulatory and administrative burden as other credit providers. A key selling point of BNPL has been the ease and convenience of the products. This includes the application process, and the lack of any requirement for customers to undergo credit checks or suitability assessments.

The removal of these competitive advantages in the form of increased regulation is likely to add further pressure to what is now a struggling sector, particularly given that most BNPL providers are yet to generate a profit. It remains to be seen how the market will adapt to any such changes, though it is reasonable to expect that some BNPL providers will not have the capacity to absorb these additional regulatory and compliance burdens.

International developments

Overseas, the UK government is also pursuing a tougher regulatory approach to the BNPL sector. BNPL products are currently not regulated by the UK Financial Conduct Authority (FCA), but under new plans BNPL providers will be required to carry out ‘affordability checks’ to ensure customers can afford their products. The UK government plans to introduce secondary legislation by mid-2023, before the FCA is set to consult on its rules.

Conclusion

A transition from the current self-regulated safe haven to the rigorous national credit regime will be a pivotal moment in the development of the BNPL industry. BNPL providers will need to take care in how they respond to and pivot under such regulation and should expect continued scrutiny and pressure from consumer groups.

Gadens will provide a further update after release of the issues paper next month.

[1] https://afia.asn.au/files/galleries/Buy_Now_Pay_Later_The_First_Year_of_Self_Regulation_March_2022.pdf

Authored by:

Edward Martin, Partner
Philip O’Brien, Senior Associate
Joshua Ranalletta, Paralegal
Ray Mainsbridge, Paralegal