Buy Now Pay Later: the shape of the new regulatory regime

Treasury has released the much anticipated draft legislation for the regulation of Buy Now Pay Later (BNPL) products and confirmed that BNPL providers should prepare to obtain a new or modified Australian Credit Licence and work through the impact of being regulated as credit providers on their businesses. Anti-avoidance protections promise to ensure there is no way around this.

First stop on this regulatory journey is likely to be understanding new responsible lending obligations and considering policies for assessing whether products are suitable for prospective customers.

The latest development

On 12 March 2024, the Government released an exposure draft legislative package for public consultation. The package includes a Draft Bill[1] and Draft Regulations[2] proposing to amend existing credit legislation, including the existing Credit Act[3] and Credit Regulations[4] to bring BNPL into the existing regulatory framework for other credit products.

Treasury will be consulting on the draft legislation. With submissions due by 9 April 2024, following on from our previous series[5], Gadens provide an update on the proposed changes below.

Key Takeaways

• The amendments aim to adopt a flexible, adaptable regulatory framework which preserves the benefits of consumer access to BNPL while ensuring there are proportionate protections against the risk of consumer harm.
• BNPL products will be regulated as a form of credit defined as low cost credit contracts (LCCCs) under the new regulatory regime.
• LCCC providers will be required to hold an Australian Credit Licence.
• A modified responsible lending obligations framework will be available to LCCC providers on an opt-in basis.
• LCCC providers will be required to develop and review written policies on assessing whether an LCCC will be unsuitable for a consumer.
• Anti-avoidance protections will be established to prevent LCCC providers from structuring their business models to avoid regulation.

A closer look at the proposed new regulatory regime

BNPL products are not currently regulated under existing credit legislation as the products fall within certain exemptions under the Credit Act and the National Credit Code. The draft legislation aims to plug this regulatory gap by inserting new provisions into the Credit Act and Credit Regulations with specific application to BNPL products.

The Draft Bill proposes to amend the Credit Act to regulate LCCCs, which include BNPL arrangements. LCCCs are defined as continuing or non-continuing credit contracts that involve the provision of credit to consumers that is low cost, interest free, and generally short term.

A feature of the proposed legislation is that it would also capture other classes of LCCC in the future (such as wage advances).

The draft legislation would create a hybrid modified regulatory framework including specific mandatory obligations (such as the requirement to hold an ACL) in addition to opt-in provisions for some or all LCCC products (including the responsible lending obligations).

The most significant changes that the proposed legislation would introduce are as follows:

• Australian Credit Licence

Providers of LCCCs will be required to hold and maintain an Australian Credit Licence (ACL), and comply with the relevant licensing requirements and licensee obligations, with some modifications to ensure the regulation is proportionate. Where an LCCC provider already holds an ACL, they may be required to apply for a variation of the authority under their licence to cover the provision of LCCCs under the Credit Act. Those who do not hold a licence will be required to obtain one.

• Responsible Lending Obligations (RLO)

The existing RLO framework under the Credit Act will be modified to create an opt-in RLO framework that is proportionate to the risks posed to consumers (Modified RLO). Under the Modified RLO, an LCCC licensee will need to make reasonable inquiries about the consumer’s requirements, objectives, and financial situation, and take reasonable steps to verify the consumer’s financial situation, before entering into an LCCC.

LCCC providers must either make an election to comply with the Modified RLO regime or the existing RLO requirements in the Credit Act.  If an election is not made, the existing RLO requirements will apply.

• Unsuitability assessment policies

LCCC providers will be required to develop and review a written policy which sets out how the provider will assess whether a contract is unsuitable and how it will comply with the relevant sections of the Credit Act.

Notably, where the credit limit of an LCCC is less than $2,000 a presumption applies that the contract will not be unsuitable, if entered into during the relevant assessment period.

• Anti-avoidance protections

Anti-avoidance protections will be established to prevent providers of LCCCs from structuring their business models to avoid regulation. A failure to comply with these provisions will result in the same penalties currently applicable for contraventions under the existing anti-avoidance sections of the Credit Act.

Conclusion

Australian consumers and merchants have benefited from the creation of BNPL. However, the industry has faced considerable scrutiny since its inception. Key concerns raised by regulators and consumer advocates relate to unaffordable lending practices, unsatisfactory complaint resolution and hardship assistance, the charging of excessive late payment fees, and a lack of transparency surrounding product disclosures and warnings.

The Draft Bill and Draft Regulations go some way towards alleviating these concerns. The proposed amendments are sensible and will likely be largely palatable for BNPL providers and consumer protection advocates.

The key message from Treasury is that the new regime is intended to be flexible yet proportionate.  Treasury has opted for a surgical approach, taking a scalpel to the existing credit regulation regime rather than a sledgehammer.

The new obligations will nevertheless impose an additional administrative burden on BNPL providers and will expose them to greater and more frequent regulatory scrutiny. Most if not all BNPL providers will have existing compliance processes in place which can be modified to adapt to the new regime.

The most significant processes facing providers will likely centre around obtaining an ACL and absorbing the additional compliance costs into the BNPL model without impacting profitability in what is an increasingly challenging business environment for BNPL providers.

Treasury is accepting submissions until 9 April 2024 and welcomes feedback on the effectiveness of the draft legislation.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:
Edward Martin, Partner
Philip O’Brien, Senior Associate

Jin Lim, Lawyer

[1] The draft Treasury Laws Amendment Bill 2024 (Draft Bill)

[2] The draft National Consumer Credit Protection Amendment (Low Cost Credit) Regulations 2024 (Draft Regulations)

[3] National Consumer Credit Protection Act 2009 (Credit Act)

[4] National Consumer Credit Protection Regulations 2010 (Credit Regulations)

[5] Buy Now Pay Later series

• Buy Now Pay Later: ‘Walks like a duck’ regulation announced | Gadens
• Buy Now Pay Later Options Paper: The reforms start to take shape | Gadens
• Buy Now Pay Later: Industry awaiting Issues Paper with bated breath | Gadens
• Buy Now Pay Later – A changing regulatory landscape | Gadens