Buy Now Pay Later: ‘Walks like a duck’ regulation announced

On 22 May 2023, the Treasury announced that the Buy Now Pay Later (BNPL) industry will be regulated under the National Consumer Credit Protection Act 2009 (Credit Act). The move was announced by the financial services minister and assistant treasurer, Stephen Jones MP, at the Responsible Lending & Borrowing Summit.

The announcement confirms that the law will be changed so that BNPL products will be regulated as credit products. BNPL “looks like credit, it acts like credit, [and] it carries the risk of credit” Minister Jones told delegates at the Summit, in line with the Minister’s statement in June 2022 that “if it looks like a duck, walks like a duck, sounds like a duck, it is a duck – and it should be regulated as a credit product“.

Key takeaways

• Treasury has announced that it will bring BNPL within the scope of the National Consumer Credit Protection Act 2009 (Cth), ending the existing self-regulation of BNPL by the industry.
• The legislation will adopt a consumer-centric approach to regulating the offering and distribution of BNPL products.
• Minister Jones announced that draft legislation will be available later this year for consultation from the industry and consumer groups, with an expectation that it will be introduced in Parliament by the end of 2023. While it is possible the new law will be enforced by the end of 2023, it may not take effect until 2024.

The Legislation

This announcement means the government has chosen to adopt ‘Option 2′ of its Options Paper released on 21 November 2022 (see Gadens’ update on that paper). The new legislation will require BNPL providers to:

• hold Australian Credit Licenses (ACL);
• comply with Responsible Lending Obligations;
• meet statutory dispute resolution and hardship requirements;
• comply with statutory product disclosure and other information obligations;
• abide by existing restrictions on unacceptable marketing; and
• meet a range of other minimum standards in relation to their conduct, and in relation to their products.

This move aims to bring BNPL into line with other regulated credit providers and address the concerns expressed regarding the largely self-regulated industry. The Minister stated that the reforms “will have consumers at their heart” and referred to the “unacceptable levels of unaffordable lending occurring“, which is largely concentrated amongst low-income borrowers. He stated that the proposed legislation plans to prevent lending to those who can’t afford it, without preventing safe and prudent BNPL use.

Additionally, the financial services regulator will be given ‘strong enforcement powers’ to regulate the BNPL space. This means that BNPL providers, like all ACL holders, will be subject to the regulatory scrutiny of the Australian Securities and Investments Commission (ASIC). The move will mean Australia is only the second country behind the United Kingdom to regulate BNPL as a standard credit product.

Relationship with the BNPL Code of Practice

The primary mechanism for self-regulation in the BNPL industry is the BNPL Code of Practice (the Code) which was introduced through the Australian Finance Industry Association (AFIA) in March 2021. A review of the Code was released by Promontory Australia in March 2023. The review commended the customer-focused principles contained within the Code but found there was room for improvement around the effective application of these principles.

The review identified some areas where the Code could be more effective in addressing consumer concerns, such as:

• the onus placed on customers to self-identify as vulnerable;
• the clarity and specificity of the Code’s commitments to vulnerable customers;
• guidance around the commitment to ensure late fees are ‘fair, reasonable and capped’;
• potential to improve product disclosure and warning practices;
• requirements around affordability and suitability assessments; and
• the consistency and accessibility of the complaints process.

Promontory’s review notes that self-regulatory mechanisms operate most effectively within a coherent overall regulatory framework. While AFIA has indicated that the industry supports all of Promontory’s recommendations, the proposed legislation that has been announced is likely to bolster or overtake the self-regulatory regime under the Code by addressing the identified gaps. In any event, it is reasonable to expect all of Promontory’s recommendations to be taken into account in the development of the proposed BNPL legislation.

That said, Minister Jones did not make reference to the role of the Code in his speech announcing the new regulations.

What’s next

Minister Jones expects exposure draft legislation will be out ‘later this year’ for consultation with industry and consumer groups. Consumer groups are broadly supportive of the announcement but have flagged concerns about potential loopholes. Fiona Guthrie, chief executive of Financial Counselling Australia is concerned the legislation will not address the problem of people taking out loans bigger than what they can afford. It also remains unclear whether the draft legislation will differentiate between large and small levels of debt or whether all debt will be regulated consistently. The government intends to introduce the final bill into Parliament by the end of the year, and while that could mean it is enforced in 2023, a commencement date in 2024 may be more likely.

In addition to the points raised regarding the Code (noted above), it is useful to note the areas of concern the government hopes to address as these will likely inform what the legislation ultimately looks like. They include:

• the ‘vicious cycle of debt’ permitted by a competitive industry in which people may open multiple BNPL accounts and accrue far more debt than they’d be able to get on a credit card or payday loan;
• the dangers to consumers which disproportionately affect women, First Nations communities and people on low incomes;
• the ‘weaponisation’ of BNPL products in abusive relationships in which people coerce their partners to take on BNPL debts or take out BNPL debts in their partner’s name without their knowledge; and
• the increased exposure to financial trouble experienced by BNPL users (last year ASIC found that 19 per cent of BNPL consumers showed two or more indicators of financial stress such as cutting back on essential items or missing payments on other bills).

BNPL users can expect a number of changes after the reforms are implemented. The regulations mean that suitability and affordability checks will be put in place so that consumers will be assessed on whether BNPL services are suitable for their needs. The changes will also provide protections for consumers through hardship provisions, improved complaint processes and caps on fees charged for missed and late payments.

The impact of these consumer-focused reforms on the BNPL industry remains uncertain. There are now around seven million BNPL accounts in Australia and the average consumer uses it for 18.2 transactions per annum. Data shows that BNPL accounts resulted in $16 billion worth of transactions in Australia in 2021-2022.

Conclusion

Minister Jones said “our plan will bring BNPL into line with other regulated credit providers, simplifying our regulatory system and addressing concerns about competitive neutrality“.

That said, the Minister has also foreshadowed industry consultation on the detail so how the regulations will apply to BNPL providers remains a work in progress. AFIA has announced that it will work with the government to find the right regulation for BNPL.

Gadens will continue to provide further updates following the release of the draft legislation and as the industry responds.

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Authored by:

Edward Martin, Partner
Susan Verginis, Senior Associate
Ray Mainsbridge, Paralegal
Joshua Ranalletta, Paralegal