BNPL regulatory reform has finally arrived. Where to from here?

After extensive review, drafting and consultation, BNPL reforms are here – but they may not be entirely welcome.

Hamilton Locke recently made a submission to Treasury’s proposed Buy Now Pay Later regulatory reform, which was proposing to regulate BNPL products as low cost credit contracts under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act). Our submission recommended extensive changes to balance consumer protection with proportionate regulation to allow the industry to innovate and thrive.

After a very busy last sitting day in Parliament, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 (BNPL Bill) was passed by both houses unchanged based on the Senate Committee’s recommendation. So, what will this mean for BNPL providers? Let’s break it down:

Will your BNPL product be caught?

Essentially, the BNPL Bill amends the NCCP Act and National Credit Code to regulate BNPL arrangements as low cost credit contracts, which is a new category of regulated credit.

The definition of a low cost credit contract specifically includes BNPL arrangements, but has the flexibility for other credit products to be added in the future (with early wage access products flagged as a potential next candidate).

The definition of BNPL arrangement is very broad and will cover any arrangement or series of arrangements:

• under which a merchant supplies goods or services to a consumer (within the meaning of the NCCP Act)
• under which the BNPL provider directly or indirectly pays the merchant an amount that is some or all of the price for the supply
• that includes a contract between the BNPL provider and the consumer under which the BNPL provider provides credit to the consumer in connection with the supply.

The BNPL Bill makes it clear that BNPL products will be covered regardless of whether:

• any fees or charges are payable by the consumer or the merchant in connection with the arrangement or series of arrangements
• the arrangement occurs before, at, or after the relevant supply
• whether the arrangement is a continuing credit contract
• whether the arrangement includes a contract to which the merchant, customer and BNPL provider are all parties.

Transition to licensing

BNPL providers will need to obtain a credit licence and comply with all licensing obligations (in some cases, as modified for BNPL).

Like other regulatory reforms, there are transitional arrangements in place for persons who have applied for a licence (including any employees or proposed representatives). At present, BNPL providers will have a period of six months from 10 December 2024 to make a licence application (unless a longer period is declared by proclamation), after which they can continue trading until the licence application is granted or declined.

What responding lending obligations (RLO) will apply to BNPL providers?

The BNPL Bill includes the same modified RLO obligations proposed in Treasury’s consultation on exposure draft legislation and regulations (see our submission for more details).

This means an opt-in modified RLO framework will apply to BNPL providers who will need to choose whether to comply with the modified RLO framework or with the existing RLO framework. This choice must be made by the licensee via a written election. If a licensee does not make such an election, the existing RLO framework applies.

Under the modified RLO framework, a licensee is required to comply with the core obligations including:

• assessing the suitability of the product for the consumer
• taking steps to make reasonable inquiries about the consumer’s financial situation
• verifying the suitability assessment before entering the credit contract or increasing a consumer’s credit limit.

However, under the modified RLO framework:

• the licensee must maintain and update an unsuitability assessment policy
• reasonable inquiries and reasonable verification must be determined by reference to specific factors, such as the nature of the product and the target market
• providers may conduct inquiries and an assessment for an amount of credit larger than that initially offered to the consumer, and that assessment will apply for any subsequent credit limit increases up to that amount up to a period of two years.

Our view has always been, and remains, that the modified RLO framework is not a meaningfully ‘reduced’ RLO obligation for BNPL. Rather, there is likely to be a convergence between applications for BNPL and applications for fully regulated credit products like credit cards, because:

• in most cases, an unsuitability assessment still needs to be done
• it is impossible to do an unsuitability assessment without data from both sides of the ledger. For example, the income or expenses of a consumer are meaningless without comparing the two. That is, no matter how high a person’s income, their expenses could be commensurately high as to make a loan unsuitable, and vice versa
• the ‘scalability’ of RLO is a subjective assessment which is open to challenge, meaning that there may be a reluctance to adopt a reduced approach to RLO in circumstances where BNPL providers have no certainty that they will actually be complying with the obligation. This is particularly so because it is unclear what practical effect the listed prescribed factors will actually have on an RLO assessment.

In practice, the modified RLO obligation will likely impose a similar burden as the usual RLO obligation. This may make the need for a BNPL provider to choose between them somewhat meaningless.

When do these changes apply?

The BNPL Bill commences on the day it receives Royal Assent, which is 10 December 2024. However, the defective dates of the amendments are as follows:

Where to from here?

It is likely that the amendments will commence, at the latest, from 10 June 2025. You should start preparing for the changes and keep an eye out for any ASIC guidance regarding licensing and transitional arrangements.

Hamilton Locke has extensive experience with assisting credit providers with their licence applications and building out compliance frameworks. We are poised to help our clients with these changes. For more information, please contact Jaime Lumsden or Michele Levine.