Regulation of the Buy Now, Pay Later Industry?

New changes are proposed to the largely unregulated Buy Now Pay Later (BNPL) sector, with Treasury having released the latest consultation paper suggesting a variety of regulatory changes to the BNPL industry.

The Options

Treasury has proposed three options to deal with the BNPL industry. These options are:

1. Strengthening the current BNPL Industry Code

The Treasury proposes a cooperative effort between the Government and Industry participants in strengthening the existing BNPL Industry Code to address gaps in coverage such as product disclosure, access to dispute resolution processes, refund and chargeback processes, advertising, excessive fees and to mitigate risks associated with scams.

2. Partial regulation under the Credit Act and the introduction of a scalable unsuitability test

Alternatively, the Treasury proposes partial regulation under the Credit Act requiring a BNPL provider to hold an Australian credit licence and comply with a reduced set of obligations, such as establishing dispute resolution processes, hardship processes and compensation arrangements as well as introducing caps on fees and rules surrounding marketing.

In addition to licensing, BNPL providers will be required to undertake a scaled version of the responsible lending unsuitability assessment to ensure a customer can afford the product they provide.

3. Full regulation under the Credit Act and introduction of all responsible lending obligations

As a safety net, Treasury has proposed full regulation of the BNPL industry, requiring BNPL providers to not only hold an Australian credit licence, but to also comply with all licensee obligations, including the reportable situations regime, ASIC reporting, information sharing and allowing customers to set their spending limit. Additionally, BNPL providers will be subject to full responsible lending obligations, including the requirement to conduct an unsuitability assessment.

The Issues

There are a number of issues within the BNPL industry that Treasury has identified as the reason to consider more robust regulation. These issues are not adequately dealt with by the voluntary BNPL Industry Code and include:

  • Frictionless sign-up processes – a frictionless sign up process, with minimal questions and customer checks has led to customers:
    • overspending;
    • purchasing goods that they might not necessarily need or really want;
    • spending more than they can afford; and
    • allowing abusive partners to use victim information to create accounts and purchase goods in the victim’s name.
  • Lack of transparency:
    • BNPL contracts are not clear and customers do not understand them or the fees and charges associated with either the contract or an ancillary service provided by the BNPL provider.
    • BNPL providers do not highlight avenues for complaints, such as AFCA or hardship assistance.
  • Excessive fees and unaffordable lending practices:
    • Research conducted by Curtin University has found that falling behind on the payment schedule for a $40 purchase on 10 fortnightly repayments would result in effective interest rates between 28.25% and 177.44% depending on the BNPL provider.
    • BNPL providers are not required to conduct unsuitability assessments, can ignore a consumer’s financial circumstances and can increase the availability of credit without customer consultation resulting in increased financial stress on customers.

The Treasury Options Paper addresses these issues in more detail than this article, see here.

Our Thoughts?

The introduction of Buy Now, Pay Later has had a positive impact on the Credit Industry, re-establishing competition and allowing innovation to thrive, and creating access to credit for otherwise vulnerable or locked out customers.

We expect that heavy regulation of BNPL providers will reduce competition, cause intense compliance burdens and increase the cost of credit for the end consumer. We support a more innovative approach, achieved through cooperation between the Government and BNPL industry participants. By revising and potentially making the Industry Code mandatory (rather than voluntary), the BNPL industry may be able to avoid restrictive regulations and continue to promote competition between providers and access to credit for consumers. As an alternative, if a mandatory Code is not considered robust enough, we think it is likely that a hybrid approach will be used, as full regulation seems excessive.

For more information, please contact Jaime Lumsden.