Buy Now Pay Later Options Paper: The reforms start to take shape

20 December 2022
Edward Martin, Partner, Sydney

On 21 November 2022, the Buy Now Pay Later (BNPL) options paper was released by Treasury for public consultation (Options Paper). The Options Paper examines the regulatory challenges of emerging financial products, particularly BNPL, and the appropriate regulatory approach to maintain the advantages of accessing credit while sufficiently protecting consumers.

With the closing date for submissions on the Options Paper of 23 December 2022 looming, this article summarises the current BNPL regulations, outlines the key regulatory issues and examines the three options for regulatory intervention as discussed in the Options Paper.

Our previous reports on the changing regulatory landscape of BNPL can be found here: Buy Now Pay Later – A changing regulatory landscape and Buy Now Pay Later: Industry awaiting Issues Paper with bated breath.

Key takeaways

  • Treasury has identified key regulatory issues that are said to militate for change to the current BNPL regulatory regime.
  • Each of the three options posed in the Options Paper would impact BNPL providers to differing degrees, summarised in the table below.
  • The government is focused on implementing reforms to the BNPL regulatory regime and the Options Paper is just the starting point for reform discussions.

Current Regulation

BNPL products and services are largely self-regulated under an industry code of conduct, the BNPL Code of Practice, and are currently not:

  • regulated under the National Consumer Credit Protection Act 2009 (Cth) (Credit Act), as they fall within the exemptions;
  • subject to responsible lending standards or other requirements of the Credit Act; and
  • required to hold an Australian Credit Licence (ACL).

BNPL are otherwise covered by broader financial regulation schemes including:

  • the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), providing general financial services consumer protections (e.g., misleading and deceptive conduct);
  • some parts of Chapter 7 of the Corporations Act 2001 (Cth), including the Design and Distribution Obligations and the Product Intervention Powers;
  • schedule 2 to the Competition and Consumer Act 2010 (Cth), which covers some BNPL provider conduct not covered by the ASIC Act, including provisions around false or misleading presentation, unsolicited supplies, pricing and information standards; and
  • the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), including obligations to conduct customer identification and verification procedures, record keeping, reporting suspicious matters, providing periodic compliance reports and requirement for reporting entities to have a framework in place covering money laundering and terrorism financial risk assessments.

Key regulatory issues

The push for further regulation of BNPL has arisen from the perception that users of BNPL products lack the key protections available to other products regulated by the Credit Act such that there is greater potential for consumer harm. The Options Paper outlines the key regulatory issues which are said to be contributing to poor consumer outcomes, including as follows:

  • unaffordable or inappropriate lending practices: BNPL products are exempt under the Credit Act from conducting unsuitability assessments of consumers, creating a scenario in which many consumers incur repayment obligations beyond their means;
  • poor complaint handling process: providers have inadequate and inconsistent complaint handling procedures;
  • excessive or disproportionate consumer fees and charges: BNPL providers operate under a fee cap exemption and there are concerns that these fees, most notably late repayment fees, are disproportionate compared to the value of the credit provided.
  • non-participation in Australia’s credit reporting framework: there is no legislative requirement to report BNPL debts to credit reporting bodies such that consumers and lenders miss out on the benefits of credit information reporting; and
  • poor product disclosure practices: consumers report that the terms and conditions of BNPL contracts are difficult to understand and therefore they do not comprehend the total costs and consequences of using BNPL products.

BNPL providers do not necessarily accept that these issues exist or are sufficiently significant to warrant further regulation. Nonetheless, the government is convinced that the status quo must be reviewed.

Proposed regulation options

Three options have been proposed in the Options Paper to address the key regulatory issues:

  1. the first option (Strengthening the Industry Code and an Affordability Test), being the least rigorous, proposes a government-industry co-regulation regime, where the current BNPL Industry Code is reinforced to address gaps, complemented with a customised affordability test legislated under the Credit Act;
  2. the second option (Limited Regulation under the Credit Act) proposes to bring BNPL within the Credit Act’s application to apply a customised version of the responsible lending obligations, which could be supplemented by a strengthened Industry Code; and
  3. the third option (Regulation under the Credit Act), being the most rigorous, would consider BNPL products similarly to other credit products regulated under the Credit Act, and require compliance with regulations such as responsible lending obligations.

The three options are further summarised in the following table:

Option 1: Strengthening the Industry Code and an Affordability TestOption 2: Limited Regulation under the Credit ActOption 3: Regulation under the Credit Act
Affordability/suitability test
Requirements on providers to check that product is not unaffordable for a person before offering it. e.g. when lending below certain thresholds, a credit score check could be used as a proxy of a consumer’s credit risk, and income/expenses only considered where person identified as a risky borrower.
No requirements to verify customer’s financial situation or check if the provision of credit aligns with a person’s needs and objectives.

Providers required to assess credit is not unsuitable for a person, similar to the existing responsible lending obligations framework, scaled to risk level of BNPL.

Providers required to check and satisfy themselves that credit is not unsuitable for a person in accordance with responsible lending obligations.
ACL required?🞩
Providers to hold ACL/be representative of a licensee.
Obligations including:
internal/external dispute resolution, hardship provisions, compensation arrangements, fee caps and marketing rules (provisions could be calibrated to risk level of BNPL, including exemptions from obligations that do not relate to BNPL).

Providers to hold ACL/be representative of a licensee.
Obligations including: reportable situations regime, internal/ external dispute resolution, compensation arrangements, ASIC reporting obligations, as well as Credit Act requirements including information sharing, warnings, and hardship provisions.
BNPL merchants required to be authorised representative of BNPL provider?🞩🞩🞩
Additional requirements🞩
Providers prohibited from increasing consumer’s spending limit without explicit instructions.
Fee caps for charges relating to missed or late payments, additional warning and disclosure requirements.

Providers need to allow consumers to set their own spending limit and a prohibition from increasing consumer’s spending limit without permission.
Fee caps for charges relating to missed or late payments, disclosure requirements.
Industry Code
Certain provisions in the improved Industry Code could be enforceable by ASIC, subject to industry body’s application and ASIC’s approval.
Code could also be mandated for all BNPL providers, however participation in the credit reporting framework would continue to be voluntary.
Revised Industry Code would supplement but not override bespoke affordability checks that would be specified in the Credit Act.
ASIC able to issue regulatory guidance on interpretation of statutory obligations.

Similar to option 1.

A revised Industry Code could include provisions to address issues not appropriately considered within the scope of the Credit Act, including setting industry standards, refund and chargeback processes, and providing guidance to BNPL providers on identifying situations of domestic violence, coercive control and financial abuse.
The industry could also choose to further strengthen its Code to ASIC’s approved standard and set a higher industry standard than required by law.
BNPL industry would work with government to strengthen Industry Code and seek to address any further concerns including relating to product and warning disclosure requirements, access and standards of dispute resolution and hardship practices, excessive consumer fees and charges, refund and chargeback processes, advertising and marketing, mitigating risks associated with scams, domestic violence, coercive control and financial abuse.

Providers will be able to engage more meaningfully with existing credit reporting regime under the Privacy Act 1988, including repayment history information and hardship information in accordance with the Principles of Reciprocity and Data Exchange.
Participation in the comprehensive credit reporting framework would continue to be voluntary unless the provider is a big bank.

Similar to option 2.

The least restrictive option has the support of BNPL providers such as Afterpay, who say that the Industry Code has been working well, whereas others including consumer action groups assert that the proposed reforms need to go further. BNPL providers such as Zip, which already hold an ACL, are supportive of the remaining options and particularly the second option, saying that they have always held themselves to higher standards.

Supplementary Reform

The Treasury has outlined four key measures that would facilitate the supplementary reforms and achieve its goal of instituting a consumer-oriented, principles-based regulatory regime as follows:

  1. (financial literacy) requirement for BNPL providers and regulators to publish additional resources aimed at educating consumers on BNPL products to improve consumers’ financial literacy and capabilities;
  2. (credit reporting) review of credit reporting framework to consider how BNPL providers may better report credit information of their consumers;
  3. (ASIC regulation) enhanced role of ASIC in regulating BNPL providers where providers are formally regulated under the Credit Act and subject to a levy to allow ASIC to recover the cost of regulating the industry; and
  4. (amended surcharging rules) further amendments of surcharging rules in order to prevent merchants from moving the cost of BNPL to consumers with the goal of improving competition and efficacy in the Australian consumer credit market.

Each of these measures would prove beneficial to supporting any of the three options above and to ensuring compliance should BNPL providers be brought within the ambit of the current Australian credit regulation regime.

Next Steps

The Treasury is taking submissions until 23 December 2022 to facilitate a more informed future regulatory regime of BNPL in Australia. Further targeted consultations with consumer groups, industry bodies, BNPL providers and regulators are expected in the coming months.

Financial Services Minister Stephen Jones reported that the Credit Act amendments could be passed by this time next year.

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Authored by: 

Edward Martin, Partner
Philip O’Brien, Senior Associate
Susan Verginis, Senior Associate and Pro Bono Manager
Joshua Ranalletta, Paralegal
Ray Mainsbridge, Paralegal

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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