Strengthening the regulation of Buy Now Pay Later (BNPL) in Australia

We expect most BNPL providers have closely monitored the former and current Government for cues to future regulatory change and will have a good understanding of how each of these options might impact their businesses.

Now is the time for BNPL providers to consider whether and how to engage with Treasury on the Options Paper, raise any further issues and start thinking about what implementation of any of these options might look like. To assist, we've set out the work that may arise if BNPL is regulated by the Credit Act or the BNPL Industry Code becomes a code enforceable by ASIC.

Customer assessment

All three options propose to strengthen the assessment of a customer's ability to afford a BNPL product, to address a concern that there may not always be adequate affordability checks undertaken on BNPL customers.

While the level of proposed assessment differs across the three options, at minimum it will require providers to complete some form of affordability check, and may also require verification of a customer's financial situation or their financial objectives.

Amendments to the Credit Act

If BNPL is regulated by the Credit Act then, in addition to complying with the responsible lending obligations and assuming no further modifications to the relevant obligations are made, BNPL providers would need to:

• review their products to ensure the terms and conditions meet the form and content requirements of the National Credit Code;
• update their systems and processes to accommodate documentation obligations under the Credit Act and the National Credit Code (eg provision of statements, rules around payments, fees and charges and general record-keeping obligations); and
• prepare the necessary documentation to be licensed by ASIC. This will include a requirement to show the organisational competence to hold an Australian credit licence, and vetting responsible managers and fit and proper people.

As credit licensees, BNPL providers would need to implement processes to comply with ongoing obligations, including in relation to:

• internal and external dispute resolution;
• customer hardship;
• compensation arrangements;
• fee caps;
• marketing rules;
• the reportable situations regime; and
• ASIC reporting obligations.

Some BNPL providers are already credit licensees, and will have systems and processes in place to comply with these obligations in respect of their regulated credit products. However, BNPL providers who are not currently credit licensees will need to consider how they will move to comply with these obligations in either the full Credit Act environment (option 3) or with the partial exemptions proposed by option 2.

BNPL Industry Code becomes an enforceable code and is strengthened

Compared with the obligations in the Credit Act, the BNPL Industry Code is significantly less prescriptive. However, this may give rise to some confusion regarding implementation. The language in the BNPL Industry Code is broad, reflecting the fact it's a set of standards that represent best practice and generally imposes less of a compliance burden on BNPL providers than the specific prohibitions and obligations in the Credit Act, although in some places the Code goes further. For example, clause 12.1 provides:

To make sure we are providing our customers with a product or service that meets their needs on an ongoing basis, we will review our BNPL Products and Services to make sure they remain suitable for them.

An obligation to ensure products and services remain suitable for the customer does not exist in the Credit Act. While there are aspects of the BNPL Industry Code that impose considerably broad obligations, there are also some gaps which may need to be addressed if the Code were to be the primary method of regulating BNPL. For example, issues raised in the Options Paper that are not currently covered by the BNPL Industry Code include:

• product disclosure and warning disclosure requirements;
• minimum standards regarding assessment processes;
• minimum standards regarding hardship practices;
• excessive consumer fees and charges, including default fees;
• refund and chargeback processes;
• advertising and marketing;
• mitigating risk associated with scams, domestic violence, coercive control and financial abuse; and
• ensuring participants' compliance with these requirements is adequate.

It's possible the BNPL Industry Code will be updated to include additional commitments to address these concerns.

Looking at the recent headlines, it's easy to forget that credit regulation is not a new concept to many in the BNPL industry. The major BNPL providers identified in ASIC's 2020 industry review generally provide both regulated and unregulated products, so they already hold a credit license. Whichever option is preferred by the Government, existing credit licensees should be well positioned to leverage their existing Credit Act processes to comply with new BNPL-specific requirements in the Credit Act or the strengthened BNPL Industry Code.

Less affected will be those providers that voluntarily apply responsible lending obligations or equivalent when assessing customers for a BNPL product. Some banks that issue BNPL products, for example, do not currently rely on an exemption from the Credit Act. These providers may only experience limited additional regulatory burden, as they already have a credit licence with the necessary authorisations and systems and processes to support compliance with their licence obligations.

The same applies to strengthening the BNPL Industry Code. In March 2021, eight companies which at that time controlled 95% of the BNPL market, signed up to the Code. Those that are not Code signatories will need to look closely at the work involved to become 'Code compliant', and those that are will need to uplift to the standards in the strengthened Code.

Overall, we expect that the smaller providers will be most affected by any regulatory changes, and the cost of compliance may weigh heavily on management's minds, particularly given the medium-term economic outlook. Like any sector facing increased regulation, some consolidation may occur.

That said, the fact that the Government is consulting on increased regulation reinforces the success of the sector and conveys an expectation it will continue to perform strongly. Increased regulation may lead to new opportunities for product diversification, attract additional investment and facilitate more rapid innovation.

While BNPL is not 'regulated credit', it is generally accepted that it is a credit product. We used 'regulated credit' to refer to a credit product that is subject to the Credit Act. Providers of regulated credit must hold an Australian credit licence with relevant authorisations, and adhere to the mandatory obligations prescribed by the Credit Act, many of which are canvassed above.

One of the defining features of BNPL is that it's largely unregulated. Some BNPL providers also issue a separate regulated credit product but, as a general rule, the majority of BNPL products are structured to avoid regulation by the Credit Act. This allows providers to give consumers access to their products in a way that is faster and more flexible as they do not need to comply with the responsible lending obligations in the Credit Act.

Generally, BNPL providers rely on one of two exemptions from the definition of 'regulated credit' in the Credit Act:

• the section 6(1) exemption, where the provision of credit is limited by the contract to a total period not exceeding 62 days and, for all non-ADIs, the maximum amount of credit fees or charges that may be provided for or imposed does not exceed 5% of the amount of credit, and the maximum amount of interest charges that may be imposed or provided for does not exceed an amount equal to the amount payable if the annual percentage rate was 24% per annum; or
• the section 6(5) exemption, where a charge that is or may be made for providing the credit is periodic or an other fixed charge that does not vary according to the amount of credit that is provided, and falls below a threshold specified by the National Consumer Credit Protection Regulations.

Structuring a product in this way means that providers can be more flexible in the provision of credit and offer it to consumers who may not otherwise have been able to access, or wanted to access, regulated credit.