On 21 November 2022, Treasury released its consultation paper on a proposed regulatory framework for buy now, pay later (BNPL) providers in Australia (BNPL Consultation Paper). The BNPL Consultation Paper follows a series of targeted consultations by Treasury to identify the impacts of BNPL, particularly those contributing to what Treasury considers to be poor consumer outcomes. Such outcomes include unaffordable lending practices, poor complaints handling processes, excessive or disproportionate consumer fees and charges, poor disclosure, unsolicited selling practices and non-participation in the credit reporting framework.

Current regulatory framework for BNPL

Since 1 March 2021, BNPL participants have been able to voluntarily subscribe to and be accredited under the Australian Financial Industry Association’s (AFIA) BNPL Code of Practice (BNPL Industry Code), an industry code developed in conjunction with the BNPL industry and interested stakeholders. The BNPL Industry Code is not law, nor is compliance with the code currently enforceable by regulators like the Australian Securities and Investments Commission (ASIC). Similarly, the BNPL industry is not subject to regulation under the National Consumer Credit Protection Act 2009 (Cth) (Credit Act), although BNPL providers may be subject to misleading and deceptive conduct provisions under the Australian Securities and Investment Commission Act 2001 (Cth) and the Australian Consumer Law, design and distribution obligations under the Corporations Act 2001 (Cth), ASIC’s product intervention powers and obligations under the Anti Money Laundering and Counter Terrorism Financing Act 2006 (Cth).

Options for new regulatory framework

The BNPL Consultation Paper is seeking feedback on three potential regulatory options, with varying degrees of regulatory intervention:

Option 1 - Strengthening the BPNL Industry Code and introducing an affordability test 

Under this option the existing BNPL Industry Code would be expanded to introduce more robust requirements for signatories and the requirement for providers to undertake an affordability test.

The key points of the regulation proposed in this option include:

  • amending the Credit Act to impose specific obligations for BNPL providers to conduct an affordability test (ie, checking that a BNPL product is not unaffordable for a person before offering the product to them). Treasury has suggested that the test will be proportionate to the overall value of credit being provided – for example, providers may use a credit score to determine the person’s credit risk but may need to consider income and expense information where a person is identified as a “risky borrower”. Treasury is not proposing to include requirements to verify a customer’s financial situation or check if the provision of credit aligns with the person’s needs and objectives;
  • BNPL providers would not be required to hold and maintain an Australian credit licence; and
  • there would be further consultation between industry and government to strengthen the BNPL Industry Code to address issues of concern such as disclosure, dispute resolution, fees, refund and chargeback processes, advertising and marketing, mitigating the risks associated with domestic violence, scams and financial abuse, and ensuring compliance controls are adequate.

The BNPL Consultation Paper also suggests that the BNPL Industry Code could be enforceable by ASIC, subject to the industry body’s application and ASIC’s approval, and be made mandatory for all BNPL providers. The revised BNPL Industry Code would also supplement but not override the bespoke affordability checks that would be specified in the Credit Act.

Option 2 - Requiring BNPL providers to hold an Australian credit license and complying with reduced regulation under the Credit Act

Under this option, BNPL providers would be required to hold an Australian credit licence or be otherwise authorised. BNPL providers would need to comply with most general obligations of credit licensees, including complying with a reduced set of responsible lending-like obligations (RLO) to confirm that BNPL credit is not unsuitable for a person (and scaled to the level of risk of the BNPL credit).

The key points of the regulation proposed in this option include:

  • BNPL providers would be required to undertake a credit assessment that BNPL is not unsuitable for a consumer but may not need to verify financial documentation or check that BNPL credit aligns with the person’s needs and objectives;
  • BNPL providers would be prohibited from increasing spending limits without customer instructions;
  • participation in the existing credit reporting framework would remain voluntary, unless the BNPL is a big bank;  
  • fee caps for charges relating to missed or late payments would be required, combined with additional warnings and disclosure requirements; and
  • merchants would not need to be an authorised credit representative of a BNPL provider.

The above legislative amendments would be supplemented by a strengthened BNPL Industry Code, with parts of the code being enforceable by ASIC (subject to ASIC’s approval).

Option 3 - Regulating BNPL providers under the Credit Act

This option would treat BNPL similarly to other credit products under the Credit Act and requires BNPL providers to obtain an Australian credit licence and step fully into the regulatory regime for credit providers.

The key points of the regulation proposed in this option include:

  • BNPL providers would need to either hold an Australian credit licence or be a credit representative of a credit licensee, subject to all relevant obligations under the Credit Act including responsible lending (ie, confirming that BNPL credit is not unsuitable for a person), compensation and dispute resolution arrangements;
  • a requirement that consumers be able to set their own spending limit and a prohibition on increasing this without permission;
  • fee caps for missed or late payments would be applied, combined with disclosure requirements; and
  • improved accessibility to the credit reporting regime by BNPL providers to share and receive credit information (eg, repayment history information and hardship information) due to such BNPL providers being credit licensees. Note, mandatory comprehensive credit reporting would only be required where a BNPL provider is a big bank.

This option also contemplates revisions to the BNPL Industry Code address issues not considered in the scope of the Credit Act, such as industry standards, refund and chargeback processes and providing BNPL providers with information on identifying vulnerable customer situations (eg, domestic violence and financial abuse).

In proposing each of the options, Treasury is seeking to leverage the existing regulatory framework to develop a regime that improves consumer protections and dissuades avoidance of regulation while being flexible enough to enable new participants to enter the BNPL industry. Treasury has noted it is open to considering alternative regulatory options beyond the three proposed in the BNPL Consultation Paper.

The BNPL Consultation Paper is silent as to the commissioned Independent Review of the BNPL Industry Code being undertaken by Promontory Australia, which includes in the Terms of Reference to compare provisions of the Industry Code against the Credit Act to identify regulatory gaps. Promontory is due to provide their final report by 1 March 2023.

Supplementary reform proposals

As well as the three options above, Treasury has suggested that supplementary reform may be considered, via the following measures:

  • improving the financial capability of BNPL consumers by publishing additional resources to educate consumers on BNPL products;
  • reviewing the credit reporting framework to consider how BNPL providers may better report credit information of their consumers;
  • enhancing ASIC’s role in regulating the BNPL industry where BNPL providers are formally regulated under the Credit Act, which may cause BNPL providers to be subject to a levy to allow ASIC to recover the cost of regulating the industry; and
  • considering amendments to surcharging rules that prevent merchants from passing on the cost of BNPL to consumers to improve competition and efficiency in the Australian consumer credit market.

Irrespective of the option (or alternative option) chosen for implementation, we expect the outcome to be a significant factor in resolving Treasury’s concerns around consumer protection in the BNPL industry as well as providing clarity for BNPL providers after a number of years of public debate on the substance of regulation applicable to BNPL providers.

The consultation period is open until 23 December 2022. If you would like to discuss the options or prepare a submission to Treasury, please contact our Fintech + Web3 team.