The voluntary Buy Now Pay Later industry code of practice was launched and came into effect on 1 March 2021.
- The new voluntary Buy Now Pay Later Code of Practice includes nine 'customer commitments' which AFIA states are designed to promote a 'customer-centric approach to the design, marketing and distribution' of BNPL products and services; lift industry standards; and supporting compliance with legal obligations
- The Code Compliance Committee will have power to impose sanctions on members for code breaches, including the power to 'name and shame' members and a requirement to impose 'mandatory sanctions' for for 'significant' breaches
- Consumer groups have raised concerns about the likely effectiveness of the Code in protecting consumers and have called for the government to follow the UK's lead and regulate BNPL products like other credit products.
What's in the new BNPL Code?
The Australian Finance Industry Association (AFIA) has launched a new, voluntary buy-now-pay-later (BNPL) Code of Practice with the aim of promoting a 'customer-centric approach to the design, marketing and distribution' of BNPL products and services; lifting industry standards; and supporting compliance with legal obligations. AFIA states that the Code 'goes above and beyond the law in Australia, setting best practice standards for the sector and strengthening consumer protections'. The Code was developed following consultation with industry, with the Australian Securities and Investments Commission (ASIC) and with other stakeholders. The commitments in the Code are contractually enforceable on Code Compliant members by customers through the Australian Financial Complaints Authority (AFCA).
The new Code took effect from 1 March 2021.
The Code is binding on Code Compliant Members (members) of the AFIA BNPL Providers Group. The current code compliance members are: Afterpay, Brighte, Humm, Klarna, Latitude, OpenPay, Payright and Zip.
According to AFIA, this group represents over 95% of the BNPL market.
Oversight: Code Compliance Committee
The Code Compliance Committee (CCC) is an independent three person Committee, established by AFIA to monitor Code Compliance, investigate alleged breaches of the Code; and impose sanctions for non-compliance (as appropriate).
- Where the CCCC determines that a member has breached the Code, it has the power to impose a series of sanctions, including certain mandatory sanctions for breaches deemed 'significant' eg for systemic breaches which require reporting to ASIC.
- The sanctions include for example: a) publicly naming a non-complying BNPL provider in a media release, in a notice of non-compliance on AFIA's website and/or in AFIA's Annual Review; b) requiring a code compliance audit of the provider at their expense; c) directing a provider to stop 'portraying itself as a 'Code Compliant Member' eg directing a provider to using the accreditation symbol and suspending/revoking the provider's certification as a Code Compliant Member; and d) recommending that the provider's membership of AFIA be reviewed, suspended or terminated.
The composition, duties, operation and administration of the Code Compliance Committee are detailed in the Terms of Reference.
Nine commitments to BNPL customers
The Code includes nine customer commitments.
1. Focus on customers
- Vulnerable customers: The Code commits members to 'take extra care' of vulnerable customers (as described in ASIC's 2019-23 Corporate Plan), provided that customers inform them of their circumstances' or it is 'otherwise reasonable' for the member to be aware of them. This includes, committing to: provide staff with training to 'act with sensitivity and respect' toward vulnerable customers and adhering to best practice guidance on dealing with vulnerable customers (eg AFCA approaches)
- Code members also commit to (among other things):
- ensuring that BNPL services/products 'are suitable' and that appropriate safeguards are in place
- only providing BNPL services/products to customers aged 18 years or older
- acknowledging 'all complaints within one day (or as soon as practicable)' and to providing an initial response within ten days from the date of the complaint
- taking 'reasonable and appropriate steps' to ensure that merchants/retail partners do not provide BNPL services/products for online gambling, retail gambling, gambling at domestic or offshore casinos and the purchase of firearms.
- proactively engaging with customers to obtain feedback and to review the reasons for customers contacting their provider with a view to improving BNPL services/products
2. Commitment to be fair, honest and ethical
Members commit to 'always act fairly and honestly, be ethical and treat you [BNPL consumers] reasonably in all our dealings, as part of this commitment'.
3. Commitment to keep consumers 'properly informed' about products/services
The Code commits members to ensuring that:
- terms and conditions are 'fair, clear and transparent and written in plain language' and 'distinguishable from our marketing material' and to comply (where relevant) with ASIC's guidance on advertising.
- advertising and promotional material is clear and not misleading or deceptive'.
- prospective customers are provided with access to 'clear and prominent information' about repayment obligations and fees (including fee amounts or how they will be charged)
- customers receive 'relevant and useful reminders' about repayment obligations
- customers are able to access their statement, see each purchase and the total outstanding balance of their purchases online
- reasonable steps are taken to exclude customers with financial hardship arrangements in place, from receiving promotional material
- information about how to close/deactivate an account is available online in a 'readily available and simple manner'
- contact details for members are available on their website and electronic forms
- Late fees:
- members commit to either: a) contacting customers who are late with making a payment before charging a late fee; or b) to reversing any late fees that have been charged where the customer makes a catch up payment within two days of the missed payment
- members agree where late fees are charged, the fees will be 'fair, reasonable and capped' (though no hard amount is specified)
- members agree to give consumers 'at least 40 days' notice in writing, before introducing new fees/increasing existing fees and to provide notice 'as soon as is reasonably possible' and 'at least 30 days notice' where other material changes are made to terms/conditions
4. Ensuring the product/service is 'suitable'
The Code commits members to assessing new customer's suitability before providing them with a product/service, as well as to assessing existing customers' ongoing suitability.
- The Code commits members to conducting an 'upfront assessment' of new customers, to assess their suitability, before providing a BNPL service/product to them.
- Clause 11.3 of the Code lists the criteria that members need to 'be reasonably satisfied' that a new customer meets before providing them with a BNPL goods/service. These criteria include (among other things) that the member is satisfied that the customer is not a vulnerable customer and meets the suitability criteria set out at clause 12 (which commits members to ensuring that their BNPL products/services are meeting customer needs and are 'are not being used by customers for whom it is not suitable'). Members will also need to be satisfied that the repayment term is 'determined as suitable and is consistent with our suitability assessment and internal risk management processes'.
- Where a customers does not meet all of the criteria in clause 11.3 and the transaction amount is $2000 or less, members will check 'at least one indicative data source' (eg information about the customer's income/expenses such as bank statements or conduct a credit check) before providing the service.
- Where the transaction amount for new customers is in the $2001-$15,000 dollar range, members will need to be satisfied that the customer meets all the criteria in clause 11.3 and customers will also need to undergo two additional checks (the member will check information about income/expenses and conduct a credit check) to ensure the product/service is suitable.
- Members will assess all new Transaction Amounts for existing customers to ensure that the service/product remains suitable prior to providing a new transaction amount (eg an increase to an existing limit).
- Existing customers will need to meet the criteria in clause 11.11 including (among other things) that: a) they are up to date with payments; b) they 'have shown appropriate repayment ability'; c) the repayment term is 'still determined as appropriate'; c) they are not a 'vulnerable customer'; and d) 'internal in-life data shows' that the BNPL product/service is not been used 'inappropriately'.
- Members will not provide any additional products/services or increase the Transaction Amount of the current product or service where a customers is behind in payments at the time of undertaking the existing customer assessment process.
- Where the new transaction amount is over $3000, in addition to meeting the requirements in 11.11, customers will need to undergo additional checks to ensure the product/service remains suitable. The amount of additional data required will depend on the size of the new Transaction Amount.
5. Undertake an ongoing review of the suitability of products/services
- Members commit to reviewing their BNPL products/services to ensure they remain suitable, including ensuring that products/services are not being used by customers for whom they are not suitable.
- This ongoing suitability assessment includes: a) monitoring products/services to 'ensure they remain suitable for our customers; b) monitoring how customers are using products/services to identify whether they are meeting their needs/whether they remain suitable; c) taking reasonable steps 'that will likely result in the distribution' of BNPL products/services being appropriate; d) monitoring/reviewing the outcomes of distribution arrangements on an ongoing basis including how merchants/retail partners use BNPL products/services and considering whether changes are required.
- Clause 12.3 lists various types of information – eg complaints data, consumer feedback, hardship data, the percentage of sales to consumers who are not in the target market, information collected from consumers and consumer advocates and AFCA - that members will take into account to ensure that this commitment is being met.
6. Dealing fairly with complaints
The Code commits members to:
- Having a complaints policy that it readily accessible on their website.
- Having in place complaints resolution procedures that comply with ASIC's internal dispute resolution standards - ie the 'same ASIC standards and requirements that Australian Financial Service Licensee holders…except where we promise to improve on those standards and requirements'.
- Resolving complaints as quickly as possible:
- Complaints will be acknowledged within one day/as soon as is practicable
- An initial response will be provided within ten days from the date of the complaint
- Upon completion of an investigation into a complaint, members will provide consumers with a written response including the outcome of the investigation and their right to take the complaint to AFCA and AFCA's contact details (unless the complaint has been resolved to the customers' satisfaction within five days or an 'appropriate explanation and/or apology' has been given and there are 'no further actions we can take to reasonably address the complaint').
- Escalating a complaint:
- Members agree to be a member of the Australian Financial Complaints Authority (AFCA) and be subject to AFCA's rules to enable customers to lodge a complaint with AFCA if dissatisfied with members' own response
- Complaints will also be able to escalated to the Code Compliance Committee (CCC) and members undertake to cooperate and comply with all 'reasonable requests' by the performance of its monitoring and investigative functions.
7. Financial Hardship Assistance
The Code commits members to:
- Providing their staff with training to ensure diverse and vulnerable customers are treated with appropriate 'sensitivity, respect and compassion'.
- Ensuring customers are aware that they have the option to request Financial Hardship Assistance eg by including information on how to do so, with contact information on their websites. Customers will have the option to inform members that they are experiencing financial hardship in writing, electronically or by phone.
- Informing customers in writing of the outcome of their hardship request within 21 days receiving the hardship request (or where additional information was sought from the customer, within 21 days of receiving the additional information).
- Where a financial hardship claim is denied, members are required to:
- provide customers with the reasons/details as to why a hardship request was denied and provide them with contact details for AFCA, as well as contact information for financial support services
- work with customer representatives (eg family member, financial or legal representative or financial counsellor0 instead of directly with customers if this is the customer's preference
- cease 'normal collection activity' and freeze late fees while financial hardship claims are being assessed
- refrain from listing the default on a customer's credit reference file while considering a request for financial hardship.
- Where a financial hardship claim results in agreement to provide assistance members are required to:
- provide written confirmation of what has been agreed, including the customer's obligations and the end date for providing the assistance
- not charge additional late fees while the customer is meeting the conditions of the Financial Hardship arrangement
- 'make reasonable efforts' to contact a customer before activating/reactivating enforcement action if they breach the conditions of hardship assessment and give them at least five days' notice. If a new repayment arrangement cannot be agreed, customers will be provided with AFCA's contact details and also be referred to financial support services.
- Recovering a debt - the Code commits members to:
- complying with the ACCC's and ASIC's Debt collection Guideline for Collectors and Creditors and with the Code of Operation: Recovery of Debts, published by the Federal Government
- not sell a customer's debt to a debt collector except in certain circumstances
- not to initiate/not to let their agents initiate bankruptcy proceedings against customers
8. Compliance with legal and industry obligations
Clause 15 of the Code states that members will comply with their obligations under the law and the Code and 'act fairly and in a way which is consistent with good practice' including, among other things, taking reasonable steps to ensure that personal and financial information is protected from misuse/loss/unauthorised access.
9. Members will 'support and promote' the Code
The Code commits members to promoting the Code to raise awareness of the protections under it through making it available via their websites, showing an 'accreditation symbol' on their websites, engaging with key stakeholders, including via AFIA and ensuring their staff, agents and representatives receive the training they need to understand the Code and how to comply with it.
Minimum standards for merchants and retail partners
The Code also sets out minimum standards members will require their merchant/retail partners to meet. These include:
- acting 'lawfully, fairly and ethnically' in their dealings with customers
- communicating clearly when dealing with consumers and in marketing/advertising material relating to BNPL products/services
- safeguarding customer confidentiality
- responding to customer complaints on a timely basis
- requiring their employees/agents to be trained in the minimum standards/understand the minimum standards
- providing customers with clear information about BNPL services, fees, charges
Members will have monitoring processes and policies in place to ensure that their merchant/retail partners meet these minimum standards on an ongoing basis. Members will be required to report instances of material non-compliance with their minimum standards (including any proposed consequences) to the CCC on a quarterly basis.
Consumer groups have raised concerns
In a statement, consumer groups – Financial Rights Legal Centre, Financial Counselling Australia, Consumer Action Legal Centre and CHOICE - raised concerns about the effectiveness of the Code in protecting consumers and called for the government to follow the UK's lead and regulate BNPL products like other credit products.
Financial Rights Legal Centre CEO Karen Cox commented,
'These services are growing at a breathtaking rate, and ASIC’s research has shown that at least one in five consumers are missing payments. As this industry continues to grow, we will see increased debts and increased financial hardship. Sadly, many people including Aboriginal and Torres Strait Islander people who are lured into BNPL are becoming embroiled in unsustainable, long-term debt…Right now, there is no obligation for BNPL providers to assess a person’s ability to repay debt or handle a consumer’s complaint fairly. We are glad to see the new Code requires membership in AFCA, but that is no replacement for proper regulation'.
Director of Campaigns and Communications at CHOICE, Erin Turner added,
'Self-regulation of the Buy Now, Pay Later sector will not be enough to fix the issues we’re seeing like high fees, inappropriate lending and pushy marketing of debt to Australians…The Code will see businesses that fail to comply with basic standards face “naming and shaming” rather than the penalties or legal action other lenders face for significant breaches of consumer credit protections. This sets an inappropriately low bar for a growing industry'.