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Australia’s Treasury has published a draft regulation that would bring buy now, pay later (BNPL) products under similar rules to traditional credit offerings for the first time.
On Tuesday (March 12), the Treasury published an exposure draft bill and 26 pages of explanatory memoranda to accompany the proposed rule changes.
Members of the public are invited to give feedback on the draft bill, and have until April 9, 2024 to submit their comments.
The bill puts forward amendments to the National Consumer Credit Protection Act 2009 and the National Credit Code (abbreviated as the Credit Act and Credit Code respectively).
The amendments would provide a means for regulating a new category of financial products known as low-cost credit contracts (LCCCs), and BNPL products would fall under this category.
The Treasury defines LCCCs as “continuing or non-continuing credit contracts that involve the provision of credit to consumers that is low cost, interest free and generally short term”.
Other LCCCs that could be regulated under this definition in future include wage advances.
If the application of the Credit Code is extended to LCCCs, then providers of LCCCs will be required to hold and maintain an Australian Credit Licence (ACL).
Additionally, the bill would modify the existing provisions on responsible lending obligations (RLOs) that fall under the Credit Code.
The new RLO framework would create an opt-in RLO framework that “better reflects” the risks of LCCCs to consumers, the Treasury said.
This would include a requirement that providers of LCCCs develop and implement a written policy to assess whether an LCCC is suitable for the relevant consumer. This is known as an “unsuitability test”.
Australian consumer groups who shared a joint statement with Vixio were broadly supportive and welcoming of the draft bill, although they said some of its details “may need fine-tuning”.
“Today is a positive day for Australian consumers with the government proposing draft legislation to treat BNPL as what it really is: credit,” said Karen Cox, CEO of the Financial Rights Legal Centre.
“Removing this regulatory loophole and capturing BNPL under the Credit Act will go a long way towards bringing these products within acceptable guardrails — helping people spread their expenses without getting into problematic debt.”
Treasury chooses the middle path
The publication of the draft bill brings to an end almost 18 months of consideration by the Treasury as to how it should regulate BNPL.
In November 2022, as covered by Vixio, the Treasury published an "Options Paper" that outlined three ways for the government to tighten the rules around BNPL products:
- Option 1) Strengthening the BNPL Industry Code with the introduction of an “unsuitability test” based on a credit score check.
- Option 2) “Limited regulation” of BNPL products under the Credit Act, with a requirement for BNPL firms to hold an Australian Credit Licence.
- Option 3) “Full” regulation under the Credit Act and application of the same RLOs to BNPL products that are applied to traditional credit products.
Based on industry feedback and analysis of consumer harm in the BNPL sector, the Treasury took the middle ground and selected option 2.
“The growth of the BNPL market sector was not contemplated by policy makers when the exemption under which they operate was designed,” the Treasury said, referring to the exemption for short-term, interest-free credit.
“However, innovation in technology and business models has resulted in new credit products operating under these exemptions with far greater levels of accessibility, convenience, immediacy and volumes than originally envisaged.
“While this is not a reason for regulation per se, poor consumer outcomes are being observed in some cases at sufficient levels to justify regulatory intervention.”
According to the Treasury, BNPL transactions accounted for an equivalent of about 2 percent of all card transactions in Australia in 2022.
'Unsuitability tests' coming soon
One of the key elements of option 2 is the introduction of an “unsuitability test” prior to a BNPL contract being entered into by a consumer.
As noted by the Treasury, a credit product will be deemed unsuitable if a consumer is unable to meet their other financial obligations, or if they can do so only with “substantial hardship”.
The draft law would require that BNPL firms tailor their unsuitability tests based on the amount of credit sought, the target market and the likelihood that hardship or arrears will follow.
For example, the regulation states that BNPL firms must vary the extent of the “enquiries and verifications” they request, but it does not explicitly state what information should be requested.
Tom Abourizk, CEO of consumer watchdog CHOICE, said that a requirement to perform income checks, which is not explicitly stated in the draft, must be added to the regulation so that accuracy in approvals is not compromised for speed.
However, where the credit limit of an LCCC is less than A$2,000 ($1,320), the regulation does state that a presumption of suitability will apply, if entered into during the relevant assessment period.
Similarly, existing contracts can be scaled up to an A$2,000 credit limit before further enquiries and verifications are required.
