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In a new review of buy now, pay later (BNPL) regulation, Australia’s Treasury calls time on a key loophole that has allowed the industry to remain outside traditional lending rules.
Australian consumers who wish to use BNPL services may soon be subject to background checks similar to those applied by mortgage lenders and credit card providers, according to new proposals issued by the Treasury.
In an options paper published on Monday (November 21), the Treasury put forward three potential models for BNPL regulation, all of which would see an end to the industry’s exemption under the 2009 National Consumer Credit Protection Act (Credit Act).
“Australia’s modern, digitally-enabled economy leads the world in innovation, and consumer protections need to keep pace,” said Stephen Jones, assistant treasurer and minister for financial services.
“That’s why the Albanese Government is today progressing our consultation process for regulating BNPL products.”
Jones noted that although the BNPL Code of Practice, which came into effect in March 2021, has “worked well” to date, the sector is maturing rapidly and reform is “long overdue”.
“These products deliver real benefits to the vast majority of these consumers,” he said. “But there is a regulatory gap that can leave some vulnerable groups in over their head.”
Of particular concern, the majority of BNPL users are made up of young people, and evidence of financial stress among these users is growing.
As noted by the Treasury, more than half of Australia’s BNPL accounts are held by 18-34 year-olds, and stress indicators are significantly higher among BNPL users than users of credit cards or mortgages.
In a survey conducted in Q1 this year, 23 percent of BNPL users reported one stress indicator, compared with 16 percent of mortgage users and 11 percent of credit cardholders.
Meanwhile, 19 percent of BNPL users reported two stress indicators, compared with 11 percent and 8 percent of mortgage and credit card users, respectively, according to the Australian Securities and Investments Commission (ASIC).
Stress indicators include inability to pay utility bills, mortgage repayments, rent or grocery bills, or seeking help from friends, family or welfare organisations.
Three roads to BNPL regulation
From the three options tabled by the Treasury, the first is described as a “government-industry co-regulation regime”.
This would involve “strengthening” the BNPL Industry Code and combining it with an affordability test, which would be based on a credit score check.
According to the Treasury, the affordability test would be imposed by new “bespoke” provisions under the Credit Act, while other regulatory gaps would be addressed via an amended industry code.
The second option, which is described as “limited” BNPL regulation under the Credit Act, would require that BNPL providers obtain and maintain an Australian Credit Licence (ACL).
It would also introduce new Responsible Lending Obligations (RLOs) under the Credit Act, and it would introduce an “unsuitability test” to determine whether BNPL products are safe for each consumer.
A credit product is deemed unsuitable under the test if the consumer is unable to comply with other financial obligations, or if they could do so only with “substantial hardship”. Once again, this would be combined with an amended industry code.
Finally, under the third option, BNPL providers would become fully regulated under the Credit Act and would be subject to the same RLOs that traditional lenders currently are.
“The existing RLOs in the Credit Act will be applied to all BNPL credit,” said the Treasury, “including requirements around reasonable inquiries into a consumer’s financial situation and taking reasonable steps to verify this information.”
As in option two, this would also mean that BNPL providers must obtain and maintain an ACL.
The Treasury has called on all interested parties to submit responses to its options paper by December 23 this year, which will inform further consultations and ultimately a government decision on BNPL regulation.
At present, BNPL products are not regulated under the Credit Act due to the low-cost and short-term nature of the credit they provide.
As noted by the Treasury, BNPL products typically operate under the exemption for interest-free continuing credit contracts that only charge periodic or other fixed consumers fees for the provision of credit.
BNPL products typically charge prescribed fee caps of A$200 ($132) in the first 12 months, and A$125 ($82) for any subsequent 12-month period thereafter.
Why regulate now?
The Treasury said its options paper came together following consultations with a range of consumer groups, BNPL providers, retailers, financial service providers and other regulators.
During these consultations, the Treasury observed that “poor consumer outcomes” were repeatedly highlighted, and were attributed to the “looser regulatory environment” and rapid growth of BNPL
As covered previously by VIXIO, BNPL is a fast-growing sector in Australia. According to the Reserve Bank of Australia, BNPL transactions tripled during the pandemic, from about 10m in the first quarter of 2020 to more than 32m in the final quarter of 2021.
During the 2021-22 financial year, the number of active BNPL accounts grew from 5m to 7m, with an overall spend of A$16bn ($10.6bn).
However, it is worth noting that this is still a small amount when compared with the A$ 272bn ($180bn) of total personal credit card spend.
During consultations with the Treasury, the most common BNPL issues raised were unaffordable or inappropriate lending practices, poor complaints handling processes and lack of hardship assistance, and excessive or disproportionate consumer fees and charges.
The Treasury also observed poor product disclosure practices and a lack of financial risk warnings around BNPL products, and concerns around advertising in spaces where consumers pay for essentials, such as food and utilities.
This was compounded by “frictionless sign-ups” that encouraged other risks and excesses, such as scams, overselling and financial abuse.
Meanwhile, consumers complained that reverse charging provisions among merchants who accept BNPL payments are “inadequate”, while consumer credit providers argued that non-participation in Australia’s credit reporting framework means that some BNPL credit information is not available for use in credit checks.
