Consumer protection at the heart of proposed BNPL reforms

‘Buy Now Pay Later’ (BNPL) is a global fintech success story, with approximately 7 million active BNPL accounts in Australia alone. However, concerns have been mounting over BNPL products being provided to Australians who struggle to make repayments and has prompted the Federal Government’s recent announcement to regulate BNPL products as credit products. We unpack the impact this reform will have on the BNPL sector.

While BNPL products can assist consumers manage the cost-of-living pressures, the sector is currently unregulated as 'credit' under the National Consumer Credit Protection Act 2009 (Cth) (NCCPA), and consumer groups in particular have raised concerns about the unsuitability of BNPL products for individuals who cannot keep up with their BNPL repayments.[1]

On 22 May 2023, the Government announced that it would regulate BNPL as a credit product, with the proposed laws aimed at seeking a sensible balance between protecting consumers and promoting innovation in the BNPL sector.

This article explores the impact of the proposed regulation on BNPL providers.

Key takeaways

In November 2022, the Treasurer released an Options Paper on ‘Regulating Buy Now, Pay Later in Australia’ (Options Paper) which sets out three models for the future regulation of BNPL products. We previously discussed these three options in detail in our ‘Treasury pays in three with release of BNPL Options Paper’ article. 

The Government has now announced that it would regulate BNPL products as ‘credit’ under the NCCPA. Notably, BNPL providers will be subject to the following requirements:

Key requirements	Corrs insights
Obtain an Australian Credit Licence (ACL)	We expect one key issue to be addressed when drafting the legislation is how BNPL products are defined. The Australian Securities and Investments Commission (ASIC) has previously used a definition in a product intervention order of ‘buy now pay later arrangement’ which requires the BNPL product to be a continuing credit contract and refers to the purchase transaction between the consumer and the merchant. Whether this definition is appropriate for the new BNPL regime remains to be seen.
Comply with responsible lending obligations	As suggested by the Options Paper, the unsuitability assessment requirement will be ‘similar to the existing responsible lending obligations framework, scaled to the level of risk of the BNPL product or service’.  With the potential removal of certain ‘prescriptive requirements’,[2]BNPL providers should start investigating methods to perform this assessment which can be easily integrated within their innovative customer journeys and still achieve the intended effect of the proposed regime.
Comply with certain general licensee obligations	This may include obligations in relation to providing BNPL services in an honest, efficient and fair manner, internal and external dispute resolution, hardship procedures and compensation arrangements. We expect that BNPL providers are likely to have a reasonable transitional period before the licensing requirement and the associated obligations come into force. However, given the significant nature of some of proposed obligations, BNPL providers who are not already complying with such obligations (given other regulated products they may offer) should start considering uplifting internal processes now with a view to complying with the potential general licensee obligations.

ASIC will likely be given strong enforcement powers to ensure BNPL providers comply with these new laws. 

The Options Paper had also noted that under Option 2, merchants who offer BNPL products to consumers will not need to be an authorised credit representative of the BNPL provider.[3]

More details on the impact on BNPL providers

There is a range of BNPL business models in the Australian market, which differ by characteristics such as product availability, affordability checks and fees.[4] For this reason, the Government considers it important to ensure the consistency and transparency of BNPL regulation, so that consumers can make better informed decisions when engaging with a BNPL service. It also underscores the principles which underly the licensing, conduct and disclosure obligations for credit products under the NCCPA. 

Under the proposed BNPL reform package, BNPL providers will be required to:

• Hold an ACL. BNPL providers will need to apply to ASIC to obtain an ACL, or perhaps seek to vary an existing ACL that they hold for other regulated credit products. At a high level, ASIC will only grant or vary an ACL if it is satisfied that the applicant:
  
  
  • is ‘fit and proper’ and has the organisational competence to engage in the relevant credit activities; and
    
    
  • has the necessary resources to comply with the general conduct obligations under the credit legislation.[5]
    
    
• Comply with responsible lending obligations. BNPL providers, under this proposed reform, will be required to perform unsuitability assessments to ensure unsuitable BNPL products are not issued to consumers.
  
  The Assistant Treasurer and Minister for Financial Services cites that while consumers may find BNPL products easier to use and less costly than other conventional credit products (i.e. BNPL products typically do not charge interest and often only charge late fees), without an effective unsuitability assessment, consumers may acquire multiple accounts which are used to roll over debts. This often leads to the consumers being “[kept] … in poverty” using these products.[6]  This observation by the Minister has been a recurring theme in many of the submissions which have been made to the Government as part of the consultation over the Options Paper.
  
  At a high level, the NCCPA responsible lending obligations that apply to conventional credit providers incorporate the following key aspects:
  
  
  • making an unsuitability assessment prior to entering into a credit contract or increasing the credit limit under an existing credit contract;
    
    
  • to make the unsuitability assessment, the credit provider must:
    
    
    • make reasonable inquiries about the consumer’s financial situation and the consumer’s requirements and objectives in relation to the credit contract; and
      
      
    • take reasonable steps to verify the consumer’s financial situation; and
      
      
  • provide a credit guide (amongst other disclosures) which satisfies the content requirements set out in the credit legislation.

As flagged in the Options Paper, the responsible lending requirements will be ‘scaled to the level of risk of the BNPL product or service’. As such, the responsible lending obligations that will apply to BNPL providers may do away with certain prescriptive requirements. The Options Paper suggested that requirements to verify financial documents and confirm the BNPL product’s alignment with a consumer’s needs and objectives may not form part of the responsible lending obligations that will apply to BNPL providers.[7] However, in a media interview aired on the day of the announcement of the BNPL reform, the Minister stated that that ‘suitability and affordability checks will have to be put in place’.[8]

As such, the exact nature of this responsible lending requirement is still subject to further discussion. It is open for BNPL providers to propose alternative models of the unsuitability assessment that achieves the purpose of guarding consumers against acquiring unsustainable credit and is cost efficient.

• Meet statutory dispute resolution and hardship requirements. ASIC reported that one in five BNPL users ‘had cut back on or went without basic essentials like food to make repayments on time’, and one in six ‘took out an additional loan simply to make their BNPL repayments on time’.[9] Given ASIC’s focus on increasing reports of hardship and lack of access to, or awareness of, dispute resolution systems in the BNPL market, we expect that under the proposed reform BNPL providers will need to:

• offer consumers financial hardship assistance (e.g., contract variation options, the consideration of hardship requests, and the provision of regulated hardship information);
  
  
• implement internal dispute resolution procedures which are transparent and accessible, and that meets the requirements of ASIC Regulatory Guide 271; and
  
  
• become an Australian Financial Complaints Authority (AFCA) member.

The Options Paper notes that the AFIA Buy Now Pay Later (BNPL) Code of Practice (BNPL Code) largely mirrors the requirements on complaint handling and hardship under the credit legislation. We expect that BNPL providers who already comply with the BNPL Code will be well placed to comply with any legislated hardship or dispute resolution requirements.[10]

• Comply with statutory product disclosure and other information obligations. According to the Options Paper, some consumers have described their BNPL terms and conditions as ‘not clear and difficult to understand’. This raises the issue of whether consumers fully understand the total costs of their BNPL product (including any late payment fees), their payment schedule, and other key terms. This issue becomes increasingly complicated for consumers when different BNPL providers use different payment models, creating difficulties in comparing key terms between BNPL products. Introducing BNPL disclosure obligations will ensure that consumers have sufficient information to make informed choices about BNPL products, including the ability to compare them.[11]
  
  We note that BNPL products are generally already captured by the design and distribution obligations regime which includes the key disclosure requirement to prepare and publish a target market determination document.

• Abide by existing restrictions on unacceptable marketing. Although certain advertising practices (e.g., advertising BNPL products to pay for essentials and advertising to consumers in-person) are highlighted in the Options Paper as being problematic, the Government appears to indicate that no new restrictions on unacceptable marketing will be introduced.
  
  Currently, BNPL providers must comply with their existing obligations under the Australian Securities and Investments Commission Act 2001 (Cth), including the requirement to ensure that their marketing is not false, misleading or deceptive, and otherwise meets ASIC’s expectations in relation to marketing consumer protections (e.g., complies with ASIC Regulatory Guide 234).[12] ASIC currently has the power to regulate these existing obligations without the need for further enforcement powers.
  
  
• Meet a range of other minimum standards in relation to their conduct, and in relation to their products. The Government is yet to provide details on what these minimum standards would entail. Factors that may contribute to these standards may include the number of complaints and measures of consumer harm. Indeed, some submissions in respect of the Options Paper have highlighted the importance of greater transparency in the provision of BNPL data to one or more credit reporting bodies as a powerful tool for addressing most of the issues highlighted in the Options Paper.

Next steps

We encourage BNPL providers to look out for and engage in the upcoming consultation process, to ensure that the outcome of the consultation is commercially realistic and achievable for the sector. We expect the key issue to be how the responsible lending requirements will be ‘scaled to the level of risk of the BNPL product or service’ and what statutory product and other information obligations are likely to be imposed.

To this end, BNPL providers should consider what suitability assessment measures are most appropriate for their BNPL products, so they can demonstrate to consumers (and ultimately the Government) that their measures would achieve the intended policy objectives for the regulation of BNPL in Australia.

In terms of timing, the Government has indicated that the exposure draft legislation is expected to be released later this year, with the final Bill to be introduced into the Parliament by the end of this year.

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_{[1]      https://ministers.treasury.gov.au/ministers/stephen-jones-2022/speeches/address-responsible-lending-borrowing-summit. See also https://consumeraction.org.au/regulate-buy-now-pay-later-like-other-credit-products-to-boost-customer-safeguards-consumer-groups-say/.}  

_{[2]      Treasury’s Options Paper ‘Regulating Buy Now, Pay Later in Australia’ (November 2022) (Options Paper) page 21.}