Regulations coming for BNPL market

In recent years, the financial landscape in Australia has been significantly transformed by the advent of Buy Now, Pay Later (BNPL) services. These innovative credit products have provided consumers with a convenient and often cheaper alternative to traditional credit forms such as credit cards, small amount credit contracts, and consumer leases.

BNPL arrangements typically involve a third-party provider financing consumer purchases of goods and services, with repayments collected in instalments. Unlike traditional credit products, BNPL services generally do not charge interest but may impose small fees on consumers and service fees on merchants. This model has gained substantial traction, with the Reserve Bank of Australia reporting BNPL transactions worth around $19 billion in the 2022-23 financial year, accounting for approximately 2% of all Australian card purchases.

While BNPL products offer a range of benefits to both consumers and the broader economy, such as providing a competitive alternative to traditional credit and contributing to greater financial inclusion to consumers who might have limited access to mainstream credit, its ease of access has led consumer advocates to call for regulation to prevent over-commitment by consumers in line with traditional credit products. 

Currently, BNPL products are not regulated under the Credit Act due to exemptions in the Credit Code. As a result, BNPL providers are not subject to Responsible Lending Obligations (RLOs) or other Credit Act requirements, and they do not need to hold an Australian credit licence. Some of the most common concerns about the BNPL sector include unaffordable lending practices, inadequate complaint resolution and hardship assistance, excessive late payment fees, and a lack of transparency in product disclosures and warnings.

Although BNPL providers adhere to the Australian Finance Industry Association’s voluntary Buy Now, Pay Later Industry Code, which covers approximately 90% of the market, this self-regulation is not enforceable by the Australian Securities and Investments Commission (ASIC). Consequently, breaches of the Code do not attract criminal or civil penalties, highlighting the need for more robust regulatory oversight.

It is against this backdrop that the government is seeking to introduce more regulation and oversight into the sector. A Bill currently before Parliament is attempting to extend the application of the Credit Code to BNPL contracts and establish Low-Cost Credit Contracts (LCCCs) as a new category of regulated credit. LCCCs are defined under the Bill as continuing or non-continuing credit contracts for providing credit to consumers on a low-cost basis and most BNPL contracts will be regulated as LCCCs.

Once passed, providers of LCCCs will be required to hold and maintain an Australian credit licence and comply with the relevant licensing requirements and licensee obligations, with some modifications to ensure regulation is proportionate to the relatively low risk posed by LCCCs. The existing RLO framework will also be modified to create an alternative, opt-in framework that scales better with the risks posed to consumers and requires each LCCC provider to develop and review a written policy on assessing whether an LCCC would be unsuitable for the consumer.

According to the Bill, examples of procedures to reduce the risk of unaffordable lending include: suspending access to credit in the event of customer arrears or defaults; undertaking supplementary real-time monitoring of creditworthiness during the life of an LCCC; or using specific protocols that govern when credit limits are to be increased or decreased.