The Federal Government’s just-released exposure draft legislation has struck a crucial balance of protecting consumers without hindering choice, competition and innovation in the buy now, pay later (BNPL) sector, according to the Australian Finance Industry Association (AFIA).
The peak financial service body and BNPL Code overseer has decisively backed the Government’s proposal to regulate BNPL products in Australia, noting that the draft legislation covering Low Cost Credit Contracts (or LCCCs, which includes BNPLs) presents “a good outcome for the 6.3 million Australians who use BNPL products, enshrining consumer protections into law”, said AFIA chief executive Diane Tate.
LCCCs are defined by the Government 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.
The exposure draft, released today, comes after a previous round of public consultation.
Tate added that the Government’s proposed changes also build on the AFIA’s “world-leading Buy Now Pay Later Code of Practice, which compels signatories to adhere to “high industry standards and consumer safeguards”, noting that the Code will also be updated to reflect the proposed legislative changes.
Approximately 90 per cent of all BNPL accounts adhere to the AFIA’s voluntary BNPL Code, the Government stressed, with those who breach the Code subject to monitoring, investigation and sanctions by the BNPL Code Compliance Committee.
Under the newly proposed legislation, which has also been put to a follow-up round of public consultation, BNPL providers will be required to hold an Australian Credit Licence and thus comply with existing Credit Act requirements. This means that BNPL products will be regulated under the same rules as other credit services provided in Australia with respect to product disclosure, dispute resolution, hardship assistance and responsible lending.
Effectively, the legislation amends the law (covering the National Consumer Credit Protection Act 2009 and the National Consumer Credit Protection Regulations 2010) to bring BNPL into line with how other types of credit are regulated.
Because BNPL products typically fall under various Credit Act exemptions (being that they typically charge fees rather than interest on their loans), they are currently not subject to the same regulatory framework that applies to other credit products.
These exemptions, according to the Government, have led to poor product disclosure, inadequate dispute resolution processes, excessive default fees, and unaffordable lending practices by BNPL providers that have caused hardship and financial stress for consumers.
The AFIA singled out its support for three notable elements of the proposed legislation.
Firstly, that LCCC/BNPL services will be provided with several different pathways to comply with Credit Act obligations, with the AFIA noting that BNPL providers can operate under a variety of unique business models.
Secondly, that scalable obligations should apply to products depending on their size, risk level and target markets. For instance, AFIA noted, that a distinction will be made between BNPL products that offer $20,000 loans for niche products like solar panels, compared to $150 for a pair of jeans.
“The Government rightly refers to this as a ‘modified’ and ‘proportionate’ approach,” AFIA said.
For instance, the regulations will now state: “The extent of the reasonable enquiries and verifications required, upon which the unsuitability test is applied, will scale due to risk factors relating to the product design, target market and risk and harm mitigation arrangements”.
The modified Responsible Lending Obligation (RLO) framework will also require LCCC licensees to make reasonable inquiries into the financial situation of a consumer, mandating that licensee must collect basic information from the consumer, including their current income, their expenditure, and whether they already have certain other credit products that are typically held by financially constrained consumers.
Thirdly, the AFIA noted its support for the draft legislation’s exemption of BNPL products from “inappropriate obligations, given their unique product characteristics” – for example, the exemption for BNPL providers from requirements regarding interest rate comparisons where their products do not charge interest.
“AFIA has been a strong advocate for proportionate regulation that is scalable and technology neutral. The proposed legislation looks like it meets this test,” Tate said.
“AFIA is pleased the Government has recognised that our BNPL Code of Practice has set best practice standards for the sector and strengthened consumer protections.
She added: “We will continue to ensure it lifts standards and supports competition and innovation across the BNPL sector.”
AFIA estimates that BNPL adds as much as $18.4 billion to Australia’s GDP and supports more than 120,000 jobs.
Submissions for the draft legislation can be made until 9 April 2024.
