News

Time to Pay, Pal: The ‘Buy Now Pay Later’ sector to be regulated under the Credit Act

On 22 May 2023, the Federal Government announced tougher regulations for the Buy Now Pay Later (‘BNPL’) industry in an attempt to better protect consumers against financial abuse by the lending schemes.

This decision comes three years after the Senate Select Committee on Financial Technology and Regulatory Technology compiled a report on the issue, which favoured the self-regulation of BNPL companies rather than legal protections.

The pre-regulation regime

In March 2023, the Reserve Bank of Australia reported there were 7 million active BNPL accounts with companies like Afterpay, Zip, PayPal Pay in 4 and Klarna in the last financial year, worth $16 billion.

BNPL providers previously fell under an exception available to certain types of credit in the National Credit Code.1 This exception meant BNPL providers were not classified as credit providers, creating an unintended regulatory gap where certain protections against consumer harm were not adequately addressed.

Why regulation is needed

The ‘spend now, worry later’ mindset that is common amongst BNPL users has caused some consumers to experience significant financial hardship and vulnerability.2 In a 2020 survey, ASIC found 15% of BNPL users had taken out an extra loan to make their payments on time and that one in five payments were late or missed entirely.3

Assistant Treasurer and Financial Services Minister Stephen Jones commented on the potential harm to consumers, stating that tougher regulation was needed to protect consumers from the “spirals of harm that unregulated, unrestricted lending can cause”. He commented further that regulation was needed to address the “growing dangers to consumers, which up until now have been largely unregulated and unchecked”.

What regulation will mean

Regulation of the BNPL industry will follow the Treasury’s publication of an Options Paper in November 2022, which outlined three options for regulatory intervention. The paper examined the appropriate regulatory approach required to maintain the benefits of accessing credit while ensuring customers were adequately protected.

The Paper outlined three options for regulatory intervention:

  1. The strengthening of the current self-regulated industry code, but adding an ‘affordability test’.
  2. Introducing ‘limited’ regulation of the industry under the National Consumer Credit Protection Act 2009 (Cth) (‘Credit Act’).
  3. Regulating the industry entirely under the Credit Act, meaning they would face the same laws as credit card providers.

The Federal Government announced in May 2023 that its preferred option was to bring BNPL groups partially under the Credit Act by introducing amendments to the Credit Act. The new laws will classify BNPL products as credit products, bringing the industry under the regulation of the Credit Act, meaning operators will need to hold an Australian credit licence (ACL).4

Support for regulation

The regulatory approach adopted has been welcomed by participants in the financial sector, including the Finance Brokers Association of Australia (FBAA). FBAA Managing Director Peter White indicated his support for the regime, stating: “this sector being required to meet responsible lending obligations and to hold an ACL will… ensure consumers are well protected… and that they understand the impact on their credit”.

Financial Counselling Australia’s Chief Executive Fiona Guthrie stated: “self-regulation isn’t working – people get into financial trouble because of buy now, pay later”. Other advocates pointed to the central issue of BNPL companies having no obligations under the National Credit Code, with Consumer Action Law Centre’s Katherine Temple stating that BNPL companies were “essentially exploiting a loophole in the national credit laws”, to avoid “lend(ing) responsibly or affordability checks”.

Implications for BNPL companies

Larger BNPL companies

Larger BNPL companies like Afterpay strongly resisted full regulation of the BNPL industry under the Credit Act, however they have applauded the Treasury’s decision to opt for only partial regulation under the Act.

In 2020, Afterpay co-founder Anthony Eisen argued that regulation could be “dangerous”, as it would “stifle innovation and competition”. The company defended its policy of not performing credit checks upon customer signup, citing their safeguarding procedures including the capping of late fees and barring consumers from spending once they miss a payment.

Eisen argued that the “existing regulatory structures would not deliver fit-for-purpose regulation”. Zip co-founder and COO Peter Gray echoed Eisen’s fears, stating that “innovation is too important to be smothered with a one-size fits all approach to regulation”.

In a 2023 statement, an Afterpay spokesperson stated that limited regulation under the Credit Act was a “strong first step” that would benefit both consumers and businesses. Peter Gray also welcomed the change, stating limited regulation was a “sensible balance between protecting consumers from harm, delivering confidence to industry stakeholders but also protecting innovation and competition”.

Smaller BNPL companies

While the larger BNPL companies will come out relatively unscathed following the new regulations, smaller BNPL providers are beginning to feel the strain the regulations will place on the BNPL industry.

INKPAY is an Australian BNPL provider which allows tattoo parlour customers to pay the cost of their tattoo over six weeks. The service is provided in more than 350 parlours nationwide, however INKPAY has recently announced that it will no longer accept new customers and pause all new transactions. The company entered voluntary administration in June 2023, stating that the cost of complying with the new regulations will be too much to bear.

The company further stated that “the INKPAY commercial model (and our smaller size) means we are unable to absorb the costs incurred in conforming to these regulatory requirements, and we feel it is unfair and unrealistic to attempt to pass them on to merchants or customers”.

Implications for consumers

Fiona Guthrie has welcomed the much-needed regulation, but stated the bespoke nature of the regulation may create loopholes that could be exploited, and that the “devil will be in the detail”. She further stated that the key to the new laws’ success will be having “appropriate, effective Responsible Lending Obligations” to ensure consumers were adequately protected.

Minister Jones has stated that consumers will now be protected by “more appropriate safeguards”, such as improved dispute resolution processes, charges for missed payments and new marketing requirements, to ensure that consumers know exactly what they are signing for when using BNPL providers.

As Minister Jones has stated, “BNPL looks like credit, acts like credit and carries the risk of credit”. Being classified as such under the Credit Act is a positive step towards meaningful regulation and consumer protection.

Consumers intending on using BNPL providers are encouraged to consider the risks of BNPL providers before using their services.

Next steps

Minister Jones stated in May that the draft legislation would be released later this year, for consultation with consumer and industry groups. However, it is more likely the final bill will be introduced into Parliament in 2024.

Footnotes

  1. National Consumer Credit Protection Act 2009 (Cth) sch 1.
  2. One in five consumers using buy now, pay later miss payments, but ASIC stops short of imposing new regulation on the sector – ABC News.
  3. Buy now, pay later? Not so fast, as the government looks to tighten regulation by year’s end – ABC News.
  4. Buy now pay later providers to pay face tougher regulations (smh.com.au).

Thaw Thaw Htin

Principal

Laura Cohn

Solicitor

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.

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