Treasury pays in three with release of BNPL Options Paper

09 December 2022

The release of the Treasury’s Options Paper ‘Regulating Buy Now, Pay Later in Australia’ (Options Paper) is a key step in the Federal Government’s moves to tighten the rules around Buy Now Pay Later (BNPL) credit products. Against the backdrop of growing industry pressure and international developments, the Options Paper seeks feedback and comments on how the sector should be regulated, and provides three framework models of regulation that could be used as the basis for future legislation.

BNPL allows consumers to defer payment for goods or services – typically into four equal payments – without being charged interest during the course of the deferral. A third party (the BNPL provider) finances the purchase, and will typically earn revenue through charging merchants service fees and charging customers late payment fees. Some BNPL providers may also charge customers an account subscription or maintenance fee but this varies given the competitive landscape they’re operating within.

Current regulation of BNPL providers

BNPL is a form of ‘credit’ under s 3 of the National Credit Code (NCC) – it involves a contract under which a person incurs a deferred debt to another. However, s 6(5) of the NCC operates such that BNPL products will not be ‘credit’ to which the NCC applies because BNPL products do not charge the borrower an amount which varies according to the amount of credit provided.

Because BNPL will not be ‘credit’ under the NCC, unlike traditional credit providers, BNPL providers are not required to hold an Australian credit licence (ACL), comply with the responsible lending obligations (RLOs) in the National Consumer Credit Protection Act 2009 (Cth) (Credit Act), or comply with the various consumer protection obligations in the NCC.

BNPL providers are not entirely unregulated – they are subject to the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (Cth). Most providers are also members of the Australian Financial Complaints Authority on a voluntary basis. Further, BNPL providers representing an estimated 95% of the BNPL market in Australia have developed the BNPL Industry Code (BNPL Code), a code of conduct which aims to improve the design, marketing and distribution of BNPL products.

Treasury sets out options for BNPL regulation

Consistent with previous statements by Government, the Options Paper sets out three models for regulation of BNPL products:

strengthening the existing BNPL Code plus implementing an affordability test;
bringing BNPL under the Credit Act in a limited capacity including scaled RLOs; and
bringing BNPL fully under the Credit Act including the full application of the RLOs.

Treasury Option	Corrs insights
Option 1: Strengthening the BNPL Code, plus an affordability test This would include: BNPL providers being required to check that a BNPL product is not unaffordable for the consumer before an offer is made to the consumer for that product; Amending the provisions in the BNPL Code relating to product disclosure and warning disclosure; and Making certain BNPL Code provisions enforceable by ASIC, with the BNPL Code being mandated for all BNPL providers.	The BNPL Code is not law and is currently not legally enforceable. It is only binding if BNPL providers contractually and voluntarily commit themselves to the BNPL Code as signatories. The BNPL Code does not currently impose any penalties for non-compliance on its signatories. Under Option 1, the BNPL Code would: be mandatory for the BNPL sector; and give ASIC the power to enforce certain provisions. The Options Paper notes that enforceability of the BNPL Code would be subject to ASIC’s approval. In the event that BNPL Code provisions became enforceable, then ASIC may be able to obtain pecuniary civil penalties against a BNPL provider or take administrative action against them (or both) for breach of such a provision. Further, unlike traditional credit providers, BNPL providers are not currently subject to the RLOs. Requiring that BNPL consumers meet an affordability test will change this position. However, we note that the Options Paper neither gives any indication of the test for whether a BNPL product would be ‘unaffordable’ for a consumer, nor does it deal with how an ‘unaffordable’ test would differ (if at all) from the current ‘unsuitability’ test in the Credit Act. In our view, it would be preferable for these tests to be aligned as closely as possible.
Option 2: Limited BNPL regulation under the Credit Act with a tailored version of the RLOs: This would include: Requiring BNPL providers to hold an ACL; Requiring BNPL providers to assess that credit is not unsuitable; Requiring BNPL providers to comply with dispute resolution requirements, hardship provisions, compensation arrangements, fee caps, and marketing requirements; Allowing BNPL providers access to more types of information under the credit reporting provisions of Part IIIA of the Privacy Act 1988 (Cth) (Privacy Act); Prohibiting increases to borrower credit limits without explicit instructions from the borrower; and Including fee caps for missed and late payments, with additional warning and disclosure requirements.	Bringing BNPL products within the Credit Act would represent an increase in the level of regulatory obligation compared to that which currently applies to BNPL products. The application of a tailored ‘not unsuitable’ test is likely to be the most significant change for access to BNPL products here. The requirement to assess whether a credit contract is ‘not unsuitable’ would mean that BNPL providers would be subject to a legal requirement to undertake a ‘not unsuitable’ assessment for BNPL products, where currently there is no legal requirement to do so. From a policy perspective, we anticipate that the Government will consider whether such a legal threshold will mean that certain borrowers may be encouraged towards higher cost credit such as ‘payday lending’ (although noting the recent regulatory reforms also proposed for this type of credit). Whether the introduction of internal and external dispute resolution requirements, hardship processes, and fee caps for missed and late payments will represent a meaningful difference for borrowers remains to be seen given the overlap with existing provisions in the BNPL Code. The introduction of warning and disclosure requirements reflects existing practices under the Credit Act, such as the small amount credit contract warnings, and the information statements and pre-signature disclosures. Applying the most significant consumer protection measures to BNPL is clearly intended to address the consumer-related issues that are identified in the Options Paper. However, the introduction of BNPL to the Credit Act, even in a modified form, will lead to an increasing compliance burden, the costs of which will ultimately be borne by borrowers through higher fees, and merchants and other consumers through pressure on merchant surcharging fees. Not surprisingly, we suspect this aspect of the proposed reforms will be met with some criticism from BNPL providers.
Option 3: Regulation of BNPL under the Credit Act, with full RLOs: This would include: Requiring BNPL providers to hold an ACL and comply with ACL holder obligations; Requiring BNPL providers to assess that credit is “not unsuitable”; Allowing BNPL providers access to more types of information under Part IIIA of the Privacy Act; Allowing borrowers to set their own credit limit and prohibit increases to borrower credit limits without explicit instructions from the borrower; Including fee caps for missed and late payments, with additional warning and disclosure requirements; and Revising the BNPL Code to introduce refund and chargeback standards, and identifying borrowers who may be in vulnerable situations.	Bringing BNPL products completely within the Credit Act would ensure that all mainstream forms of consumer credit are treated similarly from both a credit regulation and consumer protection standpoint. This includes the full application of the ‘not unsuitable’ RLOs to ACL holders for BNPL products. The requirement to comply with all ACL regulatory obligations will increase compliance costs on the BNPL sector. It is not inconceivable that this will put a cost burden on BNPL providers that is comparable with more traditional forms of credit. Increasing costs of compliance may also reduce innovation and the entry of new BNPL providers into the market.
Additional supplementary changes beyond changes to the BNPL Code and the Credit Act This would include: Improving financial literacy relating to BNPL products and alternative options; Examining how BNPL can be integrated into the credit reporting framework as part of the review of the comprehensive credit reporting framework; Including the BNPL sector in ASIC’s industry funding arrangements; and Legislating against no-surcharging rules imposed by BNPL providers on merchant providers.	These supplemental changes proposed by Treasury are additional changes that can be introduced outside of the Credit Act and BNPL Code. Steps towards improving financial literacy, particularly among the younger generation of BNPL consumers (who are more likely to access BNPL products) is welcome. When combined with increased disclosure to consumers, as well as information access through the proposed expansion of the Consumer Data Right to the BNPL sector, consumers will be better able to avoid financial hardship and compare alternatives. Including BNPL providers in ASIC’s industry funding arrangements will need to be carefully considered as it may fundamentally alter the economics of some BNPL products. Any changes to prevent the no-surcharging rules would likely have a far-reaching effect on the sector.

Treasury Option

Corrs insights

Option 1: Strengthening the BNPL Code, plus an affordability test

This would include:

BNPL providers being required to check that a BNPL product is not unaffordable for the consumer before an offer is made to the consumer for that product;
Amending the provisions in the BNPL Code relating to product disclosure and warning disclosure; and
Making certain BNPL Code provisions enforceable by ASIC, with the BNPL Code being mandated for all BNPL providers.

The BNPL Code is not law and is currently not legally enforceable. It is only binding if BNPL providers contractually and voluntarily commit themselves to the BNPL Code as signatories. The BNPL Code does not currently impose any penalties for non-compliance on its signatories.

Under Option 1, the BNPL Code would:

be mandatory for the BNPL sector; and
give ASIC the power to enforce certain provisions.

The Options Paper notes that enforceability of the BNPL Code would be subject to ASIC’s approval. In the event that BNPL Code provisions became enforceable, then ASIC may be able to obtain pecuniary civil penalties against a BNPL provider or take administrative action against them (or both) for breach of such a provision.

Further, unlike traditional credit providers, BNPL providers are not currently subject to the RLOs. Requiring that BNPL consumers meet an affordability test will change this position. However, we note that the Options Paper neither gives any indication of the test for whether a BNPL product would be ‘unaffordable’ for a consumer, nor does it deal with how an ‘unaffordable’ test would differ (if at all) from the current ‘unsuitability’ test in the Credit Act. In our view, it would be preferable for these tests to be aligned as closely as possible.

Option 2: Limited BNPL regulation under the Credit Act with a tailored version of the RLOs:

This would include:

Requiring BNPL providers to hold an ACL;
Requiring BNPL providers to assess that credit is not unsuitable;
Requiring BNPL providers to comply with dispute resolution requirements, hardship provisions, compensation arrangements, fee caps, and marketing requirements;
Allowing BNPL providers access to more types of information under the credit reporting provisions of Part IIIA of the Privacy Act 1988 (Cth) (Privacy Act);
Prohibiting increases to borrower credit limits without explicit instructions from the borrower; and
Including fee caps for missed and late payments, with additional warning and disclosure requirements.

Bringing BNPL products within the Credit Act would represent an increase in the level of regulatory obligation compared to that which currently applies to BNPL products.

The application of a tailored ‘not unsuitable’ test is likely to be the most significant change for access to BNPL products here. The requirement to assess whether a credit contract is ‘not unsuitable’ would mean that BNPL providers would be subject to a legal requirement to undertake a ‘not unsuitable’ assessment for BNPL products, where currently there is no legal requirement to do so.

From a policy perspective, we anticipate that the Government will consider whether such a legal threshold will mean that certain borrowers may be encouraged towards higher cost credit such as ‘payday lending’ (although noting the recent regulatory reforms also proposed for this type of credit).

Whether the introduction of internal and external dispute resolution requirements, hardship processes, and fee caps for missed and late payments will represent a meaningful difference for borrowers remains to be seen given the overlap with existing provisions in the BNPL Code.

The introduction of warning and disclosure requirements reflects existing practices under the Credit Act, such as the small amount credit contract warnings, and the information statements and pre-signature disclosures.

Applying the most significant consumer protection measures to BNPL is clearly intended to address the consumer-related issues that are identified in the Options Paper. However, the introduction of BNPL to the Credit Act, even in a modified form, will lead to an increasing compliance burden, the costs of which will ultimately be borne by borrowers through higher fees, and merchants and other consumers through pressure on merchant surcharging fees. Not surprisingly, we suspect this aspect of the proposed reforms will be met with some criticism from BNPL providers.

Option 3: Regulation of BNPL under the Credit Act, with full RLOs:

This would include:

Requiring BNPL providers to hold an ACL and comply with ACL holder obligations;
Requiring BNPL providers to assess that credit is “not unsuitable”;
Allowing BNPL providers access to more types of information under Part IIIA of the Privacy Act;
Allowing borrowers to set their own credit limit and prohibit increases to borrower credit limits without explicit instructions from the borrower;
Including fee caps for missed and late payments, with additional warning and disclosure requirements; and
Revising the BNPL Code to introduce refund and chargeback standards, and identifying borrowers who may be in vulnerable situations.

Bringing BNPL products completely within the Credit Act would ensure that all mainstream forms of consumer credit are treated similarly from both a credit regulation and consumer protection standpoint. This includes the full application of the ‘not unsuitable’ RLOs to ACL holders for BNPL products.

The requirement to comply with all ACL regulatory obligations will increase compliance costs on the BNPL sector. It is not inconceivable that this will put a cost burden on BNPL providers that is comparable with more traditional forms of credit. Increasing costs of compliance may also reduce innovation and the entry of new BNPL providers into the market.

Additional supplementary changes beyond changes to the BNPL Code and the Credit Act

This would include:

Improving financial literacy relating to BNPL products and alternative options;
Examining how BNPL can be integrated into the credit reporting framework as part of the review of the comprehensive credit reporting framework;
Including the BNPL sector in ASIC’s industry funding arrangements; and
Legislating against no-surcharging rules imposed by BNPL providers on merchant providers.

These supplemental changes proposed by Treasury are additional changes that can be introduced outside of the Credit Act and BNPL Code.

Steps towards improving financial literacy, particularly among the younger generation of BNPL consumers (who are more likely to access BNPL products) is welcome.

When combined with increased disclosure to consumers, as well as information access through the proposed expansion of the Consumer Data Right to the BNPL sector, consumers will be better able to avoid financial hardship and compare alternatives. Including BNPL providers in ASIC’s industry funding arrangements will need to be carefully considered as it may fundamentally alter the economics of some BNPL products.

Any changes to prevent the no-surcharging rules would likely have a far-reaching effect on the sector.

International developments

The Options Paper notes the regulatory developments on the BNPL sector in a number of major economies, including New Zealand, the United Kingdom and the United States of America. Though not mentioned in the Options Paper, other jurisdictions such as the European Union and Singapore have also started to pay more attention to the BNPL sector following the identification of similar concerns to those raised by ASIC.

Consumer credit regulation in different jurisdictions will take many different forms. This is further complicated in nations (e.g., the USA) where there is overlapping state and national laws. The different forms of credit regulation internationally means it is difficult to compare these approaches, and compare them to the proposals in the Options Paper.

However, a number of observations may be made on the approaches or directions taken elsewhere:

Legislation of BNPL a common approach: Most jurisdictions are actively investigating the introduction of legislation (or amendments to existing legislation) to regulate aspects of the BNPL sector.
Affordability assessment: A form of affordability assessment is being considered by almost all jurisdictions. While some regulatory regimes have favoured application of the existing affordability assessment requirements under existing legislation which applies to general consumer credits, many jurisdictions are investigating a more nuanced approach so that the test is tailored to the risks presented by the customer (e.g. amount of debt borrowed, repayment behaviour, etc.).
Strengthening disclosure requirements: Many regulators consider existing pre-contractual disclosure requirements that apply to general consumer credit products to be too onerous for BNPL products, however, some disclosure requirements may be required to improve transparency.
Supporting consumer protection mechanisms: It is common to see consumer protection mechanisms being a feature of the broader BNPL regulatory approach. These include, for example:
- protection against unfair practices;
- hardship processes;
- capping of fees; and
- mandating membership of external dispute resolution schemes.

Conclusion

The Government has clearly signalled its intent to regulate the BNPL sector as a form of credit. As the Minister for Financial Services has said, “If it walks like a duck and quacks like a duck, it’s a duck.”

If Option 3 is adopted and BNPL is regulated in the same manner as other credit products, then there are likely to be fundamental changes to the nature of BNPL products on offer, as the increased regulation will impose additional costs on these products. This cost burden is unlikely to be able to be passed onto merchants through higher merchant fees given competition has already seen these fees decrease as more BNPL providers have entered the market. This means increased costs will likely have to be absorbed by BNPL providers or passed on to consumers in the form of increased fees or interest. As profitability in this sector is low, it seems more than likely that BNPL providers will seek to pass on these costs to consumers.

As a result, if Option 3 is selected then we would expect that BNPL products will evolve over time to mirror credit cards, where consumers who pay their instalments on time (known as ‘transactors’ in the credit card industry) are not charged interest. Other consumers who are unable to make their instalment payments on time (known as ‘revolvers’ in the credit card industry) will likely be subject to high personal loan interest rates. If this is the outcome, then a far more challenging issue will arise for regulators and the credit providers: credit products will have evolved so that those consumers who can least afford to pay end up subsidising the interest free loans of those who can most afford to pay.

The opportunity to provide feedback and comments on the options proposed and the overall regulatory approach to BNPL products will be open until 23 December 2022. It is unclear how quickly the Government will move to action the recommendations ultimately made by Treasury, but it is clear that 2023 is shaping up as a big year for BNPL providers and their business model.

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