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Despite rising popularity, buy now, pay later (BNPL) has not been regulated under the National Credit Act as providers do not charge interest on repayments and providers do not hold an Australian Credit Licence (ACL).
However the rise in ‘easy credit’ has raised concerns over the impacts on consumers in a fairly unregulated sector.
Given this, the federal government released a discussion paper on Monday (21 November) following targeted consultations with a range of consumer groups, BNPL providers, retailers, financial services peak bodies, and regulators to identify the impacts and advise several changes.
It noted that BNPL had “unaffordable lending practices”, where some “vulnerable BNPL consumers” were cutting back on essentials to pay BNPL debt, increasing financial stress at a time when cost-of-living pressures are high.
Indeed, the Australian Securities & Investments Commission’s (ASIC) Consumer Monitor monthly survey report for quarter 1 of 2022 found 19 per cent of BNPL consumers surveyed cut back or went without essentials to make BNPL repayments on time.
The paper also noted “inconsistent or inadequate complaint handling procedures” as well as “excessive or disproportionate consumer fees and charges” and “poor product disclosure practices”.
While BNPL has led to people having more choices, Minister for Finance Katy Gallagher said given the financial stress it has caused consumers, it was “responsible for the Government to have a look at how to regulate it” and “put some guardrails around it”.
She said people are starting to view it as a credit card and providers need more responsibility in ensuring people can afford to get into contracts.
“When you’ve got that responsibility on you, you have to go through and do more checks and understand people’s financial situations,” she said.
Options for regulatory intervention
Three tier options being discussed include imposing an “affordability assessment” for BNPL providers, implementing limited BNPL regulation, or bringing BNPL products completely into the Credit Act.
Option 1: Strengthening the BNPL industry code plus an affordability test. This option imposes a “bespoke affordability assessment” for BNPL providers under the Credit Act and addresses any other regulatory gaps in a strengthened industry code.
Option 2: Limited BNPL regulation under the Credit Act. This approach would require BNPL providers to obtain and maintain an ACL, plus introduce modified responsible lending obligations (RLOs) under the Credit Act to determine unsuitability, combined with a strengthened industry code.
“This option would not require merchants who offer BNPL products to consumers to be an authorised credit representative of the BNPL provider,” the options paper said.
Option 3: Regulation of BNPL under the Credit Act, with full RLOs.
This option would treat BNPL products similarly to other credit products regulated under the Credit Act and require BNPL providers to comply with regulations, such as the RLOs.
For example, BNPL providers would be required to hold an Australian Credit Licence or be an authorised representative of one. Providers would also be required to check that a BNPL is not unsuitable for a person in accordance with RLOs.
Launching the consultation, Assistant Treasurer Stephen Jones said: “Australia’s modern, digitally-enabled economy leads the world in innovation, and consumer protections need to keep pace.
“That’s why the Albanese Government is… progressing our consultation process for regulating Buy Now, Pay Later (BNPL) products.
”While the industry’s Code of Practice has worked well to date, the sector is maturing rapidly,” he added noting that active BNPL accounts grew from 5 million to 7 million last financial year.
Broker warns BNPL could impact credit score
It comes after the Australian Prudential Regulation Authority (APRA) made amendments to its prudential framework, which set out that banks needed to include buy now, pay later and higher education debts when reporting debt-to-income ratios from September.
The changes aimed to ensure that banks are “operationally prepared” to limit growth in “higher risk residential mortgage lending”, such as loans at high debt-to-income multiples or high loan-to-valuation ratios.
Queensland broker Cara Giovinazzo at Borro said the move to add BNPL in debt ratios could be enough to prevent a client from gaining a loan, as lenders take a “hard-line” approach.
“We are seeing BNPL facilities are now appearing on client’s credit reports and significantly reducing their credit scores, which was not the case in the past,” Ms Giovinazzo said.
“Previously, BNPL facilities did not show up on your comprehensive credit reporting, so it was a good option to utilise when you wanted to purchase larger items online and pay it off, usually over 4–6 smaller fortnightly repayments.”
[Related: BNPL stings borrowers credit scores]
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