BNPL to be regulated under Credit Act

The Financial Services Minister and Assistant Treasurer, Stephen Jones MP, has confirmed that the government will change the law, so that buy now, pay later products are regulated as credit products.

The Treasury has confirmed it is adopting ‘Option 2’ of its recent options paper on regulating the buy now, pay later (BNPL) sector and will be introducing legislation that will require BNPL providers to:

• Hold Australian credit licences
• Comply with responsible lending obligations
• Meet statutory dispute resolution and hardship requirements
• Comply with statutory product disclosure and other information obligations
• Abide by existing restrictions on unacceptable marketing
• Meet a range of other minimum standards in relation to their conduct and in relation to their products

Announcing the move at the Responsible Lending & Borrowing Summit on Monday (22 May), the Assistant Treasurer flagged that there are “unacceptable levels of unaffordable lending occurring, largely concentrated among low‑income borrowers, including those on social security”.

For example, Mr Jones outlined that people may open multiple BNPL accounts and are then able to access “far more debt than they’d be able to get on a credit card or a payday loan”. Concerns have also recently been raised about users getting into a ‘vicious cycle of debt’.

He said the move to regulate would therefore “bring BNPL into line with other regulated credit providers, simplifying our regulatory system and addressing concerns about competitive neutrality”.

“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Mr Jones told delegates, adding that the responsible lending regime would therefore be central to the BNPL regulatory approach.

“However, our legislation ensures that the obligations on BNPL providers are scalable and technologically neutral. We will make sure they are the right fit for the risk level of their products.

“Our plan prevents lending to those who cannot afford it, without stopping safe, prudent BNPL use.”

Mr Jones added that the financial services regulator would also be given “strong enforcement powers” to regulate the BNPL space.

The government will reportedly soon consult with industry and consumer groups “on the detail”.

It is expected that exposure draft legislation will be out for consultation “later this year”, with Mr Jones saying the government intends to introduce the final bill into Parliament by the end of the year.

The weaponisation of BNPL

According to the government, while BNPL has been a “fintech success story”, with many countries adopting Australian BNPL innovation, he noted that the widespread and fast adoption of the products required legislation to protect consumers.

Mr Jones told delegates that there are now around 7 million active BNPL accounts in Australia and that the average BNPL consumer uses it for 18.2 transactions per annum, with an average transaction amount of $136.

“Studies from the Australian Financial Industry Association tell us that in 2022, BNPL created an additional $2.7 billion in new revenue for merchants, through new customer acquisition, increased basket sizes and increased customer satisfaction and retention,” he said.

“And, through its relatively low‑cost offering, BNPL has also provided a valuable source of competitive pressure on traditional credit products, such as credit cards or payday loans.

“But with those opportunities have come new and growing dangers to consumers, which up until now have been largely unregulated and unchecked,” suggesting that those risks are disproportionately affecting women, First Nations communities, and people on low incomes.

For example, he flagged that some people may be “weaponising BNPL products in abusive relationships” by coercing their partners to take on BNPL debts or taking out BNPL debts in their partner’s name without their knowledge.

Moreover, BNPL customers are more than twice as likely to end up in financial trouble as a credit card customer and could jeopardise their future borrowing capacity.

Last year, ASIC found that 19 per cent of BNPL consumers showed two or more indicators of financial stress, such as cutting back on essential items or missing payments on other bills, including their mortgage.

“Consumer protection is economy protection,” Mr Jones said on Monday (22 May).

“A strong economy requires well‑regulated consumer markets for credit products.

“Our plan maintains the benefits of BNPL that many Australians enjoy, and we must ensure that providers will have appropriate safeguards in place, and we must ensure that they operate honestly, efficiently, and fairly, in line with other regulated credit products.

“The government’s plan will help people.

“The plan will protect people from the spirals of harm that unregulated, unrestricted lending can cause.

“The Albanese government’s reforms in this space will have consumers at their heart.

“And they’ll protect our economy too.”

The Albanese government also recently passed legislation to make small amount credit contracts and consumer leases “safer and better regulated for people who chose to use them”.

The bulk of the reforms commence from 12 June 2023.

[Related: Call for full BNPL regulation gains more supporters]