Does the BNPL regulation move go far enough?

On Monday (22 May), the Financial Services Minister and Assistant Treasurer, Stephen Jones MP, confirmed that the government will change the law so that buy now, pay later products are regulated as credit products.

The move, which has been years in the making, aims to “prevent lending to those who cannot afford it, without stopping safe, prudent BNPL use”.

Speaking to ABC yesterday, Treasurer Jim Chalmers said: “This is about recognising that buy now, pay later has become really popular, something like 7 million accounts. It’s got a legitimate role to play but there is the potential for harm and that harm falls disproportionately, so it’s time to legislate and regulate buy now, pay later.”

While the details are yet to be worked through (with the Treasurer saying the government will work with industry on the details of making BNPL a regulated credit product under the Credit Act and introduce “appropriate transition arrangements”), the government has flagged that it will follow Option 2 of its recent options paper on the matter.

According to the options paper from November 2022, this would see “limited BNPL regulation under the Credit Act, including licensing and scalable unsuitability test”.

Indeed, this option proposes to bring BNPL within the Credit Act’s application to apply a “tailored version” of the responsible lending obligations (RLOs) to BNPL products.

For example, BNPL providers would be required to assess that a BNPL credit is ‘not unsuitable’ for a person, similar to the existing RLO framework but “scaled to the level of risk of the BNPL product or service”.

This may include removing some prescriptive requirements, such as verifying a person’s financial documentation and checking that the BNPL credit aligns with the person’s needs and objectives.

Participation in the comprehensive credit reporting framework would also continue to be voluntary, unless the provider is a big bank and this option would not require merchants that offer BNPL products to consumers to be authorised credit representatives of the BNPL provider.

Several players in the BNPL space welcomed the move, with Zip’s co-founder and global chief operating officer Peter Gray stating Option 2 “provides a sensible balance between consumer protection and minimum standards, while also promoting competition and innovation”.

He added that it meant “business as usual” for the company, as it had held an Australian credit licence since inception (in 2013) and already conducts identity, credit and affordability checks on its customers.

“With BNPL now well and truly established and some 7 million Australians adopting better and simpler ways to pay, this will provide clarity and consistency across the sector, deliver confidence to stakeholders and build on the already very high levels of trust we have with our customers,” he said.

However, consumer groups and financial counsellors have argued that the plans for regulation will need to include strong requirements for lenders to ensure that loans are safe and suitable, regardless of the size of the loan, in order to protect people from harm.

The groups had supported Option 3 of the government’s options paper, which would have seen BNPL come under the full RLO regime and had also called for additional consumer protections including prohibiting BNPL debt from being paid from a credit card.

The chief executive of CHOICE, Alan Kirkland, said: “To protect people from the unsafe lending practices we are seeing now, these changes will need to include strong requirements for BNPL providers to check that a loan is suitable, regardless of the size of the amount involved.

“We will be particularly concerned about how the safe lending provisions of these reforms are drafted. While the government has said these will be scalable, we should not assume that small loans are automatically safe. Many of the people who end up in financial hardship as a result of BNPL have smaller loans, often many of them.

“We need to remember how we got into this mess — through loopholes in our credit laws that allowed a whole new type of credit to emerge without proper regulation. The government needs to resist pressure from the industry to build carve-outs in these new laws.”

Financial Counselling Australia CEO Fiona Guthrie added that “the devil is going to be in the detail”.

“Too many financial counselling clients have multiple BNPL accounts. The government’s approach will only work if there is a requirement for BNPL providers to be part of the credit reporting system, to reduce the risk of over-commitment,” Ms Guthrie said.

Financial Rights Legal Centre CEO Karen Cox said that while she welcomed the licensing requirement and move to bring BNPL providers under the same dispute resolution options as providers of “traditional credit”, she said it was “disappointing BNPL will not be treated the same as all other credit”.

“Great attention will be needed in the drafting of these obligations to make sure they address the harms we see every day. Small amount, low-cost credit does not equal safe or sustainable lending,” Ms Cox said.

“The government needs to ensure that all of the requirements that apply to BNPL lenders are in legislation, rather than relying on the industry code of practice.

“Many people we see owe money across multiple BNPL providers at the same time, with monthly bank statements running to pages and pages of BNPL transactions. Very few BNPL providers use the credit reporting system.

“To be effective, these responsible lending obligations will need to make sure BNPL lenders are making decisions based on much better information than they are now.”

Members of the broking industry had also backed Option 3 but still welcomed that the government was moving to regulate the BNPL sector.

[Related: BNPL to be regulated under Credit Act]