Australian Government announces Buy Now Pay Later will be regulated as credit

In brief - today, the Australian Government announced that BNPL will be regulated under the Credit Regime with reforms likely to impose the new regulatory obligations on BNPL providers.

Today, the Financial Services Minister Stephen Jones has announced at the Responsible Lending and Borrowing Summit in Sydney that buy now, pay later (BNPL) services would be treated as a credit product and are to be regulated under the Credit Regime.

Background to Regulatory Consideration by Treasury 

Currently BNPL products:

• are not regulated under the Credit Act because they fall under the exemptions available to certain types of credit in Schedule 1 of the Credit Act (the National Credit Code). 
• are not subject to responsible lending standards or other requirements of the Credit Act, and BNPL providers do not need to hold an Australian Credit Licence (ACL).

In November 2022, Treasury released an options paper Regulating Buy Now, Pay Later in Australia which proposed three broad options to regulate BNPL in Australia.

The following three options for regulatory intervention were proposed:

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

• to impose a bespoke affordability assessment for BNPL providers under the Credit Act 
• address any other regulatory gaps in a strengthened Industry Code to make it fit-for-purpose.

Option 2: Limited BNPL regulation under the Credit Act:

• require BNPL providers to obtain and maintain an Australian Credit Licence
• introduce modified Responsible Lending Obligations (RLOs) under the Credit Act to determine unsuitability
• a strengthened Industry Code to make it fit-for-purpose.

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

• BNPL providers to obtain and maintain an ACL
• existing RLOs in the Credit Act to be applied to all BNPL credit, including requirements around reasonable inquiries into a consumer’s financial situation and taking reasonable steps to verify this information. 

BNPL subject to Credit Act

The announcement by Financial Services Minister indicates that the Australian Government has landed on Regulatory Option 2 above - 'Limited BNPL regulation under the Credit Act'. 

Therefore, subject to further consultation with BNLP providers and consumer groups about the proposed legislation, we anticipate that once enacted the reforms are likely to impose the following regulatory obligations on BNPL providers:

• will be required to have a credit licence
• must comply with responsible lending obligations to determine unsuitability
• will have to implement hardship requirements 
• will be subject to minimum conduct standards 
• will be subject to disclosure standards and must include a warning about the nature of the BNPL product 
• must impose fee caps on charges for missed payments
• will be subject to the “design and distribution obligations” which apply to financial services and require identification of and suitability of the BNPL product for the consumer target market. 

However, we also expect that the introduction of modified responsible lending obligations means that the standard RLOs in the Credit Act are likely to be “scaled to the risk” involved for particular BNPL products.

Some of the practical concerns raised in Treasury's options paper which may influence the scope of the legislative reform and which BNPL providers may need to review their current procedures are: 

• unaffordable or inappropriate lending practices 
• poor complaints handling processes and unsatisfactory remediation
• excessive or disproportionate consumer fees and charges 
• poor product disclosure practices and  lack of warnings
• unfair sales process such unsolicited selling and frictionless sign-up to BNPL products
• inadequate reverse charging provisions.