Last week, the Commonwealth Parliament passed legislation to regulate Buy Now, Pay Later (BNPL) products under the National Consumer Credit Protection Act 2009 (Cth) (Credit Act). The Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 (Bill) is a culmination of years of government inquiries and consultation which began in 2018 with a review by the Australian Securities and Investments Commission (ASIC).
The new legislation (which is yet to receive Royal Assent) is intended to bring BNPL products – which to date have not been regulated under Australian consumer credit laws – in line with the way other credit products are regulated. Certain modifications to the law are designed to lessen the regulatory burden and ensure that it is proportionate to the nature of the risks associated with BNPL products.
According to the Minister for Financial Services, Stephen Jones, the new legislation strikes the right balance between giving Australians access to innovative products and ensuring they are protected from the potential harm.
Why is the government looking to regulate BNPL?
To date, BNPL products have not been regulated under the Credit Act because they do not meet the definition of credit under the Act or, if they do meet that definition, because they fit within an exemption in the National Credit Code (Credit Code) (see National Consumer Credit Protection Act 2009 (Cth), schedule 1, sections 6(1), 6(5)). Accordingly, BNPL providers have not been required to hold an Australian credit licence (ACL), abide by the responsible lending obligations (RLOs), or adhere to other consumer protection requirements in the Credit Code.
In May 2023, following a nearly yearlong consultation with regulators, industry and consumer groups, the Department of the Treasury announced the government’s intention to regulate BNPL products.
While most consumers experience good outcomes from BNPL products, certain segments of the market – and particularly those consumers who are financially vulnerable – experience increased financial stress when taking out such products. Treasury identified key issues in the consultation such as unaffordable lending practices and unsatisfactory complaint resolution and hardship assistance.
Key obligations for LCCC providers under the new legislation
According to the government, the overarching aim of the new legislation is to provide appropriate and proportionate protections to consumers, while maintaining the benefits associated with access to BNPL products.
The Bill brings BNPL products under the Credit Act and Credit Code through a new definition of credit products known as ‘low cost credit contracts’ (LCCCs). LCCC providers will be required to abide by many of the obligations that apply to traditional credit providers, such as:
Holding an ACL and complying with the relevant licensing requirements and licensee obligations. The Explanatory Memorandum to the Bill provides that if an LCCC provider already holds a licence to engage in a different kind of credit activity, it may be required to vary its existing licence. This is a matter for ASIC to determine. In REP 797 Licensing and professional registration activities: 2024 update, ASIC stated that it will release further guidance for BNPL providers, including information on how to apply for a credit licence and the transitional arrangements.
Implementing a dispute resolution procedure that complies with ASIC-approved standards and requirements.
Being a member of the Australian Financial Complaints Authority (AFCA) external dispute resolution scheme.
Abiding by the various requirements of the Credit Code such as precontractual disclosure obligations (among others).
Anti-avoidance measures to prevent LCCC providers from structuring their business models to avoid regulation.
While many of the Credit Act requirements will apply to providers of LCCCs, certain adjustments will be made to ensure that regulation is proportionate. The most significant of these changes are to the RLO regime that require credit providers to assess whether credit is suitable for a consumer. Under the Bill, LCCC providers would be able to elect between complying with the current ‘full’ version of the RLOs under the Credit Act, or opt-in to a modified version of the RLOs that are ‘scaled down’ to only the kinds of risks associated with LCCC products (see section 5 below).
When the legislation comes into effect
The majority of the Bill's provisions applying the regulatory framework to LCCCs (being Parts 2 - 10 of Schedule 2) come into effect either on proclamation or six months after the Bill receives Royal Assent. Part 1 of the Bill, which extends the application of the Credit Act to LCCCs by introducing the new definitions of regulated credit, comes into effect the day after Royal Assent.
Types of credit products covered by the Bill - LCCCs
The Bill covers LCCCs. A contract is an LCCC if:
Credit is, or may be, provided under the contract.
The contract is a BNPL contract, or a contract of a kind prescribed by the regulations (the exposure draft regulations are yet to prescribe such contracts but the government has flagged that other products such as wage advance products may be brought within scope).
The period during which credit is, or may be, provided under the contract is no longer than the period (if any) prescribed by the regulations (no such requirements have been prescribed to date).
The contract satisfies any requirements prescribed by the regulations that relate to fees or charges payable under the contract (see below section on ‘Maximum fees and charges to qualify to be an LCCC’).
The contract satisfies any other requirements prescribed by the regulations (no such requirements have been prescribed to date).
While the new definition will initially capture only BNPL products, the government has flagged that this may be expanded in the future through regulations to capture other new innovative credit products in the market, such as wage advance providers.
What if you are a provider of a small amount credit contract (SACC), a medium amount credit contract (MACC) or a short-term credit contract (STCC)?
If a credit contract falls within the definition of an LCCC but could also be characterised as a SACC, a MACC or a STCC for the purposes of the Credit Act, it is regulated as an LCCC only. The Bill amends the definitions of ‘short-term credit contract’, ‘small amount credit contract’ and ‘medium amount credit contract’ to exclude LCCCs.
Maximum fees and chargers to qualify to be an LCCC
Treasury has released the exposure draft to the National Consumer Credit Protection Amendment (Low Cost Credit) Regulations 2024 (Cth) (exposure draft regulations), which specifies the maximum fees and charges for a credit product to be considered to be an LCCC.
For consumers who are not already a party to an LCCC with the credit provider, these include:
caps on the total amount of fees (other than default fees) of:
$200 per annum for the first year of the contract
$125 per annum for every subsequent year that the contract is in effect.
caps on default fees of $10 per month.
However, if at the time when the contract is entered into, the debtor is already, or was within the previous 12 months, a party to an LCCC with the credit provider or an associate of the credit provider, neither of which is an authorised deposit-taking institution, the total amount of fees and charges must not exceed $0. The exposure draft regulations also prescribe maximum amounts for default fees and charges.
Third party ‘hook’ necessary to be classified as buy now pay later arrangements
Under the Bill, a “buy now pay later arrangement” is an arrangement between a merchant and a consumer under which the BNPL provider pays the merchant for the goods or services, and where there is a contract between the BNPL provider and consumer for the provision of credit.
Critically, this definition relies on a third-party ‘hook’ – the definition does not capture products that are financed directly by a merchant. For example, if a large retailer such as Apple Inc. were to offer their own BNPL finance directly to consumers purchasing Apple Inc. products, this would not be caught under the definition since there is no third-party credit provider.
How will the modified RLOs operate?
In line with the government’s aim to put in place a proportionate regulatory regime of BNPL products, the Bill allows LCCC providers to choose whether to comply with the current RLOs under the Credit Act or a new, modified RLO framework. An LCCC provider may, in writing, elect for the modified RLOs to apply to it in relation to all LCCCs or to each LCCC in a specified class of LCCCs. If an LCCC provider opts in to the modified RLO framework in relation to an LCCC product, each contract document must (while the election is in force) contain a statement that the LCCC provider has made such an election.
Under the modified RLO regime, the core obligations of the existing RLO framework will still apply. These require LCCC providers to:
make reasonable inquiries as to the requirements and objectives of the consumer
make reasonable inquiries as to the consumer’s financial situation
take reasonable steps to verify the consumer’s financial situation
subsequently assess whether the credit contract is unsuitable for the consumer.
However, the RLO framework is modified to reduce the regulatory burden on LCCC providers by (among other things):
Easing some requirements on the timing of inquiries and verification in relation to the assessment of suitability.
Providing that specified risk factors must be taken into account in determining what constitutes reasonable inquiries and reasonable verification.
Clarifying that a provider may conduct inquiries and an assessment for an amount of credit larger than that initially offered to the consumer, and that this assessment will also suffice for any subsequent credit limit increases up to that amount, up to a period of two years.
Creating a rebuttable presumption for LCCCs with a credit limit of $2,000 or less that the ‘requirements and objectives’ limb of the unsuitability test is met, when granting credit or increasing a credit limit.
Inquiring into and verifying a consumer’s financial situation
The kinds of factors that LCCC providers may consider when deciding what are reasonable steps to inquire into and verify a consumer’s financial situation include:
The nature of the product (including the amount of credit and fees)
The target market for the product (including whether it contains financially vulnerable persons and any historical data on likely credit risks associated with the target market).
Any policies that reduce the risk of unaffordable lending or mitigate its harms (such as suspending access to credit in the event of customer arrears, undertaking supplementary real-time monitoring of creditworthiness, and the LCCC provider’s approach to debt collection).
Broadly speaking, these factors will generally enable a LCCC provider to ‘scale down’ the level and intensity of the assessment required. For example, if a BNPL product:
charges low fees and no interest
involves small amounts of credit
includes other risk mitigating features (such as freezing a consumer’s line of credit if they miss a payment),
then the provider may conduct a less extensive assessment of a consumer’s financial situation, such as conducting a basic credit check and requesting a consumer’s income and expense information.
While the intensity of the RLO assessment is designed to scale with the level of risk of associated with the LCCC product, a minimum level of assessment will always be required. The Treasury’s exposure draft regulations create a “floor” that providers cannot go below, including that a LCCC provider must always obtain from a consumer certain information, such as:
the current income of the consumer
the expenditure of the consumer
the details of any LCCCs, small amount credit contracts, or consumer leases to which the consumer is currently a party.
LCCC providers will also have to conduct, at a minimum, a credit check with a credit reporting body:
For LCCCs that are less than $2,000, a provider will need to conduct a “negative credit check” (including information about a consumer’s identity, credit inquiries, defaults, bankruptcies and court proceedings).
For LCCCs that are $2,000 or greater, a provider will need to conduct a “partial credit check” (which includes a negative credit check as well as a person’s current credit liabilities).
Unsuitability assessment policy
If an LCCC provider is to opt-in to the modified RLO regime, they must have a written unsuitability assessment policy that sets out how the provider will comply with its obligations under the modified RLO framework.
The exposure draft regulations prescribe requirements for reviewing and updating unsuitability assessment policies. Among other things, for each review, the licensee must ensure that it has regard to information and evidence that it reasonably believes is accurate, and provides an appropriate basis for assessing and identifying changes to the policy. The Explanatory Statement to the exposure draft regulations provides that this would be expected to include information or evidence on poor consumer outcomes that indicate unsuitable lending may have occurred. The Explanatory Statement provides that, at a minimum, this includes:
the rates at which debts are being partially or fully written off
measures of the rates of arrears
relevant complaints data (both under internal and external dispute resolution processes)
hardship data.
Regulated credit providers are already required to collect this kind of information as licensees under the ACL framework and the design and distribution obligations in the Corporations Act 2001 (Cth).
A LCCC provider will be required to make changes to its unsuitability assessment policy if it has identified that the policy does not enable it to comply with the modified RLO regime (in particular, sections 128 and 131 of the Credit Act, which deal with assessments of the unsuitability), or if the licensee identifies that it could more fully comply with these obligations.
How the Bill differs from the Exposure Draft of the legislation
While these factors will likely reduce the regulatory compliance burden for LCCC providers, they are not as generous as those proposed by Treasury under the exposure draft legislation. Under the exposure draft, in addition to the factors above, a LCCC provider would not be presumed to have failed to satisfy the requirement to make reasonable inquiries and reasonable verification (for the purposes of the unsuitability assessment) merely based on having:
relied on information or documents provided by a consumer
followed a general policy about the inquiries to be made, or steps to be taken in certain kinds of cases
relied on certain presumptions about a consumer’s financial situation.
These factors appear to have been removed from the Bill passed by the Parliament. Unless these factors are introduced at a later date in the regulations made under the legislation, the regulatory relief for LCCC providers may be less generous than that proposed by Treasury in the exposure draft.
What does this mean for credit providers?
The legislation marks a new era for credit regulation in Australia. Historically, credit regulation has focused on protecting consumers from products with high fees, predatory terms, or deceptive features. It generally has not been concerned with credit products that charge little to no interest, are short term, and have small fees. This is reflected in the exemptions under the Credit Act, which do not apply to low-cost, short-term credit products.
The Bill changes this by closing off the exemptions under the Credit Act for low-cost credit contracts. While the LCCC definition will only apply to BNPL products at first, it is expected that the regime will be extended to any new and emerging low-cost credit products, such as wage advance products.
BNPL and other providers of low-cost, short term credit products will therefore need to review their current business practices to ensure they have robust policies and procedures in place to adhere to the new requirements under the Credit Act.
We have seen some providers of low cost credit exit the market due to a range of factors. These factors include increased regulatory scrutiny but also include higher costs, competitive pressures from alternative product providers, costs of living pressures impacting the credit profile of borrowers and macroeconomic conditions (principally interest rates).
If large bank and non-bank lenders exit the market, there is some concern that space in the market will be taken up by firms with a higher risk appetite which do not adequately mitigate the harms the legislation is designed to address. We have already seen high profile collapses in the BNPL market, for example the LayBuy Group was put into receivership earlier this year.
How we can help
Should you have any questions in relation to how best to respond to the new regulatory developments in the sector, please reach out to our Financial Services Solution team.
We can assist with reviewing and uplifting your consumer credit arrangements against existing legislative requirements, proposed regulatory reforms and various Codes of Practice, including your credit policies (such as unsuitability assessment and hardship policies), processes and procedures.
Our Financial Services Solutions team routinely advise clients on the current state of their risk and compliance arrangements, including assessing the adequacy of their frameworks, target market determinations, policies and procedures for compliance with various financial regulatory regimes and better industry practice.