On 16 November 2020, ASIC released its industry update on key observations about Australia’s buy now pay later industry, the experiences of consumers and recent regulatory developments. The update follows a 2018 report on buy now pay later arrangements.
Buy now pay later arrangements allow consumers to buy and receive goods and services, and repay the buy now pay later provider over time. The arrangements share some of the features of consumer loans, laybuy schemes and receivables factoring. However, there has been uncertainty as to how and where such arrangements are regulated, or whether they should be regulated at all.
ASIC’s update reports on the growth of the industry, the impact on consumers and upcoming regulatory developments. Importantly, these upcoming regulatory developments are utilising existing and impending regulatory changes rather than proposing new industry specific policy and regulation, which ASIC states “remain a matter for Government and, ultimately, the Parliament”.
In our view, ASIC’s update is a warning to the buy now pay later industry - improve consumer outcomes and product suitability, or expect more targeted and prescriptive regulation.
Industry data
The update draws on a review of six buy now pay later providers and four financial institutions, and commissioned consumer research. The update found the industry is growing across several metrics. Key findings include:
The six providers had approved 6.1 million accounts.
The number of buy now pay later transactions in Australia increased from 16.8 million in 2017-18 financial year to 32 million in the 2018-19 financial year.
The total value of all transactions increased by 79% from $3.1 billion in the 2017-18 financial year to $5.6 billion in the 2018-19 financial year.
One in five consumers are missing payments under buy now pay later arrangements. The total missed payment revenue for providers totalled over $43 million in the 2018-19 financial year.
The total outstanding balance increased by 53% from $907 million as at June 2018 to $1.4 billion at June 2019.
Business models are evolving, and include arrangements for low value items such as fashion, high value items such as solar, battery and home improvement products and bill payments.
Established and licensed credit providers are also entering the buy now pay later industry, and some providers are offering buy now pay later using credit card networks outside of established merchant relationships.
All participating buy now pay later providers charged fees to merchants and generally contractually prohibit merchants from increasing the costs of goods and services to consumers. However, ASIC found that it is still possible for surcharging to occur.
Regulation of buy now pay later arrangements
The update describes the approach to regulation in other jurisdictions, which ASIC notes are not uniform but generally considers buy now pay later as being outside of the ordinary consumer credit laws.
The update reports that buy now pay later providers are generally considered not to be regulated under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act), but are regulated as “credit” under the Australian Securities and Investments Commission Act 2001 (Cth). This is important as it brings buy now pay later arrangements into the scope of ASIC’s new product intervention powers and the forthcoming design and distribution obligations. Unlike the licensing regimes imposed under the NCCP Act or the Corporations Act 2001 (Cth), the product intervention power and design and distribution obligations are focussed on consumer outcomes and product suitability, rather than prescriptive compliance obligations.
ASIC’s product intervention power commenced in April 2019. The power enables ASIC to intervene in products in a targeted and timely way, where ASIC is satisfied that financial or credit products have resulted in or are likely to result in significant consumer detriment. ASIC can ban a product or a feature, impose restrictions or conditions on the issue of the product or amend disclosure documents. ASIC can exercise the power whether or not there has been a breach of law.
From October 2021, design and distribution obligations will apply to most products that ASIC regulates including buy now pay later arrangements. These obligations require issuers to identify the class of consumers for whom their products are appropriate and to direct distribution to that target market. The issuer will also need to consider whether the product if consistent with the likely objectives, financial situation and needs of consumers in the target market. These determinations will need to be recorded with reasons and data supporting decisions made. For buy now pay later providers, this will mean monitoring the outcomes of arrangements and consider whether changes are required to the arrangement, the way it is sold or to whom it is sold.
The update also confirms a code of conduct is being developed by the industry, the purpose being to promote good consumer outcomes. The code is being developed by the Australian Finance Industry Association in response to the findings of ASIC’s 2018 report. Consultation on the draft code closed in May 2020 and the final code is expected to be published and effective from 1 March 2021.
An accompanying media release notes these regulatory changes and code of conduct “provide an opportunity for the industry to address consumer harm” , from which it might be inferred that greater regulation may be introduced if the industry does not take steps to improve product suitability and consumer outcomes.