The buy now pay later (BNPL) sector, arguably assisted by Australia’s innovative and evolving payments system, has been growing rapidly over the past few years with further big names joining the BNPL race – Apple being the latest large entrant.
With a change in Government, and a developing local market environment of rising interest rates and falling asset prices (with associated consumer pain), it looks almost certain that Australia’s consumer credit laws will be extended, at least in some way, to BNPL products, with reports that Australia’s new Minister for Financial Services, Stephen Jones, will push ahead with associated regulatory reform.
Tackling the question of BNPL product regulation is just one part of broader payments system regulatory reform plans in Australia, aimed at developing a more efficient and competitive payments system. This is consistent with various policy actions pronounced by the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority, including the modernisation of the Payments Systems (Regulation) Act 1998 (Cth).
Current (non-) regulation of BNPL products
BNPL products, such those offered by companies like Zip Co and Afterpay, are currently not regulated under Australia’s consumer credit laws (principally, the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and the National Credit Code (Schedule 1 to the NCCP Act). This is on the basis that the National Credit Code does not apply to certain types of ‘credit’, such as where the provider does not charge the consumer for providing the credit (missed payment fees do not count for this purpose) or the credit is provided under a continuing credit contract where the consumer is only charged a fixed upfront fee or periodic fee (and which is less than a specified threshold amount).
Instead, a significant number of Australian BNPL providers adhere to an industry code of conduct (the AFIA BNPL Code of Practice), aimed at providing good consumer outcomes across the diverse range of business models operating in the BNPL industry. The Code essentially mirrors ASIC’s 2018 and 2019 reports on BNPL.
BNPL products also fall within the scope of ASIC’s relatively recent design and distribution obligations (Part 7.8A of the Corporations Act 2001 (Cth)). These obligations require the industry to design fit-for-purpose products that meet consumer needs, and ensure that their products are reaching the right consumers.
Recent global regulatory developments
Globally, different approaches are being taken in respect of regulating BNPL arrangements. There is, however, a relatively consistent theme in major financial centres, with BNPL arrangements commonly falling outside of traditional consumer credit laws (but still typically subject to regulatory probe and scrutiny), and regulators being lobbied by consumer groups to alter that position.
For example, in the United Kingdom, BNPL products are currently not regulated by the UK Financial Conduct Authority (FCA). Notwithstanding, in February this year, the FCA was able to use its investigatory powers to review the terms and conditions of BNPL consumer contracts for fairness. Since then, we understand that four BNPL providers have voluntarily agreed to amend their terms and conditions to ensure that its consumer contracts are fairer and easier for consumers to understand and to better reflect how those consumers are able to use the BNPL products. This is in advance of a new regulatory regime planned by the UK government for 2023.
A similar focus can be seen in our region. In Malaysia, Bank Negara Malaysia (the Malaysian Central Bank) recently announced that it will pass consumer credit legislation in 2022 to strengthen its regulation of consumer credit activities, including BNPL. In New Zealand, the government is looking at whether merchants offering BNPL products should be allowed to apply surcharges to purchases, as part of a range of regulations being considered.
BNPL providers, consumers, investors and other interested parties (including us) will be watching for the Federal Government’s next regulatory announcement in this area, as they have been since further, enhanced regulation was announced by the previous Federal Treasurer, Josh Frydenberg. Whether this takes the form of a full or partial extension of the NCCP Act to apply to BNPL products, based on the current voluntary BNPL industry code of conduct, or some form of combined approach (which we consider most likely), remains to be seen. As a starting point, the RBA has already indicated that it will engage with Treasury with a view to extending the definition of payments ‘systems’ to capture BNPL products so that it can call on BNPL providers to remove the clauses that prevent costs and surcharges from being passed on to customers.
It may be the case, as some consumer groups have called for, that an independent inquiry might be convened by the Government to determine the preferred approach. If this was to be announced, given the importance of the product to many Australians (particularly in tougher market conditions), and current associated debt levels, we would expect there to be significant interest and participation in any such inquiry.