Federal Government to remove Buy Now Pay Later loophole

The Federal Government has announced that it will move to regulate Buy Now Pay Later (BNPL) providers under the National Credit Act.

The Hon Stephen Jones MP, Minister for Financial Services and Assistant Treasurer, flagged that legislation could be introduced as soon as the end of this year. So, what do these reforms mean for the BNPL industry?

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The proposed reforms
The Government will seek to regulate BNPL in line with Option Two from Treasury’s November 2022 options paper.

Under this option, BNPL providers will require an Australian Credit Licence and be required to comply with several obligations under the National Credit Act, including the general obligations, the responsible lending obligations and the breach reporting regime.

While there will be some relaxation of the responsible lending obligations and not all of the general obligations will apply, there will still be bans on unsolicited increases to consumer spending limits, caps on default fees and additional warning and disclosure requirements.

The industry code will also be strengthened, with parts of the code becoming enforceable by ASIC (subject to ASIC approval).

The announcement leaves several questions unanswered. To what extent will the general obligations apply? How will responsible lending obligations be scaled to each business? What additional disclosure, reporting and other obligations will be introduced? Which businesses will be bound by the industry code and which parts will ASIC enforce? And will the definition of BNPL capture retailers that offer their own deferred payment plans?

What general obligations will apply to BNPL providers?
Option 2 in Treasury’s options paper indicated that most of the general obligations under section 47 of the National Credit Act would apply to BNPL providers, with the one exception noted so far being the Reference Checking protocols.

So, at this stage, BNPL providers can expect to be bound by the following general obligations:

• Engage in credit activities efficiently, honestly and fairly;
• Manage conflicts of interest;
• Adequately train credit representatives;
• Have internal dispute resolution procedures, being a member of AFCA and having compliant compensation arrangements; and
• Have adequate compliance systems and processes, resources (financial, technological, human) and risk management systems.

Complying with these general obligations is likely to involve significant changes to BNPL providers’ practices, policies, and procedures. This will include having a written plan that documents their arrangements and systems to ensure compliance with the general obligations.

One of the general obligations that the Minister specifically singled out as applying to BNPL providers, and which could potentially have a far-reaching impact, is the efficiently, honestly and fairly obligation.

In recent years, the Courts have considered the application of the obligation in many contexts. In one recent case, the Federal Court held that conduct that is self-interested and unfair, even if not necessarily misleading or deceptive, or dishonest, can breach this provision. 

The licensee was found to have breached the obligation by engaging in conduct that had ‘a degree of calculated sharpness’, and that was ‘sufficiently egregious’. Cases like this provide guidance on the standard that BNPL providers will be expected to meet, and the type of conduct that ASIC and AFCA are likely to focus on when considering whether the obligation has been breached.

‘Scalable’ responsible lending obligations
The Government also announced that while the responsible lending obligations will apply to BNPL providers, they will be ‘scalable and technologically neutral’ so as to produce ‘the right fit for the risk level of their products’.

The observation is curious as elements of the responsible lending obligations are already ‘scalable’. It is to be seen how the Government will reflect this principles-based approach to responsible lending for BNPL providers in the new legislation.

Under Chapter 3 of the National Credit Act, credit licensees are obligated to:

• Only enter into a credit contract with a consumer if they have assessed the contract as not unsuitable for the consumer; and
• Assess credit contracts as not unsuitable in circumstances where the credit contracts meet the requirements and objectives of the consumers and if the consumers are able to comply with the repayments without substantial hardship; and
• Make reasonable inquiries into the consumer’s requirements and objectives and the consumer’s financial situation’; and
• Take reasonable steps to verify the consumer’s financial situation.

There has been much debate about how a credit licensee must comply with the obligation to verify a consumer’s financial situation. Following the Federal Court’s decision in ASIC v Westpac 3 , where it was held that a lender ‘may do what it wants in the assessment process’ in that there is no specific process that most lenders must use to satisfy themselves that the loan is not unsuitable for the borrower.

Conversely, for small amount credit contracts (SACCs), a licensee is required to request and consider bank statements for the previous 90 days as part of the unsuitability assessment.

And, under recent reforms, loans of up to $2,000, where the term of the contract is between 16 days and 12 months, must have equal repayments and repayment intervals for the life of the loan with limited exceptions. In some circumstances, the Regulations will be able to prescribe that repayments may not exceed a specified percentage of a consumer’s income.

While the Government’s plans in relation to responsible lending for BNPL are not yet clear, it is possible that for BNPL providers offering large amounts of credit – say up to $30,000 – the regulatory path may be more akin to that currently applied to non-SACC lenders. For BNPL providers offering smaller amounts of credit – typically less than $2,000, which is the most popular form of BNPL credit contract – the regulatory path is less clear and may reflect the responsible lending obligations that apply to SACC lenders.

Other obligations
In addition to ‘most of’ the general obligations and ‘scalable’ responsible lending obligations, BNPL providers will be subject to a range of other legislative requirements concerning hardship, debt enforcement, breach reporting, disclosure, and credit reporting.

Furthermore, the Government has announced that the industry code will be strengthened and parts of it enforceable by ASIC. The code would need to meet rigorous standards set by ASIC, including ASIC’s expectation that code subscribers cover a majority of participants in the sector, in order to obtain ASIC-approval to make certain provisions enforceable.

Whether this is achievable within a reasonable timeframe remains to be seen.

Final word
While many questions are yet unanswered about the new regulatory regime, what is clear from the Government’s announcement is that ASIC will have a significantly expanded regulatory toolbox to address misconduct and consumer harm in the BNPL sector. This includes applying the strengthened penalties for breaches of the National Credit Act with maximum civil penalties of up to:

• 50,000 penalty units (currently $13.75 million);
• Three times the benefit obtained and detriment avoided; or
• 10 per cent of annual turnover, capped at 2.5 million penalty units (currently $687.5 million).

So, whatever fine tuning the legislation undergoes between now and its passage, regulation is coming and likely by the end of the year.

For BNPL providers, this means the time is now to start considering how the new regulatory regime will impact their businesses and the compliance arrangements they will need to put in place to ensure they are ready to comply with their new licensee obligations.

Ursula Noye is senior associate and Jesse Vermiglio is a partner at Holley Nethercote Lawyers.