Regulating the ‘buy now, pay later’ industry – By Alexandra

Regulating the ‘buy now, pay later’ industry: Should BNPL products will regarded as credit?

ALEXANDRA DOUVARTZIDIS, ASSOCIATE, HWL EBSWORTH LAWYERS

We (arguably) live in a market driven by consumerism, and with that, we have seen the rise of new electronic instalment payment arrangements, known as “buy now, pay later” (BNPL) services. In recent years, we have seen a significant increase in the use (and acceptance of) these services in Australia.

BNPL services allow customers to purchase goods and services by paying part of the purchase price at the time of purchase. Consumers are subsequently given a period of time to make instalments to pay off the entire amount.1 What is distinguishable from the traditional lay-by method is that the consumer receives the purchase immediately, whereas the traditional lay-by model was that a consumer would not usually be allowed to have the product and/or service until the amount had been paid in full.2 Most BNPL services provide an app which automatically deducts the instalment amount from the customer. One of the main appeals of the BNPL service is that they often do not charge interest or fees if the customer pays on time.3

The growth of the industry has led to many consumer and financial groups calling for tighter regulations of the BNPL industry. CPA Australia’s digital economy policy lead, Dr Jana Schmitz noted that, ‘in Australia, there are almost 6 million accounts across a variety of buy now pay later platforms, and users made an average of 16.6 transactions at an average value of $151 last year”.4

The features of the BNPL services (such as only charging low and/or flat fees (rather than interest) to consumers) means that BNPL services and providers currently fall outside the scope of the National Consumer Credit Protection Act 2009 (NCCPA). However, BNPL services do fall within the scope of ASIC’s relatively recent design and distribution obligations (Part 7.8A of the Corporations Act 2001 (Cth)), which require the industry to design fitfor-purpose products that meet consumer needs, and ensure that their products are reaching the right consumers.5

In an interview with the Australian Financial Review in February 2021, Financial Counselling Australia chief executive Fiona Guthrie stated that BNPL providers “run a mile at the mention of the word ‘credit’, telling their customers the service is all about better budgeting. What they tell retailers, however, is much closer to the truth – that [buy now, pay later] encourages people to spend more.’6 Ms Guthrie felt that what BNPL providers were really doing was turning a loophole in the law into a ‘gaping hole’.7

But not everyone sees the BNPL industry as necessarily problematic. The National Online Retailers Association (NORA) considers BNPL services as an improvement on the traditional ‘layby’ model. Amongst other things, NORA noted that one of the benefits was the reduction or absorption of Card Not Present fraud (which is possible when buyers give credit card details, for example online or by phone or email, and do not present their card).8 Others argue that the interest-free finance aspect is a win for consumers and allows them the flexibility to purchase larger items and pay over a set period of time.

How is the industry currently regulated?

As indicated previously, BNPL services currently fall outside of the scope of the NCCPA - meaning the industry is considered to be largely unregulated.

Currently, there is the BNPL Code of Practice (BNPL Code), which was voluntarily established in 2021 in response to a Senate inquiry which called for self-regulation to improve safeguards for customers, (with version two of the BNPL Code released in March this year).9 The BNPL Code is aimed at providing good consumer outcomes across the diverse range of business models operating in the BNPL industry, based on 2018 and 2020 reports prepared by ASIC.10

Despite the establishment of the BNPL Code, consumer advocates, including Financial Rights Legal Centre, Financial Counselling Australia, Consumer Action Legal Centre and CHOICE were of the view that the BNPL Code was insufficient for bringing the BNPL sector under Australia’s credit laws.11

Gerard Brody, CEO of Consumer Action Law Centre, said the BNPL Code had many deficiencies, including, amongst other things, that the BNPL Code did not appear to adequately address issues such disputed transactions, non-provision of product or goods and refund rights, or faulty or unsatisfactory goods and refund rights.12

Furthermore, the suitability provisions in the BNPL Code “don’t seem to be considering defaults, late fees, or consumer harm associated with going into default on other commitments as part of this requirement”.13

Regulating the industry in 2023

The consumer groups called on the Government to regulate the industry, highlighting that BNPL services were leading to an increased ‘number of people who end up in unaffordable debt through using them, poor industry hardship practices and excessive late fees. While the promise of BNPL is that they do not charge interest, for some people the cost of late fees or account keeping fees can be just as expensive as a credit card. BNPL providers also charge a fee to retailers of between 3% – 6%. These costs will be passed on to all consumers.’14

Come mid-2023, credit products will be regulated under the NCCP Act,15 with an announcement from the Minister for Financial Services, Stephen Jones, in June 2022 that BNPL will be regulated under in the NCCP Act.16

Mr Jones recently told the Australian Financial Review that bringing BNPL products within the scope of the NCCP Act “doesn’t mean that every single existing provision” would apply to the BNPL sector.17

Mr Jones indicated while he did not want to stop BNPL products from continuing to be used by Australians as a good way of managing cash flow and their purchases from payday to payday, he wanted to ensure that “it’s a safe product, and it’s appropriately marketed and provided”.18

Mr Jones went on to make several statements to the Guardian regarding BNPL services, noting that “Products like Zip and Afterpay, [are] a good innovation in the credit market,” and that he wanted to stop arguing about whether BNPL providers are credit or not, noting it was “a dead-end street.”19 Mr Jones wants to focus on regulating BNPL providers within the credit space, and welcomed the fact that they have worked to establish the BNPL code - which they intend to “move to legislate it and fill any gaps.”20

So what happens from here?

It’s likely that BNPL providers will lobby against any significant change beyond the current scope of the voluntary BNPL Code, and will undoubtedly maintain its position that BNPL services are not ‘credit’. Other groups within the financial services industries and consumer groups will likely continue to push for tighter regulation in line with the NCCPA, including credit checks for amounts under $2,000 and tighter regulations on the amount of BNPL transactions a person can have at one time. B

Endnotes 1 Developments in the Buy Now, Pay Later Market, by

Chay Fisher, Cara Holland and Tim West (18

March 2021). 2 Ibid. 3 Ibid. 4 Buy now, pay later needs greater regulation, says CPA, Accountants Daily, Josh Needs (August 2022) (https://www.accountantsdaily. com.au/regulation/17375-buy-now-pay-laterneeds-greater-regulation-says-cpa) (accessed 27

September 2022). 5 Buy now, pay later, regulate soon, James Morris,

Rajaee Rouhani, Shen Low (June 2022) (https:// www.nortonrosefulbright.com/en/knowledge/ publications/9fd68114/buy-now-pay-laterregulate-soon) (accessed 27 September 2022). 6 Consumer groups attack the new buy now, pay later code of conduct, Australian Financial Review, James

Eyers (24 February 2021) (https://www.afr. com/companies/financial-services/consumergroups-attack-the-new-buy-now-pay-later-codeof-conduct-20210224-p575ey) (accessed 27

September 2022). 7 Ibid. 8 Mrs Sandra Blake, Financial Counsellor, Financial

Counselling Australia, Committee Hansard, 12

December 2018, p. 3. 9 Copy of the BNPL Code can be accessed here: https://afia.asn.au/files/galleries/AFIA_Code_ of_Practice_for_Buy_Now_Pay_Later_Providers. pdf 10 https://asic.gov.au/regulatory-resources/find-adocument/reports/rep-672-buy-now-pay-later-anindustry-update/ 11 Buy now pay later sector must be regulated by Government not itself (https://consumeraction.org.au/buy-nowpay-later-sector-must-be-regulated-by-governmentnot-itself/) (accessed 27 September 2022). 12 Above n 6. 13 Ibid. 14 Ibid. 15 ‘If it looks like a duck’: Buy now, pay later to be treated as credit, Australian Financial Review, Michael Rapport (9 June 2022) (https://www.afr.com/politics/if-itlooks-like-duck-buy-now-pay-later-to-be-treatedas-credit-20220609-p5asfq) 16 Ibid. 17 Ibid. 18 Ibid. 19 Embattled buy now, pay later sector to be regulated under credit laws, The Guardian, Ben

Butler (8 June 2022) (https://www.theguardian. com/business/2022/jun/08/embattled-buy-nowpay-later-sector-to-be-regulated-under-creditcard-laws) (accessed 27 September 2022) & One in seven buy now, pay later customers had more than 20 loans last year, Choice survey shows, The Guardian ( 16 September 2022) (https://www.theguardian. com/australia-news/2022/sep/16/one-in-sevenbuy-now-pay-later-customers-had-more-than-20loans-last-year-choice-survey-shows) (accessed 27

September 2022). 20 Ibid.