Consumer credit protections catch up to the…

Precisely two years after Treasury published an Options Paper proposing options for regulating the ‘buy now pay later’ (BNPL) sector, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 has passed the Parliament imposing some consumer credit protections obligations on BNPL products.

What’s changed?

Historically, BNPL products had avoided the consumer credit protection regime by charging consumers periodic or other fixed fees for the provision of credit below the prescribed fee cap.

The Bill amends the National Consumer Credit Protection Act 2009 (‘Credit Protection Act’) and the National Credit Code to add a new category of regulated credit – low cost credit contracts (LCCC) – which include BNPL contracts. By classifying a BNPL contract as a form of LCCC and amending sections of the Credit Code to specifically apply a modified form of the Credit Code to BNPL contracts and LCCCs, BNPL providers will no longer be exempt from existing regulations and will now be required to hold and maintain an Australian credit licence and comply with the relevant licensing requirements and licensee obligations, but with modifications.

Modified Responsible Lending Obligations (RLOs)

Licensees that are LCCC providers will be required to choose between complying with either:

the current version of the RLOs; or
the new narrower RLOs for LCCCs, which operate to scale the obligations imposed on the licensee proportionate to the level of risk associated with BNPL contracts.

Under the new narrower framework, a BNPL provider:

will not need to make an unconditional representation to the consumer that they are eligible to enter into or increase the limit of a credit contract; and
will only need to:
- make reasonable inquiries about the consumer’s requirements and objectives in relation to the LCCC;
- make reasonable inquiries about the consumer’s financial situation; and
- take reasonable steps to verify the consumer’s financial position,
to determine whether a BNPL product is suitable or unsuitable for the consumer.

Consideration for BNPL providers

1. We’re yet to see the Regulations

Many key questions and aspects of the proposed modified BNPL RLOs will be impacted by the yet to be published regulations, including:

(a) what contracts, which might otherwise be a BNPL contract, are excluded from the definition;

(b) what is the maximum permitted length of a BNPL contract;

(d) what is the threshold cap on the value of the BNPL contract.

2. A written policy is a must

Regulators will be focused on whether BNPL providers have an adequate policy for determining whether the LCCC provided to consumers is suitable or unsuitable for the particular consumer.

It will be important for BNPL and other LCCC providers to adopt an assessment policy that encapsulates the factors set out in s 133BXD of the amended Credit Protection Act.

The Explanatory Memorandum provides guidance on specific issues that may arise for providers under this requirement. Such issues include cases where the lender has historical data on the likely credit risks associated with the target market for their product, including bad debt rates, arrears rates, hardship arrangements and complaints relating to unaffordability. Consideration of such information will contribute to the assessment of whether ‘reasonable steps’ have been taken to ensure the LCCC is suitable for the consumer.

3. Avoid avoidance schemes

Regulators will also be carefully examining how BNPL providers structure their products with the introduction of a new anti-avoidance scheme. BNPL providers who seek to structure their products to avoid the definition of LCCC to continue being exempt from licensing, RLO and other regulatory requirements under the Credit Protection Act may breach the new anti-avoidance scheme.

When?

Commencement of the Bill is currently split, with licencing requirements effective immediately upon Royal Assent and the key obligations set to apply six months after receiving Royal Assent.

This article was written with the assistance of Benjamin Curtain, Seasonal Clerk.

Consumer credit protections catch up to the 'buy now pay later' sector