What should BNPL providers be focusing on? 6 min read
The Federal Government recently released an exposure draft legislation package seeking to regulate Buy Now, Pay Later (BNPL) arrangements as 'low cost credit contracts' (LCCCs). In this Insight, we explain key elements of the Treasury Laws Amendment Bill 2024: Buy now, pay later (the Draft Bill) and canvass some of the issues that BNPL providers will need to consider.
Key takeaways
- The Draft Bill, released 12 March 2024, is seeking to regulate LCCCs by expressly including them within the scope of the regulatory framework under the National Consumer Credit Protection Act 2009 (Cth) (the Credit Act) and National Credit Code. LCCCs are credit contracts that involve the provision of credit to consumers that is low cost, interest free and generally short term – eg BNPL arrangements and certain wage advance services.
- If the Draft Bill is enacted in its current form:
- LCCC providers will be subject to the licensing requirements in Chapter 2 of the Credit Act. This means currently unregulated providers will need to apply for an Australian credit licence (ACL), and existing ACL holders may need to apply for a variation to cover their activities in relation to LCCCs. ACL holders are subject to a range of conduct and other obligations under the Credit Act, including the overarching requirement to act efficiently, honestly and fairly, and the breach reporting regime. See recent Insights here.
- LCCCs (including BNPL arrangements) and related processes will need to be updated to comply with the National Credit Code's form and content requirements.
- The Draft Bill introduces a modified 'opt-in' responsible lending framework for LCCC providers. This will give licensees the option to apply existing responsible lending processes or to develop a framework specific to LCCCs. This will allow providers who currently offer both LCCCs and regulated consumer credit products to apply one responsible lending process.
- Treasury consultation on the proposed reforms is open until 9 April 2024. (See our previous Insight for details regarding the previous consultation on the proposed regulation of BNPL arrangements.)
Summary of requirements for LCCC providers
The Credit Act
The proposed reforms will:
- define a BNPL contract as a type of LCCC, and allow other classes of LCCC to be prescribed by regulations – ensuring the law can quickly adapt as products and technologies evolve;
- require LCCC providers to comply with the licensing requirements in Chapter 2 of the Credit Act;
- require credit contracts that could be characterised as LCCCs, or credit provided under a small (or medium) amount credit contract, to be regulated as LCCCs only; and
- prevent LCCC providers from restructuring their credit activities to fall outside the regulatory framework for LCCCs under the Credit Act.
With a nod to the need for regulation that is 'proportionate' to the lower risks and perceived benefits of LCCCs, the Draft Bill introduces a modified, opt-in version of the existing, scalable responsible lending obligations (discussed in detail below). Further:
- there will be no requirement for credit representatives of LCCC providers to be formally sub-authorised, have a credit guide or be an Australian Financial Complaints Authority member unless they are also debt collectors; and
- LCCC providers will not need to follow the Reference Checking and Information Sharing Protocol.
The National Credit Code
The proposed reforms will:
- define a contract as a LCCC if, among other things, it limits the fees and charges that are or may be payable under the contract to those specified in the regulations. Currently, Treasury is proposing to:
- limit the maximum amount of fees and changes (other than default fees and charges) to the same amounts as currently specified in regulation 51 of the National Consumer Credit Protection Regulations 2010 (Cth) for certain exempt credit products in section 6(5) of the National Credit Code (being $200 for the first year and $125 each year thereafter, or $0 if the consumer was a party to a LCCC with the credit provider or its associate (who are not authorised deposit-taking institution (ADIs)) in the previous 12 months); and
- limit the maximum amount of default fees and charges to $10 per month, or $0 if the consumer was a party to a LCCC with the credit provider or its associate (who are not ADIs) in the previous 12 months;
- require LCCC providers to comply with the National Credit Code's form and content requirements (the requirements relating to interest rates will only apply to LCCC providers that charge interest on the provision of credit); and
- expand the default notice requirements beyond direct debit, to cover a broader range of payment types including creditor-initiated charges on a credit card.
Again, to ensure proportionate regulation, LCCC providers won't be required to provide consumers with comparison rates in advertisements.
Modified responsible lending framework
Providers of LCCCs can choose to opt in to the modified framework, or comply with the current responsible lending obligations (which might be the preferred approach for eg LCCC providers that already hold ACLs).
As most readers would be aware, providers of consumer credit products must comply with the responsible lending obligations under Part 3-2 of the Credit Act. Key to this are the obligations to make reasonable inquiries regarding the consumer's requirements, objectives and financial situation, and to take reasonable steps to verify their financial situation. This feeds into an assessment of whether a credit contract will be unsuitable for a consumer, which must be done before the credit provider enters into a credit contract or increases a credit limit.
Broadly, under the Credit Act, a credit provider must not:
- enter into a credit contract with a consumer without a current suitability assessment (which must have been made within the past 90 days, or 120 days for a home loan – the Draft Regulations are proposing to set this at 120 days for LCCCs under the opt-in framework); or
- enter into, or increase the credit limit of, a credit contract if that contract is unsuitable for the consumer.
The responsible lending obligations are 'scalable', in the sense that what is reasonable will depend on a range of circumstances. Broadly speaking, more information will likely be needed, and more rigorous steps taken, where the product itself presents a greater risk to the customer or is particularly complex, or the customer (or target market) is particularly vulnerable or has difficulty understanding the product.
The Draft Bill has proposed a modified opt-in responsible lending framework for LCCCs that is (interestingly) more prescriptive than the existing scalable regime.
Eg when making reasonable inquiries about the consumer's requirements and objectives and financial situation, and taking steps to verify that information, the Draft Regulations will require a LCCC provider to seek to obtain:
- a range of prescribed information about the consumer from a credit reporting body, to inform the suitability assessment (such as default and payment information about the consumer, and other consumer credit contracts they have entered into); and
- specific information about the consumer's income, expenditure and other LCCCs, small amount credit contracts or consumer leases to which they are currently a party.
In determining whether inquiries are reasonable, LCCC providers must have regard to:
- the nature of the LCCC;
- the nature of the target market;
- whether the consumer belongs to a class of persons whose members are likely to be financially vulnerable;
- whether the licensee has implemented any policies that reduce its risk of providing credit to a consumer on terms that are not affordable for them; and
- whether the licensee has implemented any policies mitigating the harm that may be caused to a consumer if the licensee provides credit to them on terms that are not affordable.
Treasury is also proposing greater flexibility for credit limits of less than $2,000. The Draft Bill introduces a presumption that an initial LCCC will meet a consumer's requirements and objectives (and therefore will not be unsuitable under that limb of the unsuitability assessment) if the credit limit of the initial contract at the time it is entered is less than $2,000 (unless the credit provider assessed the consumer for a maximum credit limit that exceeds $2,000). A similar presumption will apply for the purposes of increasing a LCCC's credit limit, where the credit limit after the increase will be less than $2,000.
The drafting notes suggest that the responsible lending obligations may be less onerous in some cases, depending on matters such as those listed above. This may give the green light to LCCC providers to apply lesser standards than might currently be considered acceptable, but takes the question of scalability out of the Australian Securities and Investments Commission's (ASIC) hands and may make it harder to justify a scaled approach – particularly as providers will still need to obtain detailed information from credit reporting bodies. It will be interesting to see how this plays out in the consultation, and how ASIC will respond in the longer term in Regulatory Guide 209: Responsible lending conduct.
Under the modified opt-in RLO framework, licensees who provide LCCCs must implement a written policy that details how they will assess whether the LCCC is unsuitable. The intention is for this policy to be regularly updated and evidence based, with the Draft Regulations requiring a licensee to regularly assess if the policy has facilitated compliance with the responsible lending obligations.
Next steps
If you would like to discuss the issues raised in this Insight, please contact any of the people below.
* The authors would like to thank Nima Nimalachandran for his assistance in preparing this Insight.