Treasury has released exposure draft legislation and explanatory materials to regulate the Buy Now Pay Later (BNPL) industry. The draft legislation amends the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and the National Consumer Credit Protection Regulations 2010 (Cth) to bring BNPL products into the existing regulatory framework for other credit products.
The proposed legislation will require BNPL providers to:
- hold and maintain an Australian credit licence (ACL);
- comply with the licensing obligations under Chapter 2 of the NCCP Act, including the general conduct obligations;
- comply with the requirements under the National Credit Code (NCC); and
- conduct suitability assessments in accordance with modified responsible lending obligations (RLOs).
For some BNPL providers, the requirement to hold an ACL may only be the beginning of their licensing journey. If Treasury’s proposed reforms to the licensing framework for payment service providers under Chapter 7 of the Corporations Act 2001 (Cth) are implemented, BNPL providers that provide a payment function (such as a digital card) may also be required to hold an Australian financial services licence. Collectively, these reforms signal a significant shift in the regulatory landscape for the BNPL industry which to date has largely been self-regulated.
The full impact of the reforms will not be known until Treasury makes it clear how BNPL contracts will be subject to the NCC.
Consultation on the draft legislation closes on 9 April 2024.
Background
In November 2022, Treasury released an options paper that put forward 3 options for regulating the BNPL industry. Following public consultation, the government announced its intention to regulate BNPL products under the proposed Option 2. Under this option, BNPL providers are required to maintain an ACL and comply with a reduced set of obligations under the NCCP Act including modified RLOs. This regulatory approach aims to strike a balance between the benefits of BNPL products and the potential for consumer harm.
What is covered in the draft legislation?
The draft Bill seeks to regulate BNPL products by introducing a new regulatory framework for ‘low cost credit contracts’ (LCCCs). LCCCs are described as continuing or non-continuing credit contracts that involve the provision of credit to consumers that is low cost, interest free and generally short term.[1] Relevantly, the draft Bill defines a BNPL contract as a type of LCCC, whilst also providing for future classes of LCCCs to be prescribed by the regulations.
The Bill brings BNPL providers that are currently relying on an exemption under the purview of the NCCP Act by ensuring that LCCCs are a form of credit regulated under the NCCP Act. As a result, BNPL providers will be subject to the licensing requirements in Chapter 2 of the NCCP Act, including the obligation to hold and maintain an ACL. Relevantly, BNPL providers that already hold an ACL may be required to apply for a variation of the authority under their ACL to cover the provision of LCCCs.
The following table summarises the proposed obligations applying to LCCC providers under the draft legislation.
Obligations that will apply to LCCC providers
Exposure draft explanatory materials - Treasury Laws Amendment Bill 2024: Buy now, pay later (Explanatory Materials) at [1.1].
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OBLIGATION
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INDIVIDUAL
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Example
uses 2
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Licensing
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Comply with the licensing requirements in Chapter 2 of the NCCP Act. Accordingly, LCCC providers will be required to hold and maintain an ACL as well as comply with the relevant licensing obligations which include, among other obligations:
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Obligations under the NCC
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Comply with the obligations and requirements under the NCC including:
Mandatory disclosure obligations relating to interest rates and charges will only apply to LCCC providers that charge interest on the provision of credit. Additionally, Part 10 of the NCC which deals with comparison rates will not apply. |
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Modified version of RLOs
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LCCC providers must elect for each LCCC product that it provides whether to comply with a modified version of the RLOs or the existing RLOs under Divisions 1 to 4 of Part 3-2 of the NCCP Act. This election must be in writing and retained for a period of approximately 6 years. Under the modified RLOs, LCCC providers will still need to conduct reasonable enquiries into, and reasonable verification of, the financial circumstances of the borrower before assessing suitability. These obligations however will be subject to increased scalability by allowing providers to consider specific risk factors relating to the product design, target market and the providers risk and harm mitigation arrangements. The effect of which is to reduce the steps that an LCCC provider would otherwise be reasonably required to take to assess suitability. LCCC providers may satisfy the reasonable steps obligations based on information provided by the customer. Moreover, reasonable steps may involve general rules and the application of presumptions. Where the credit limit is less than $2000, a rebuttable presumption applies that the contract will not be unsuitable. LCCC providers can conduct an assessment for an amount greater than what is initially offered to a consumer, and subsequently rely on that assessment for any future credit limit increases up to that amount, for a period of two years. LCCC providers must maintain a written unsuitability assessment policy that sets out how the provider will assess whether the contract is unsuitable. |
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Obligations that will not apply to LCCC providers
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OBLIGATION
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INDIVIDUAL
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Example
uses 2
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Existing RLOs
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LCCC providers will not be required to comply with the existing RLOs under Divisions 1 to 4 of Part 3-2 of the NCCP Act where they elect to comply with the modified regime. |
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The Reference Checking and Information Sharing Protocol
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LCCC providers will not be required to comply with the Reference Checking and Information Sharing Protocol which sets out reference checking and information sharing obligations for credit licensees in the mortgage industry. |
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Credit Representatives
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In certain circumstances, credit representatives of LCCC providers will not be required to meet requirements relating to the following:
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Credit assistance providers
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Credit assistance providers that provide credit assistance in relation to LCCCs will be exempt from the requirement to conduct a preliminary assessment. |
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What’s next?
For most BNPL providers, the reforms will require substantial changes to their origination procedures to ensure compliance with the requirements of the NCCP Act and the NCC. Although the draft legislation is subject to further consultation, BNPL providers should be taking steps to prepare for the reforms. BNPL providers that also perform a payment function should be considering whether and how they will be impacted by the proposed reforms to the licensing framework for payment service providers.
