New legislation for the buy now, pay later industry has been released for consultation, bringing in licensing and responsible lending obligations for the first time.

The federal government has released a new exposure draft legislative package for public comment, which aims to bring buy now, pay later (BNPL) into the existing regulatory framework for other credit products.

While BNPL arrangements – such as Afterpay and Zip – are already covered by some consumer protection provisions (such as those relating to misleading, deceptive, and unconscionable conduct and product intervention power and design and distribution obligation regimes), the industry has largely been self-regulated up until now.

However, the growing popularity of BNPL products in Australia (which accounted for the equivalent of approximately 2 per cent of Australian card purchases during the 2022 financial year) has led to a growth in poor consumer outcomes.

According to the Treasury, these poor consumer outcomes are “being observed in some cases at sufficient levels to justify regulatory intervention”.

These mainly relate to unaffordable lending practices, unsatisfactory complaint resolution and hardship assistance, the charging of excessive late payment fees, and a lack of transparency surrounding product disclosures and warnings.

Following on from several rounds of consultation, a new package of draft legislation has been released.

The bill amends the National Consumer Credit Protection Act 2009 and the National Consumer Credit Protection Regulations 2010 to provide a means for regulating BNPL and low cost credit contracts (LCCCs) by:

• Extending the application of the Credit Code to cover BNPL and LCCCs.
• Requiring providers to hold and maintain an Australian Credit Licence and comply with the relevant licensing requirements and licensee obligations (albeit with some modifications to ensure regulation is proportionate).
• Modifying the existing RLO framework to create an opt-in RLO framework that scales better with the risks posed to consumers. This will allow firms offering both LCCCs and regulated consumer credit products to use common responsible lending processes if they wish.
• Requiring providers to develop and review a written policy on assessing whether each contract would be ‘unsuitable’ for the relevant consumer.
• Requiring providers to take appropriate and proportionate steps to assess the suitability of lending (and document and review their RLO policies and procedures).
• Establishing anti-avoidance protections to prevent providers from structuring their business models to avoid regulation.

Releasing the package for consultation, the Assistant Treasurer and Financial Services Minister Stephen Jones commented: “The government is committed to a financial system that leads to good consumer outcomes with appropriate safeguards in place.

“The emergence of BNPL products has created new opportunities in the Australian economy … At the same time, BNPL isn’t subject to the regulatory framework that applies to other credit products. This can lead to poor product disclosure, inadequate dispute resolution processes, excessive default fees and unaffordable lending practices that lead to hardship and financial stress.

“That’s why the government is taking action to regulate BNPL … This will ensure Australians can continue to enjoy the benefits of BNPL while receiving appropriate protections.”