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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

Buy now, regulate later – is the buy now pay later regulatory loophole set to close?

The buy now, pay later (BNPL) sector enjoys a largely unregulated existence in Australia, sitting outside the scope of the National Credit Code. With increasing pressure from consumer groups and interest in the BNPL sector from international regulators, moves by the Australian Securities and Investments Commission (ASIC) to remind the BNPL sector of the soon to commence design and distribution obligations (DDO) regime may be the first step in strengthening the BNPL regulatory framework.

Australian BNPL providers are not currently subject to the consumer credit obligations – including credit checks and other responsible lending obligations – applicable to most credit providers under the National Credit Code (the Code).

The industry argues that BNPL is 'budgeting' – not credit – and it is therefore appropriate that BNPL lending not be subject to the same regulation. This is at odds with research undertaken by ASIC, which found not only that the use of BNPL 'credit' had doubled between the 2017/18 and 2018/19 financial years to $32m in the latter period, but that one in five consumers were missing payments, and missed fee payment fee revenue for all BNPL providers in the review totalled over $43m. Both ASIC and the Reserve Bank of Australia have commented that the value of BNPL transactions has continued to grow strongly through the COVID-19 pandemic as the shift to electronic payment methods and online shopping accelerated.

ASIC's figures, reported in November 2020, are concerning in the context of a rapidly expanding BNPL industry, including a rapidly increasing number of BNPL providers. In the absence of consumer credit obligations, there is nothing to stop consumers from obtaining credit from multiple BNPL providers, with the outcome that the individual is potentially saddled with significant debt they are not able to repay. The fact that BNPL providers typically do not charge interest is arguably not a significant reassurance in the context of ASIC's findings as to the significant late payment fees charged, and that 20% of consumers surveyed said they cut back or went without essentials (e.g. meals) in order to make BNPL payments on time; 15% of consumers surveyed said they had taken out an additional loan to meet a BNPL repayment.

ASIC is looking to a combination of self-regulation and the soon to commence DDO regime as a means to address the potential harms of BNPL lending. BNPL lending was not caught by the DDO regime as originally proposed. However, the legislation introducing the regime was amended to include BNPL within its scope following a February 2019 Senate Economic Committee report on 'Credit and financial services targeted at Australians at risk of financial hardship', which included an entire chapter on the risks and impact of BNPL lending to Australian consumers.

The Australian Finance Industry Association Limited's BNPL Code of Practice, that came into effect on 1 March 2021, sets out "best practice" for the sector and strengthening consumer protections. Critics of the industry code have argued that it requires no more than what BNPL providers were already doing and, whilst the code creates additional obligations for loans greater than $2,000 which may mean customers with impaired credit history are less likely to be extended BNPL 'credit', it is not necessarily the size of the loan which harms consumers so much as the impact of missed repayments and late fees.

The DDO regulatory regime, which comes into effect on 5 October 2021, seeks to create a consumer-centric approach to the design and distribution of financial products. The regime requires an issuer to:

  • consider the design of the product (including key attributes);
  • consider the determination of an appropriate target market; and
  • specify distribution conditions and restrictions.

These details must be set out in a "target market determination" document. Issuers and distributors must then take "reasonable steps" that are "reasonably likely" to result in the distribution being consistent with the target market determination. The issuer must also monitor and review the outcomes produced by the design and distribution of its financial products and consider whether changes are required.

ASIC's efforts to increase regulatory scrutiny of the BNPL sector are not peculiar to Australia. In February 2021, the UK's Financial Conduct Authority (FCA) announced that the BNPL sector would be brought within the scope of its remit. This decision follows a review of the UK's unsecured credit market, led by Christopher Woolard, which recommended (amongst other things) that "[a]s a matter of urgency, the FCA should work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation."

It remains to be seen whether ASIC's DDO regime will have the desired effect in Australia – but with lending through the BNPL sector continuing to increase and tangible evidence of consumer harm as a result of this form of lending, it seems inevitable that scrutiny of the BNPL sector will remain a regulatory focus.