The federal government will regulate the buy now, pay later industry under the Credit Act to better protect consumers against financial abuse by the lending schemes.

Key points:

  • Buy now, pay later products will be regulated similarly to credit products
  • The government has taken a middle road option in introducing regulation, that brings providers within a subset of the credit act
  • They will also be required to hold an Australian Credit Licence and offer consumers better dispute resolution processes

In a speech delivered on Monday morning, Financial Services Minister Stephen Jones told the Responsible Lending and Borrowing Conference that buy now, pay later (BNPL) services would be treated as a credit product, with providers required to have a credit licence, hardship requirements and minimum standards for conduct.

The decision comes after a Treasury paper published in November last year, which explored possible BNPL regulation options suggested three potential options for regulation:

1.That the services remain largely self-regulated

2.That the services be subjected to limited regulation under the Credit Act

3.That the services be subjected to the same laws as credit card providers

The second option, chosen by the federal government, requires BNPL products meet modified Responsible Lending Obligations under the Credit Act to determine unsuitability, combined with a strengthened Industry Code.

The consultation paper said there were 7 million active BNPL accounts in the 2021-22 financial year, which resulted in $16 billion in transactions — an increase of nearly 37 per cent compared to the year prior.

Mr Jones said tougher regulation was needed as BNPL products had posed “growing dangers to consumers, which up until now have been largely unregulated and unchecked”.

“The plan will protect people from the spirals of harm that unregulated, unrestricted lending can cause,” he said.

Evidence had shown that the risks were disproportionately affecting women, First Nations communities and people on low incomes.

He said some people were opening multiple BNPL accounts, to access far more debt than they’d be able to get on a credit card or a payday loan.

“And we have also heard that some people may be weaponising BNPL products in abusive relationships – doing things like coercing their partners to take on BNPL debts or taking out BNPL debts in their partner’s name without their knowledge,” he said.

A study conducted by Good Shepherd in late 2022, found that about 73 per cent of financial counsellors said clients had missed essential payments, or cut back on essentials, or gone without essentials, to service BNPL debt.

“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Mr Jones said.

Consumer groups and financial counselling organisations have long argued that BNPL providers need to adhere to the same responsible lending laws as other credit providers.

Previously, whether missed payments would end up on your credit report would depend on the service you used. Zip held an Australian credit licence, so defaults would be reported to credit agencies, whereas Afterpay and Klarna did not.

A report by the corporate regulator, ASIC, in 2020 found that some consumers were “suffering harm” as a result of BNPL schemes, with people cutting back on or going without essentials, or taking out additional loans to make their repayments on time.

Buy now pay later businesses, including Afterpay, had argued against potential regulation, with a Senate inquiry into fintech two years ago under the previous Coalition government suggesting players could voluntarily adhere to an industry code, instead of wider regulation.

‘The devil will be in the detail’

In a statement, Afterpay said the regulation was a “strong first step” that would benefit consumers and businesses and would provide certainty for the industry.

“We look forward to working with the government, consumer groups and other stakeholders to get the details right in the coming months and build on the many consumer protections we already provide and set high industry standards across the board for all providers of a BNPL service,” an Afterpay spokesperson said

Zip co-founder Peter Gray also welcomed the regulation, saying it balanced the needs of consumers and industry.

“We do really believe that option two is a sensible balance between protecting consumers from harms, delivering confidence to industry stakeholders, but also promoting competition and innovation,” Mr Gray said.

The chief executive of Financial Counselling Australia, Fiona Guthrie, said the regulation was much needed but she fears there will be loopholes that could be exploited.

“These products will have specific bespoke regulation. We don’t know the detail of that, and the devil will be in the detail,” she said.

“It’s unclear what they [the government] mean by modified Responsible Lending Obligations, and if that’s going to rely on the self-regulatory code being toughened up, that will be inadequate.

“So the key to these laws being successful is having appropriate, effective, Responsible Lending Obligations that make sure people don’t get in over their heads.”

Mr Jones said the regulation was about striking a balance that ultimately protected consumers.

He said the providers would now need to “have appropriate safeguards in place” such as better dispute resolution processes.

There would be caps on charges for missed payments and new marketing requirements.

“We must ensure that they operate honestly, efficiently, and fairly, in line with other regulated credit products,” he said.

Further details would be developed over the coming months, he said.

Treasury would work closely with the industry and with consumer groups, with exposure draft legislation out for consultation later this year and the Bill introduced into Parliament by the end of the year.

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