Australia has joined the UK in regulating the buy now, pay later industry, under sweeping changes announced by the Financial Services minister on Monday.
Financial Services Minister Stephen Jones told a borrowing and lending conference in Sydney that buy now, pay later (BNPL) "looks like credit, it acts like credit, it carries the risk of credit" and therefore the services would be regulated as credit products.
Let's take a closer look at what the BNPL regulations mean, and how it will affect you.
What is buy now, pay later?
For the uninitiated, BNPL is a modern-day lay-by, where you can pay for something in instalments.
The difference is that with BNPL, you can take the item home right away while you pay it off over a certain number of weeks.
It was initially used to buy fairly stock-standard items, including clothing and technology products, but it's increasingly been used to pay for groceries, medical bills and vet bills.
It can be a convenient option to pay off an item you want right now, and the companies don't ask questions about whether you can afford to meet the repayments — which can be where some customers come unstuck.
If you are able to meet the repayment schedule, you won't have to pay any interest — but if you do miss a deduction, you will incur a late payment charge, which vary depending on the provider.
The missed payments can also add up quickly, especially if you have multiple purchases and repayments to meet.
Those late repayments can also appear on your credit report, which affects your ability to borrow money in the future — meaning it can be harder for you to get a mortgage, or a loan for a new car.
What's changing?
In short, the federal government is going to change the law to classify BNPL products as credit products, which means they will be subjected to tougher regulations.
Until now, the services have been largely unregulated, with a treasury paper released last year finding the services followed "unaffordable or inappropriate lending practices", and contributed to financial harm.
Millions of Australians have accounts with BNPL services, with the majority aged between 18 and 35.
Regulation of the sector has been on the table for months, with the government considering three possible options:
- 1.Strengthening the current self-regulated industry code, but adding an "affordability test"
- 2.Introducing "limited" regulation of the industry under the Credit Act
- 3.Regulating the industry entirely under the Credit Act, meaning they would face the same laws as credit card providers
The federal government has selected option two, meaning BNPL services will be considered credit products, and will need to meet certain elements of the Credit Act — which include complying with Responsible Lending Obligations, and holding Australian Credit Licences.
BNPL providers will also have to meet statutory dispute resolution and hardship requirements, comply with product disclosure obligations, and follow existing restrictions on marketing their products.
Why is it being introduced?
As Financial Services Minister Stephen Jones put it in a speech to the Responsible Lending and Borrowing Summit in Sydney on Monday, it boils down to the fact that the industry has been "unchecked and unregulated", and the products have been causing serious harm.
A report in 2020 by ASIC, the corporate watchdog, found that some consumers were "suffering harm" as a result of BNPL schemes.
The report noted that 19 per cent of customers had been cutting back on essentials, or going without them altogether, or and one in five consumers were missing payments, with some taking out additional loans to make up the shortfall.
"Evidence suggests those risks are disproportionately affecting women, First Nations communities and people on low incomes," Mr Jones said on Monday.
"We have heard people are opening multiple BNPL accounts, to access far more debt than they'd be able to get on a credit card or payday loan.
"We have also heard that some people may be weaponising BNPL products in abusive relationships.
"These accounts tell us that doing nothing is not an option. BNPL looks like credit, it acts like credit, it carries the risks of credit."
Mr Jones said a government-initiated review of the industry also found significant concerns around the dispute resolution and hardship processes, and excessive fees and problematic marketing processes.
Ultimately, the government says the changes are about protecting consumers, while also ensuring the stability of the BNPL industry.
How will it affect me when I make purchases?
If you're a user of BNPL services, you can expect a few things to change.
Firstly, suitability and affordability checks will be put in place. That means for customers, you will be assessed on whether BNPL services are suitable for your needs, and you are able to afford the repayments, like with any loan.
The regulation will also mean BNPL providers won't be allowed to raise spending limits without permission.
The changes will also mean better protection for consumers if things go awry.
There will be hardship provisions and better complaint processes, as well as caps on fees charged for missed and late payments.
Essentially, going forward it won't be as easy to use BNPL services as it currently is, without some further checks and balances to ultimately protect customers.
What have the affected companies said?
The biggest BNPL player, Afterpay, has welcomed the changes put forward by the federal government.
"[The] announcement from the government is a strong first step in the development of a fit-for-purpose Buy Now Pay Later regulatory framework that embeds effective consumer protections, generates positive outcomes for consumers and businesses, and provides certainty for industry," an Afterpay spokesperson said.
"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."
Zip co-founder Peter Gray has also praised the changes, saying it balances 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.
What do consumer groups make of the changes?
They are also broadly supportive, but there are some concerns that there may be some loopholes.
Fiona Guthrie, chief executive of Financial Counselling Australia, wants assurances that the modified lending obligations will prevent people from taking out loans bigger than what they can afford.
"The biggest concern that financial counsellors will have is that the modified Responsible Lending Obligations won't go far enough, and so the core problem with this product is people getting in over their heads," she said.
"We're really worried that the legislation may not address that problem."
Ms Guthrie said she wants to see more detail to understand how consumers will be protected, including whether BNPL providers will be part of the credit reporting system.
"If they're not part of the credit reporting system, then the problem with multiple accounts will continue," she said.
"On average, our clients have three accounts, but we'll see people with four, five, six, seven and eight accounts and huge amounts of debt.
"There's a myth that a small amount of credit is less dangerous, but when you're on a low income, a small amount of debt can mean a really big problem."
When will these changes happen?
Treasury says it's going to work closely with the BNPL industry and consumer groups, and will iron out further details about how the regulation will work in the coming months.
It's expected exposure draft legislation will be released for consultation later this year, and the Bill would be introduced to parliament before the end of the year.
Mr Jones expects the legislation will be enforced by the end of 2023.
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