Under proposed new legislation, buy now, pay later contracts (BNPL) will be regulated as low cost credit contracts (LCCCs) and BNPL providers will require an Australian Credit Licence and be subject to responsible lending obligations, disclosure requirements and fee restrictions.

The Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 (Bill) was introduced into Parliament on 5 June 2024 and is currently before the Senate.
 
Schedule 2 to the Bill will introduce amendments to the National Consumer Credit Protection Act 2009 (Credit Act) to extend the application of the Credit Code to BNPL and establish LCCCs as a new category of regulated credit.

Developments in digital technology have enabled credit businesses to build a profitable market for low cost credit and credit-like arrangements.
 
Generally the BNPL model is a digital credit innovation involving third‑party merchant finance which operates as follows:

• A third-party provides consumer finance to cover purchases of goods and services and the payment of bills.

• BNPL consumers generally pay no interest for the finance (or otherwise a small fee).

• BNPL products facilitate general retail purchasing up to a spending limit of $2,000 or less.

• BNPL providers:

  • do not provide cash to consumers

  • have a contract between the BNPL provider and the consumer for the provision of credit in relation to the transaction

  • directly or indirectly pay- the merchant the value of the purchase upfront (some or all of the price of goods or services purchased by a consumer) (less any merchant fee)

  • may charge merchants a service fee for accepting BNPL transactions

  • collect repayments from consumers in instalments.

BNPL arrangements are not currently regulated under the Credit Act as they tend to fall under the exemptions available to certain types of credit in the Credit Code, namely low cost continuing credit or low cost, short term credit products
 
As a consequence, BNPL contracts are not subject to responsible lending obligations (RLOs) or other Credit Act requirements, and providers do not need to hold an Australian Credit Licence.
 
The advantage to a consumer of a BNLP contract is that it allows consumers to spread their spending over a number of interest-free instalments and it is interest-free if the instalments are paid on time. Otherwise, late fees or interest may apply to missed payments, similar to a credit card.
 
BNPL schemes are accessible to consumers without a credit history or stable income and do not typically affect their credit scores. However, market evidence suggests that:

"Compared with traditional consumer credit, BNPL users are typically younger, with less education, more debt, lower credit scores and higher delinquency rates."; and
 
"imprudent spending or a poor understanding of BNPL terms can lead to overindebtedness." (BIS Quarterly Review 04 December 2023)

 As BNPL products are a convenient and flexible way to access credit without interest charges or credit checks they are popular among younger consumers
 
However, given that demographic, BNPL products also pose significant risks to consumers, such as overcommitment, late fees, debt stress and reduced access to other forms of credit.
 
Thus the underlying regulatory policy driving the Bill is a response to this risk by regulating BNPL arrangements and BNPL contracts.

The legislative amendments establish a LCCC as a new category of regulated credit under the Credit Act. BNPL contracts will be regulated as a class of LCCC.

Fundamentally LCCCs are continuing or non-continuing credit contracts for providing credit to consumers on a low cost basis.

Their capture is achieved by disapplying the exemptions in subsections 6(1) and (5) and paragraph 5(1)(c) of the Credit Code.

If a credit contract falls within the definition of an LCCC but could also be characterised as a small amount credit contract or a medium amount credit contract for the purposes of the Credit Act, it is regulated as an LCCC only.

A BNPL arrangement is defined to capture an arrangement where the merchant is the initial lender, but the predominant amount of the credit is provided by another provider.

However, the new framework does not cover entities that merely accept BNPL products or are engaged in their promotion.

LCCC providers are required to hold and maintain an Australian Credit Licence and to comply with the relevant licensing requirements and licensee obligations under the Credit Act.

The table below sets out the scope of Credit Act and Credit Code obligations which will apply to a BNPL provider and contract classified as a LCCC.

Under the new legislation a BNLP provider classified as a LCCC provider will be subject to the Credit Act and Credit Code.
 
As a consequence they must:

• Hold an Australian Credit Licence. If they currently hold a licence then they will still need to apply for a variation of authority to authorise them to provide LCCCs.

• Comply with licensing requirements.

• Make an election to either be subject to the modified RLO framework or to comply with the existing RLO requirements.

• Comply with disclosure requirements including pre-contractual disclosure and if applicable, mandatory disclosure obligations relating to interest rates and charges.

• Implement policies and governance frameworks relating to the compliance with the unsuitability test including reasonable inquiries and verification required and introduction of an unsuitability assessment policy.

• Review their sales process, systems and documents for compliance including increasing the credit limit and customer default procedures.

Given the inclusion of anti-avoidance prohibitions in the Bill it leaves limited options for current BNLP providers other than to adapt their business models and practices to meet the new regulatory standards and requirements.

We recommend that providers of low cost continuing credit or low cost, short term credit products undertake an early assessment of the impact of the above reforms and take steps to implement necessary changes to their operations, sales processes and governance infrastructure and frameworks to achieve an efficient and effective transition to the new credit regime.
 
We anticipate that the legislation is likely to commence this year and that it will include a transition period however the terms of such transition and the timing of the application to current BNPL operators for compliance is uncertain.
 
In forthcoming FS Insights we will examine the modified RLO framework and other tailored modifications of the new LCCC regime including anti-avoidance.