New buy now, pay later rules no burden: Stephen Jones

The new custom-made regulations for the buy now, pay later sector should be met with ease, Financial Services Minister Stephen Jones says.

Buy now, pay later providers should already be applying credit checks and ensuring deals are suitable for customers, Financial Services Minister Stephen Jones says, meaning a new set of custom-made regulations for the sector should be met with ease.

The new laws, to be introduced in the fourth quarter, represent a less onerous option for the industry than responsible lending rules that apply to banks and were advocated for by the corporate regulator along with Westpac.

“I would have thought the ­majority of the players should be able to make this transition easily,” Mr Jones told The Australian.

“Ensuring that they are doing consumer credit checks, suitability checks and affordability checks, ensuring that they have robust internal and external dispute resolution processes, not having inappropriate marketing, all of these things – any decent business in this sector should already be doing.”

The rules, which had been ­opposed by the largest industry player, Afterpay, will not impose the full set of responsible lending laws. Instead, they represent a middle ground from a range of three possible regulatory options the government said it was considering in November.

BNPL providers would have to assess the level of suitability of a product based on the amount being borrowed, Mr Jones said.

“This is not home loans we are talking about here, it’s generally speaking small amounts,” he said. “So credit checks and other obligations that are put in place should be commensurate with the risks involved.”

Shaw and Partners analysts said the new rules would probably “throttle” transaction volumes for the industry and add costs to the sector, requiring a “system rebuild” in Afterpay’s systems to change its current approval process and serviceability checks.

Consumer groups are worried that adopting a tailored version of the responsible lending obligations will result in watered down regulations, and won’t be enough to protect vulnerable consumers from taking on too much debt, for example, by having multiple BNPL accounts.

Afterpay and other industry players including Zip and Humm on Monday welcomed the less stringent approach taken by the government and said they welcomed the certainty the regulatory clarity brings.

BNPL providers would have to assess the level of suitability of a product based on the amount being borrowed, Mr Jones said. Picture: NCA NewsWire /Gaye Gerard

“Today’s announcement from the government is a strong 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,” a spokesman for Afterpay said.

The company, which currently handles about 60 per cent of BNPL volumes, would work with the government in the next few months to “get the details right”, he added.

The new laws will prohibit credit limit increases without express instructions from cus­tomers and will introduce caps on late fees. This will particularly ­affect Afterpay, given the company’s model involves starting customers with low limits and subsequently increasing them based on their repayment history. They will be technology agnostic, meaning they will apply equally to BNPL loans made through mobile phones or cards.

The new rules would “likely, over the near-term (post implementation) in our view result in throttled industry volumes. Particularly as the majority of participants don’t utilise a number of these measures,” Shaw and Partners wrote in a note. “At the very minimum we could expect some turbulence on suitability checks, auto limit pro­vision for Afterpay and an impost on how customers sign up to level the playing field across all providers.”

The announcement follows a government review that considered three regulatory options for the industry as it highlighted lax lending practices that were contributing to financial stress, excessive consumer fees and dis­pro­portionate charges when compared with other credit products.

A separate review by the Australian Securities & Investments Commission last year found one in every five BNPL users showed two or more indicators of financial stress, such as cutting back on essential groceries or missing payments on other bills.

The BNPL industry disrupted consumer finance around the world, positioning itself not as a credit product because the fees and charges are not called “interest”, but as a marketing offering for retailers and an instalments payment solution to buyers.

In Australia, providers have enjoyed explosive growth from 2018 to 2021 without credit regulation and in an environment with low interest rates and inflation, with volumes expected to reach $20bn annually in the next few years.

Currently, there are 7 million BNPL customer accounts in Australia, each making 18 BNP payments worth $136 each a year.

But the industry is now struggling with higher funding costs, higher prices and tougher scrutiny.

Openpay collapsed in February after failing to secure funding. Rivals Sezzle, Zip, Splitit and Humm have seen their share prices fall in the past year, while Laybuy moved to delist in January.

Shares in Afterpay owner Block fell 1.35 per cent on Monday, while Zip closed down 4.35 per cent at 55c. Sezzle closed down 2.6 per cent, while Humm was down 1.19 per cent. Splitit shares were unchanged.

Consumer groups and financial counsellors called on the government to ensure the new laws required BNPL lenders to ensure loans were appropriate “and suitable regardless of the size of the loan in order to protect people from harm”.

“The devil is going to be in the detail,” Financial Counselling Australia chief executive Fiona Guthrie said.

“Too many financial counselling clients have multiple BNPL accounts.

“The government’s approach will only work if there is a requirement for BNPL providers to be part of the credit reporting system, to reduce the risk of over-commitment.”

Australia’s banks, who have been forced to strengthen their lending criteria in recent years and must comply with responsible lending laws for all their products, have called for more regulatory supervision of the BNPL industry for years.

On Monday, the public advocacy group for the retail credit industry in the country, including the big four banks, credit reporting agencies and fintechs, backed the new regulation.

“Australian Retail Credit Association has long held the view that BNPL is credit, and we consider it appropriate that, with today’s announcement, it will now fall within the scope of the National Consumer Credit Protection Act,” said ARCA chief executive Elsa Markula.

“We consider regulatory measures to introduce these requirements will ensure BNPL remains accessible by those who can use it appropriately, but is not made available for those customers at higher risk of harm.”