What is Buy Now Pay Later?

Buy Now Pay Later (‘BNPL’) is a system of advancing funds to consumers for the purchase of goods and services, with repayments made in regular instalments. The consumer can take possession of the goods or services immediately.

Currently, BNPL advances are unregulated by consumer credit law, as no interest is charged on the advances. 

The National Consumer Credit Protection Act 2009 (‘the Credit Act’) does not apply, and providers of BNPL finance are not required to meet the compliance requirements of that legislation.

Finance providers obtain a return on BNPL transactions via the collection of merchant fees (paid by vendors to the finance provider at the time of sale) and by recovery of fixed late fees by consumers if they default on their repayment schedule.

How does it work in practice?

A consumer wishing to purchase a product or service may engage with a merchant for the supply of that product or service.

Due to an agreement between the merchant, the financier and the consumer, the financier will immediately pay the merchant the value of the goods or service, less an agreed fee.

The financier then enters an agreement with the consumer for repayment of the full amount of the purchase provided, deferred over a number of payments at set times. 

No interest is charged to the consumer, although various fees may be charged to the consumer.  There are usually penalties for late payment of the instalments. These are fixed and do not calculate on the amount of the late repayment.

What licensing is required?

At present, no licensing is required.  An Australian Credit Licence is not required because the Credit Act does not apply. 

Is there Self-Regulation?

Yes.

The Australian Financial Industry Association (‘AFIA’) - a group of financiers, has established both a voluntary Code of Practice for financiers and a system for accreditation.  If a financier seeks accreditation under the Code of Practice, it is bound by the terms of the Code. 

Once accredited, the financier is entitled to represent in its marketing to consumers and merchants that it is code-compliant.

What does the Code of Practice require?

The Code has been developed by AFIA to promote a customer-centric approach to design, marketing, and the distribution of BNPL products and services.  It is also intended to support compliance with legal and industry obligations. 

The Code is a contract entered into by code-compliant members and is enforceable in the Australian Financial Complaints Authority against them by consumers.  It operates alongside additional laws and regulations. 

There are 8 key commitments made by code-compliant members to customers.  These include:

1. Members will properly train their staff, make all services inclusive and accessible and take care if a consumer has a vulnerability. 
2. Members will adopt best industry practice and ensure that appropriate safeguards are in place to protect consumers, only provide BNPL services to persons over 18 and deal with complaints within 10 days.
3. Members agree to be fair, honest and ethical in their dealings with consumers.
4. Members agree to keep consumers informed about their products.
5. Members agree on an upfront basis to assess the reasonableness and appropriateness of their products for consumers.  Guidelines will be established for the needs of consumers, depending on the amount to be borrowed and whether there is an upfront or continuing transaction. 
6. Members will ensure that an ‘ongoing suitability of product’ process applies.
7. Complaints are regulated and can be resolved by AFCA in the event of consumer disagreements. 
8. Members will ensure financial hardship assistance is available.

How do financiers become code-compliant members?

AFIA has published by-laws for the BNPL scheme, setting out the requirements for accreditation. 

There are six key compliance obligations to be satisfied:

1. The directors of the financier must not have been made bankrupt or otherwise made an arrangement with creditors in the last five years.
2. The financier must not have a director who has in the last five years been found guilty of a breach of a rule by a relevant regulatory body which might bring disrepute to AFIA.
3. The financier must not have a controlling shareholder who has been found guilty of such an offence, or otherwise might bring AFIA into disrepute.
4. The financier must have appropriate risk management arrangements in place, as well as other arrangements for compensating BNPL customer in respect of any actionable claims for loss or damage.
5. The financier must comply with any other reasonable requests by AFIA in relation to complying with the Code.
6. The financier must be able to demonstrate to the AFIA that it has systems and processes to allow it to comply with the Code, including:
   1. it must submit copies of its proposed BNPL pro forma contracts, with legal advice confirming that it complies;
   2. it must provide confirmation about its processes for a system of suitability assessment for applications;
   3. it must provide details about its general dispute resolution processes and confirm it is a member of AFCA;
   4. it must provide details of its hardship assistance policies and programs;
   5. it must set out details of its merchant guidelines;
   6. it must certify it is not aware of any material issue that could result in non-compliance;
   7. it must comply with relevant legislation including privacy laws, anti-money laundering rules, anti-spam laws and consumer protection laws; and
   8. any other information requested by AFIA.

The financier must also be a member of the AFIA. 

Changes in the air

Several reviews of BNPL arrangements have been undertaken by ASIC, including in November 2018 and November 2020.  In addition, the possible further regulation of BNPL has been discussed in a parliamentary joint committee report concerning mobile payment and digital wallet financial services, released in October 2021. 

As a result of that report, the Treasurer has indicated the government is considering possible regulation in this area in the next 12 months. 

See Holman Webb’s 1 February article: Transformation of Australia's Digital Payment System

It remains unclear what will happen. If self-regulation is considered inadequate to protect consumers, the most likely course seems to be that BNPL will become regulated as a consumer credit arrangement, under the Credit Act, under the supervision of ASIC.

If you have a query relating to any of the information in this update, or you would like to speak with somebody in Holman Webb’s Banking and Finance Group with respect to a matter of your own, please don’t hesitate to get in touch with Partner Nick Maley today.