Several members of the mortgage broking industry have welcomed the news that the buy now, pay later sector is set to be regulated under the Credit Act.
The federal government has confirmed that it will be introducing new legislation into Parliament this year that will bring buy now, pay later products under credit law for the first time.
On Monday (22 May), the Assistant Treasurer and Financial Services Minister, Stephen Jones MP, said that the government has decided to adopt ‘Option 2’ of its recent options paper on regulating the buy now, pay later (BNPL) sector and will be introducing legislation that will require BNPL providers to:
- Hold Australian credit licences
- Comply with responsible lending obligations
- Meet statutory dispute resolution and hardship requirements
- Comply with statutory product disclosure and other information obligations
- Abide by existing restrictions on unacceptable marketing
- Meet a range of other minimum standards in relation to their conduct and in relation to their products
However, Option 2 only supports limited BNPL regulation and would apply modified responsible lending obligations (RLOs) under the Credit Act to determine unsuitability, combined with a strengthened industry code.
Exposure draft legislation on the move will be out for consultation “later this year”, with Mr Jones saying the government intends to introduce the final bill into Parliament by the end of the year, following consultation with industry and consumer groups.
Several members of industry had backed the proposal for BNPL to be regulated.
For example, in its response to the options paper last year, the Mortgage & Finance Association of Australia (MFAA) had backed Option 3 of the regulatory proposals; full regulation of BNPL under the Credit Act.
In its submission, the MFAA outlined the detrimental impact that BNPL debt can have on borrowing serviceability and the relative ease with which consumers could adopt the form of debt without the corresponding protections.
The MFAA said that members had observed that while it was easy to take out multiple BNPL agreements from different providers, there was a lack of requirements for BNPL providers to undertake creditworthiness assessments.
It therefore called for BNPL to be treated and regulated like all other forms of credit and for it to be included in comprehensive credit reporting in the same way as other consumer credit products.
Finally, it urged the government to prioritise financial literacy education to “dispel any misunderstanding of BNPL as anything other than a credit product”.
Speaking following the announcement that BNPL will be regulated under Option 2, MFAA chief executive Anja Pannek told The Adviser: “We are supportive of the regulation of BNPL products and believe it will improve outcomes for consumers.
“Consumers that enter multiple BNPL commitments often don’t realise the impact it can have on their financial position, including their borrowing capacity and serviceability.
“In this current economic environment, multiple BNPL commitments may mean the difference between being able to refinance easily or not. We’ve heard from many of our members that BNPL can act as a barrier or cause delays when their clients seek to purchase a home or to refinance.
“In our view the convenient access to credit needs to be considered against the harms that this type of credit can cause for consumers.
“In line with recommendations made in our submission for further regulation for this sector, we are pleased to see the government taking action to regulate BNPL under the Credit Act.
“As such we look forward to participating in Treasury’s consultation on draft legislation to give effect to the government’s policy position.”
The managing director of the Finance Brokers Association of Australia (FBAA), Peter White AM, commented: “‘We firmly support the Financial Services Minister, the Honourable Stephen Jones MP, on the outcomes of this regulatory approach.
“Last year I spoke on a panel session at the Consumer Credit Conference on the Gold Coast whereby this proposed regulation of the BNPL sector was discussed in depth and [I was] supportive of this coming under RLO & NCCP legislation and of [BNPL] being an ACL Holder.”
Mr White said that the move to bring BNPL providers under responsible lending obligations and licensing requirements would go some way to “ensure consumers are well protected when using this kind of facility and understand the impacts on their credit when doing so”.
Reducing the potential of hurting credit scores and serviceability
Brokers also applauded the move to bring BNPL under credit law. Queensland broker Cara Giovinazzo at Borro had previously warned that BNPL facilities were now appearing on borrowers’ credit reports and significantly reducing their credit scores.
Speaking to The Adviser on Monday (22 May), Ms Giovinazzo said the regulation of BNPL was “very welcomed”, adding: “Previously, people were able to apply for BNPL facilities without having to show that they could meet repayments without incurring financial difficulties. Because it wasn’t regulated, people could also apply for multiple BNPL facilities.
“We, unfortunately, could see people who have six to eight BNPL facilities come out on the [same] day they received their pay, eating up 70 per cent of their net income, putting them in financial stress,” the Borro broker told The Adviser.
“With [BNPL] having to also abide by statutory product disclosure and other information obligations, hopefully, there will be better education to clients around the impact that these applications and the ongoing conduct BNPL facilities have on their credit reports, giving them more information to make a better-informed decision about taking out the credit facility.
“Overall, I think this move is extremely positive and will facilitate more appropriate use of BNPL facilities. It will hopefully lessen the financial pressure they can cause when they’re not given to clients responsibly, to begin with.”
Noting the change, Peter Cole, chief executive of credit repair agency Clear Credit Solutions, said: “This is something that should’ve been done a long time ago, because although BNPL is, technically, not a form of credit, in practice it has all the characteristics of a loan.
“From my work in credit repair, I see a lot of consumers who, unfortunately, get in over their heads with BNPL. Also, most of these people don’t realise how BNPL can negatively affect their credit profile, making it harder to qualify for a home loan.”
Indeed, he flagged that credit reporting bureaus tend to regard BNPL use as potentially negative credit behaviour, reporting BNPL accounts on consumers’ credit files even though BNPL does not fall under the typical definition of ‘credit’.
He had previously suggested that the government should place BNPL under the National Consumer Credit Protection Act, or, at least, require BNPL companies to disclose to consumers that signing up for a BNPL service could damage their credit score.
“BNPL can be a useful product and has its place in our economy. But it needs to be properly regulated, so it gets appropriately marketed and delivered to consumers,” he told The Adviser following the government’s announcement on Monday (22 May).
“Hopefully, the government’s reform will mean that BNPL is only made available to consumers who can afford it and manage the risks.”
While the broking industry has been largely supportive of regulating BNPL, consumer advocacy and financial literacy groups have lamented that a full adoption of RLOs was not chosen (Option 3).
[Related: BNPL ‘crucifying cash flow’, broker warns]