New regulation must close Buy Now Pay Later ‘loopholes’

Joseph Brookes
Senior Reporter

Consumer groups are urging the Albanese government to adopt the toughest regulatory model on the table for the booming $16 billion Buy Now Pay Later sector, warning vulnerable Australians are foregoing essentials to meet mounting digital debts.

Assistant Treasurer Stephen Jones, who has pushed for greater scrutiny of the sector, on Monday launched a consultation for the new government’s proposed reforms that will capture the likes of Afterpay and Zip to protect around 7 million active users.

Three options have been canvassed, ranging from continued self-regulation of Buy Now Pay Later (BNPL) with a new “affordability test”, up to completely bringing the companies under the tougher rules for traditional credit providers.

A proposed middle ground would partly bring BNPL into the Credit Act, including licensing providers, and a sliding “unsuitability test” requiring providers to assess that “a BNPL credit is not unsuitable for a person”.

Assistant Treasurer Stephen Jones

According to an options paper released by Treasury, BNPL transactions reached $16 billion last year, an increase of approximately 37 per cent on the previous financial year.

While the sector has surged, it has avoided the increased scrutiny, compliance and reporting requirements of traditional credit products. BNPL grew quickly from 2015 with little regulation and has operated under a self-regulatory Industry Code since 2021.

Nine providers have signed up to the code, including Afterpay, Klarna, Latitude and Zip, but there are notable providers that haven’t, including PayPal, the Commonwealth Bank and some smaller BNPL providers.

The Industry Code is not law and is not enforceable, with the BNPL sector declining an option to have the corporate regulator take an enforcement role. No penalties are paid for non-compliance with the code.

Yet to be published ASIC data referenced by Treasury shows 19 per cent of BNPL consumers surveyed cut back or went without essentials to make BNPL repayments on time.

23 per cent of BNPL users experienced one financial stress indicators; and 19 per cent experienced two or more stress indicators – similar levels to car financing and personal loans. Nearly a third report not fully understanding all the fees and charges of their BNPL arrangements.

“Many of the people using BNPL are on low, and sometimes, precarious incomes,” Financial Counselling Australia chief executive Fiona Guthrie said.

“While the amounts people borrow may look small, the impact when the debt cannot be paid is not. People are having to forgo other essential items in order to pay their BNPL debts.

“BNPL is credit, plain and simple, so it needs to be regulated in the same way as other credit products to provide people with adequate safeguards.”

Assistant Treasurer Stephen Jones said the government wants to consult genuinely on reforms but flagged at least some changes.

“Things like credit checks, things like ensuring that these products are appropriately marketed at the right group of people — I think is a minimum standard that we can expect,” he told Sky News Monday.

“But we’re not serving up a cooked meal. We want to have a genuine consultation.”

Mr Jones would not set a timeframe before a government decision on the three approaches, but expects one to be made within a year.

Only the toughest option– treating BNPL like traditional credit – will adequately address harm, a coalition of consumer groups say.

“Financial distress is just so clear in calls to financial counsellors at Consumer Action,” the organisation’s chief executive Gerard Brody said.

“Often we’re hearing from people with multiple accounts, with repayments coming out of their accounts at different times, meaning that they lose financial control. BNPL and wage advance services don’t help people budget, they make it harder.”

Financial Counselling Australia earlier this year published an open letter signed by 120 organisations urging the Parliament to make BNPL products safer after fielding mounting cases of financial hardship involving BNPL.

The debate about whether BNPL is credit is over, according to Consumer Credit Legal Centre WA, principal solicitor Roberta Grealish.

“It is credit and must be regulated as other credit products are – without distinction,” she said.

“The new legislation must close the loopholes. We all know that unscrupulous providers thrive in the grey areas, so we can’t have any carve-outs. Payday lenders have to do responsible lending checks and they also lend small amounts. It is hard to argue that BNPL providers shouldn’t be held to the same standard.”

Do you know more? Contact James Riley via Email.

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