Buy Now Pay Later Industry Code launched in Australia to protect customers against rising debts

Print

Email

The retail credit market has been evolving with accessibility to various credit options such as traditional loans, credit cards, in-store finance, leases and lately, BNPL. BNPL industry globally has largely been unregulated so far but with its growing popularity over the past few years, the need for regulations has emerged to protect consumers and provide greater transparency.

Competition in the BNPL market is intense and while BNPL is being promoted as a budgeting tool or an affordable payment mode, many customers are missing their payments and are incurring late fees. Also, customers are facing financial hardship and are at risk of paying inflated prices for products and services.

Although, BNPL is regulated under the Australian Securities and Investments Commission Act 2001 (ASIC Act) as credit, a new code of conduct has been developed for the sector to ensure consumer protection. The code follows recommendation of the 2019 Senate Economics Reference Committee report, and was endorsed by the Senate FinTech Inquiry in 2020.

In March 2021, Australian Finance Industry Association (AFIA) developed a code of conduct for BNPL market to protect consumers and go beyond current regulatory obligations. The code requires its members to conduct upfront and ongoing assessments on customers before offering a product or service.

The code was developed to encourage a customer-centric approach while designing, publicizing and distribution of BNPL offerings. It also aims to promote high industry standards and develop best practices, as well as ensure industry and legal requirements compliance.

For transactions below $2,000, the code does not require any credit check of customers, but customer’s identity needs to be verified by the BNPL firm. Also, the customer needs to pay first installment at the time of the purchase of product or service in such a case. For transaction value ranging $2,000-$15,000, BNPL firms are required to evaluate bank statement of the customer or any other external data source. For transactions ranging $15,000-$30,000, BNPL companies are expected to evaluate two external data sources to check customer credit history.

Further to protect customers, all Code Compliant BNPL providers have caps on fees. For instance, Afterpay’s late fees can never exceed 25% of the original value of the customer’s order, and never over $68.

The code also requires BNPL consumers to be adults, and it excludes BNPL products used for gambling or buying guns. Companies such as Afterpay, Humm Group, Brighte, Klarna, Openpay, Latitude, Payright, and Zip, are code-compliant members.

The Code is apace with existing regulatory oversight by the Australian Securities and Investments Commission (ASIC). The ASIC is responsible for product intervention enabling it to interfere where there is a risk for consumers and the forthcoming design and distribution obligations, which intend to guarantee that all providers offer products that are suitable. These outcomes-based regulatory tools, along with minimum standards in the Code, will ensure the BNPL industry in Australia is held liable for offering positive consumer outcomes.