The big changes coming to Afterpay

Buy now, pay later (BNPL) products could be regulated under the Credit Act before the end of the year following an announcement from the federal government that it will move to provide stronger safeguards for consumers who use services like Afterpay and Zip.

In a speech given to the Responsible Lending and Borrowing Summit on Monday, Financial Services Minister Stephen Jones noted that while BNPL has provided plenty of positives, it also comes with "new and growing dangers" for users that have largely been left unchecked.

"Buy now, pay later products have created many opportunities across the Australian economy. They have brought benefits to both consumers and businesses.

"Our plan maintains the benefits of BNPL that many Australians enjoy, and we must ensure that providers will have appropriate safeguards in place, and we must ensure that they operate honestly, efficiently, and fairly, in line with other regulated credit products."

As Stephanie Tonkin, chief executive of the Consumer Action Law Centre, explains, classifying buy now, pay later as a form of credit could help ensure that fewer users fall into financial trouble.

"At the moment buy now, pay later products fall into the margins of regulation - they're unregulated credit. What that means is that people can buy things without any checks as to whether they can afford to repay the money that they obtain on credit.

"For the people that we speak to every day, that can pose a real problem two, four or six weeks down the track if they can't afford to repay that money."

What is the government proposing?

Last November, Treasury released a paper outlining three potential courses of action being considered for the BNPL industry, one of which is a middle ground option titled 'Option 2: Limited BNPL regulation under the Credit Act, including licensing and scalable unsuitability test'.

This is the option the government has ultimately decided to run with, which - depending on further consultation and successful legislation - would bring BNPL products closer in line with existing credit products like credit cards, mortgages, payday loans and personal loans.

It would require BNPL providers to:

• Hold an Australian Credit Licence or be an authorised representative of one
• Comply with 'general licensee' obligations such as internal and external dispute resolution and hardship provisions
• Cap fees for charges relating to missed or late payments
• Abide by existing restrictions on unacceptable marketing

Jones did suggest that while BNPL is set to be treated as credit, there are likely to be differences in the requirements imposed on it compared to other credit products.

"The responsible lending regime will be central to our approach. However, our legislation ensures that the obligations on BNPL providers are scalable and technologically neutral. We will make sure they are the right fit for the risk level of their products."

Safeguarding the most vulnerable

In his speech, Jones referenced research released by Good Sheperd last year which found that roughly 73% of financial counsellors have had clients either report missing essential payments, cutting back on essentials, or going without essentials altogether in order to service their BNPL debt.

Furthermore, 84% of counsellors said that they had had clients attempt to manage their existing buy now, pay later debt by opening additional accounts.

"We want to see the right safeguards put in place to prevent our clients from drowning under a mountain of unmanageable debt or being coerced by their partner to take out multiple BNPL debts," says Dr Ros Russell, Good Shepherd's director of research, advocacy and system impact.

This matches the experiences of financial counsellors working on the National Debt Hotline who, Tonkin says, often deal with clients trying to juggle debts from multiple BNPL providers.

"Most people think about buy now, pay later being used for discretionary expenses, but increasingly what we're seeing on the National Debt Helpline is that people are using it to get by. They're using it to pay for their energy bills and to put food on the table, and it's plugging a hole in their income because there's simply not enough money to live on."

"And it's not just one product. People are presenting with five or six different buy now, pay later accounts, and when they start to fall behind, then there are additional fees and charges which start to add up and that's when we find that clients can fall into debt spirals which can be incredibly stressful and expensive."

Do the new BNPL regulations go far enough?

While advocacy groups have largely welcomed the move towards regulation and components like a cap on fees and greater customer access to hardship programs that are likely to come about, there are concerns that measures related to credit reporting and responsible lending won't go far enough.

"Although the exact details of what will be proposed remain to be seen, they're talking about a scalable approach with Option 2. So I don't think credit reporting - certainly not in its fullest form - is going to apply, although banks with buy now, pay later products will have to use it," says Tonkin.

"This option will involve some responsible lending - so checking the suitability of the loan - but there won't be verification of a borrowers' financial position. And the obligations will be scalable, so for a lower amount of money I imagine the obligation to check is far less than for a much bigger loan.

"We recognise that it can be a really convenient, frictionless product, but I think that has to be balanced against the harms that these products can cause the most vulnerable in our community. That's why we strongly advocated for Option 3, so that consumers aren't pulled into unaffordable debt."

The government says that it will continue to consult with both the buy now, pay later industry and consumer advocates in the coming months before drafting legislation and putting a bill to parliament before the end of the year.

If you're struggling with debt you can speak with a financial counsellor for free by calling the National Debt Helpline on 1800 007 007 (9:30am-4:30pm on weekdays). You can also live chat with a counsellor or find a counsellor in your local area by visiting the National Debt Helpline website.

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