Providers of low cost credit contracts, including buy now pay later companies, will have to hold a credit licence and comply with modified responsible lending obligations under proposed changes to the National Consumer Credit Protection Act and the Credit Code.
The Albanese government yesterday released an exposure draft of Treasury Laws Amendment Bill 2024: Buy Now Pay Later and has called for submissions on the bill and accompanying draft regulations by April 9.
Low cost credit contracts are defined as continuing or non-continuing credit contracts that involve the provision of credit to consumers that is low cost, interest free and generally short term. BNPL is included in the bill as a type of LCCC.
Regulation of LCCCs may capture a wider range of credit activities that just BNPL. Other sub-classes may be prescribed in regulation. The bill includes anti-avoidance provisions to prevent business from structuring their business models to avoid regulation.
Responsible lending obligations will be modified for LCCCs so that they “scale better with the risks posed to consumers”.
LCCC providers will be required to assess whether entering into a credit contract or increasing a consumer’s credit limit would be unsuitable for the consumer. But where the credit limit of an initial LCCC is less than $2000, a presumption applies that the contract will not be unsuitable.
Other responsible lending obligations will still apply, including: making reasonable inquiries as to the requirements and objectives of the consumer; making reasonable inquiries as to their financial situation; and taking reasonable steps to verify their financial situation.
The extent of reasonable inquiries will be scaled, based on risk factors relating to product design, target market and harm mitigation arrangements.
The range of factors an LCCC provider will be expected to consider relating to the risks of unaffordable lending occurring will be less than requirements for currently regulated products.
This may not be the case in circumstances where the provider is targeting a high-risk market segment. Additional compliance requirements may be prescribed in regulation.
Providers will be required to document and review their RLO policies and procedures.
LCCC providers will be able to choose whether to comply with the modified responsible lending framework or all of the responsible lending requirements currently in the NCCP Act. This will allow firms offering both LCCCs and currently regulated consumer credit products to use common responsible lending processes if they wish.
Other modifications of the Credit Code include no requirement for LCCCs to provide a comparison rate and an easing of requirements in relation to the content and giving of credit guides.
Credit representatives of LCCC providers will not be required to meet requirements relating to sub-authorisation and associated reporting and credit guide provision. LCCC providers will be allowed to authorise representatives that are not members of AFCA unless the representative is collecting repayments.
The release of the bill follows consultation ion the regulation of the BNPL sector last. Most submissions were in favour of some form of regulation.
A Treasury consultation paper said: “New credit products such as BNPL can offer consumers a cheaper and easier-to-access for of credit” and that “advances in technology have enabled credit businesses to build a market for free or low-cost credit”.
However, Treasury accepted that a regulatory gap had contributed to potential harms and poor outcomes. These include unaffordable lending contributing to financial stress, poor complaints handling, excessive fees and charges, poor product disclosure, unsolicited selling and inadequate reverse charging provisions.
The paper also made clear that the government views BNPL as “credit in the ordinary sense of the word”, along with wage advance products, instalment payment plans and loans for rent payments and rental bonds.