On 28 November 2018, ASIC released a report reviewing buy now pay later (BNPL) arrangements.
What are BNPL arrangements?
BNPL arrangements allow consumers to purchase goods and services immediately, but pay for that purchase over a period of time. The BNPL provider will generally pay the merchant for the consumer's purchase upfront, with the consumer repaying the BNPL provider over the scheduled repayment period.
ASIC reports that the number of consumers using BNPL arrangements has grown over recent years to two million consumers (as at June 2018), with transaction volumes also expanding rapidly to $346 million each month (as at June 2018).
As part of its "mandate to promote confident and informed consumers in credit and financial services", ASIC undertook a review of the BNPL industry to develop a better understanding of the industry and identify potential risks for consumers. ASIC reports that consumers are now benefitting from more choices in how they pay, and that using BNPL arrangements is often more convenient than other payment alternatives. The report also provides the industry with an insight into ASIC's perspective on the regulation of this fast-evolving form of payment.
ASIC released eight findings in relation to BNPL arrangements, of which we highlight several below. Importantly, these findings highlighted the two types of BNPL providers (one-off purchases and "accounts" on which multiple purchases are contemplated) and the basis for why ASIC considered that each type of provider sits outside of standard regulated credit. The report also put the spotlight on what appear to be ASIC's key concerns with BNPL products.
Arrangements that result in the price of goods being inflated: ASIC confirmed that each BNPL arrangement reviewed contractually prevents merchants from charging consumers higher prices for using BNPL, but there was "anecdotal evidence" that some merchants may have been charging more under BNPL arrangements where pricing was negotiable (e.g. for cash payments) or in particular sectors (e.g. for solar panels). Such charges could threaten the regulatory basis for BNPL products. BNPL providers should monitor their merchants to avoid this practice, and not just rely on contractual arrangements.
Over-commitment risk for consumers: ASIC continues to flag concerns that easy access to payment arrangements can contribute to financial over-commitment by vulnerable consumers. However, ASIC also confirms that the responsible lending obligations do not apply to BNPL arrangements. ASIC acknowledged that most BNPL providers took some steps towards consumer protection and against inappropriate use (detailed below). These steps provide a useful guide to what ASIC considers relevant, even where regulation under the consumer credit regime does not apply. Interestingly, the report also highlights the dangers in collecting too much information, where that information is subsequently ignored or not considered when approving consumer applications.
Steps a BNPL provider can take: ASIC notes that the steps set out below may not be sufficient to protect consumers, but they indicate its approach to regulation of BNPL products. And while they are not equivalent to complying with the consumer credit regime, ASIC notes that as a 'credit facility' under the ASIC Act, these arrangements are already subject to some degree of regulation, and implementing these ASIC recommendations can demonstrate to ASIC an appropriate concern to ensure consumers are properly protected. The steps include:
- sending updates about upcoming repayments;
- presenting prospective repayment terms in a straightforward, plain English way;
- facilitating online accounts and mobile applications so consumers can review repayment deadlines;
- having detailed written policies for responding to consumer complaints and requests for hardship assistance;
- ensuring consumers adequately understand the terms of the arrangement;
- ensuring the complaints process is visible and accessible to consumers; and
- ensuring consumers understand that they can request financial hardship assistance.
ASIC also indicates its approval of BNPL providers requiring merchants to comply with the provider's guidance on how merchants are to advertise and distribute the BNPL product. This is consistent with ASIC's submission on the product suitability provisions and their application to all products regulated under the Australian Securities and Investments Commission Act 2001 (Cth).
The ASIC report notes briefly that is has not formed a view on whether BNPL products should be regulated under the consumer credit regime.
Lastly, the report also provides a reminder that these consumer arrangements under standard form are contracts subject to the unfair contracts regime, and that the following terms are potentially unfair:
- a broad unilateral discretion to vary the contract;
- a broad range of circumstances in which a consumer will be regarded to "default" on their arrangement;
- limited and excluded liability of the BNPL provider in relation to goods or services supplied by the merchant (which seems to apply a "linked credit provider" approach, which may require some clarification on ASIC's part);
- holding the consumer liable for unauthorised transactions; and
- very broad indemnities against losses, costs, liabilities and expenses.
As this area evolves, so too does the regulation and characterisation of BNPL products. While this report provides some confirmation of the basis on which BNPL providers currently operate, it is clear that the rule book for operation is not yet fully set. ASIC's deliberation on these issues and the Government's legislative response mean that providers should continue to "watch this space."