While these reforms have been in the works for some time, the finalised regulations include some important differences from the original proposals. In particular, there are much wider exemptions from the affordability and suitability requirements, which will otherwise continue to apply for standard consumer credit products such as personal loans. These exemptions are intended to ensure that the regulations are tailored to the specific nature of BNPL arrangements, but risk creating an uneven regulatory landscape for the credit sector.
Summary of key changes
To summarise the key features of the amendments:
- CCCFA obligations: BNPL products have not previously been treated as “consumer credit contracts” for the purposes of the CCCFA (because they do not charge interest or credit fees, or take security). Under the regulations, BNPL products will be deemed to be consumer credit contracts, regardless of those features. As a result, BNPL providers will need to comply with various CCCFA obligations, including:
- ensuring that default fees are “reasonable” (i.e. that they are calculated based on the actual cost of defaults);
- certain “responsible lending” obligations including assisting borrowers to make informed decisions and treating them reasonably and ethically;
- providing relief to borrowers who face “unforeseen hardship”;
- joining an external dispute resolution scheme;
- disclosing information about financial mentoring services to borrowers in default;
- providing disclosure of key information about credit contracts and variations;
- obtaining certification from the Commerce Commission; and
- (for directors and senior managers of BNPL providers) complying with a duty to exercise “due diligence”, breach of which can result in personal liability.
- Modified obligations: Some other CCCFA obligations have been modified under the regulations to suit the BNPL context. In particular, BNPL providers:
- may disclose their own cancellation policy, rather than the borrower’s statutory right to cancel after a five-day “cooling off” period;
- will not need to inquire into the suitability of a BNPL contract for the consumer; and
- will not have to carry out any affordability assessments (provided they comply with certain credit reporting and disclosure requirements noted below). This is a significant exemption and is broader than the original proposal (which had instead proposed staggered affordability checks depending on the value of the BNPL contract).
- New obligations: In addition to the above, BNPL providers will be subject to the following new specific obligations (not applicable to other lenders):
- obtaining a mandatory comprehensive credit report when customers sign up or increase their credit limit (and contributing information to the credit reporting system);
- for each purchase, clearly disclosing default fees and the timing of instalments; and
- developing a “credit policy” setting out how the BNPL provider takes credit report information into account when making lending decisions. This must be available to the Commerce Commission on request.
- Implementation: BNPL providers will have a 12-month grace period, until 2 September 2024, before they need to comply with the CCCFA. Given the wide-ranging nature of the above obligations, we expect that BNPL providers will want to make an early start in getting underway with preparations for the new regime.
The regulations mark a pivotal juncture in the regulatory framework governing BNPL services in New Zealand, and the implications for the sector are significant. Even though the regulations include material exemptions for BNPL providers and do not impose the full weight of the CCCFA, the new regime nevertheless represents a significant new compliance burden. In particular, BNPL providers will need to develop new template disclosure documents, review their fee calculations, and prepare new policies and compliance procedures (including designing Credit Policies in a way which demonstrates suitable assessment of credit information). Directors and senior managers of BNPL providers should also take note of the personal liability they may face in relation to any breaches of the due diligence duty under the CCCFA. There is much to do within the 12-month grace period.
Bell Gully’s Consumer, Regulatory and Compliance (CRC) Team have been closely monitoring the BNPL reforms. If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.