Buy-now, pay-later (BNPL) enables consumers to defer payments for goods and services on an interest-free basis, but fees are charged for late payments. The current consultation responds to concerns that BNPL products can result in financial hardship for consumers.
Three options for regulation have been proposed in a discussion paper released by the Ministry of Business, Innovation and Employment (MBIE). Submissions on these options is open until 5pm on Thursday 16 December 2021.
Option 1: Retaining the status quo
Under this option, BNPL products would continue to fall outside the scope of consumer protections under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) that apply to other consumer credit providers.
Unlike credit cards or personal loans, BNPL providers are not required to comply with the CCCFA because BNPL contracts do not include any of the following required elements of a “consumer credit contract”: interest charges, “credit fees”, or the grant of a security interest. Importantly, the definition of credit fees excludes “default fees” such as late payment fees (so BNPL providers are able to charge late payment fees without being caught by the CCCFA).
Under this option, the regulatory framework would remain unchanged: BNPL schemes would remain outside the scope of the CCCFA. The discussion paper notes that this option would provide flexibility for the BNPL sector to continue innovating, but also observes that these regulatory settings provide “no ability to enforce improved standards for consumers or to hold providers accountable for outcomes.”
Option 2: Incentivising BNPL providers to develop an industry code
The second option is that the Government may incentivise the BNPL sector to establish, maintain and comply with an industry code that addresses identified triggers of financial hardship. Industry standards would be mutually agreed by BNPL providers and the Government.
If this option were adopted, ongoing independent reviews would be conducted to assess how BNPL providers are addressing financial hardship triggers, and to monitor compliance with the code. This option would enable greater regulatory oversight of the BNPL sector (although, as with Option 1, BNPL schemes would remain outside the scope of the CCCFA).
This option is similar to the approach followed in Australia, where the Australian Finance Industry Association (AFIA) introduced a voluntary industry code of practice for the BNPL sector on 1 March 2021. The Australian code of practice was developed by the BNPL sector and the Australian government, and its progress will be monitored by an independent committee appointed by the AFIA.
Option 3: Extending the CCCFA to capture BNPL products
The third option is the most significant in terms of regulatory intervention, and would involve extending the CCCFA to capture BNPL products. This would rely on new regulation-making powers, introduced in December 2019, which enable any arrangements to be deemed “consumer credit contracts” (regardless of whether they technically meet the definition of that term).
These new powers were introduced in large part as a reaction to BNPL and similar products. Prior to their introduction, the Minister of Commerce and Consumer Affairs, Kris Faafoi, noted of BNPL products: “Consumer advocates and some lenders have raised concerns about these products, although there is very limited evidence of harm from them to date. We have not considered bringing them within scope of the CCCFA at this time, however this could be reconsidered if variants of these products emerged that were shown to cause consumer harm.”
If this option was adopted, the extensive requirements of the CCCFA would apply to BNPL products. These include, for example:
- Lender responsibility principles (such as conducting suitability and affordability assessments before entering into the contract).
- Protections against unreasonable fees.
- Unforeseen hardship protections.
- Various disclosure requirements to help consumers understand the full implications of entering into or varying a BNPL transaction.
In short, extending the CCCFA to BNPL products would introduce significant compliance obligations for BNPL providers. MBIE notes in the discussion paper that the current proposals to introduce a consumer data right (discussed in our article here) could mitigate that burden, by facilitating access to consumers’ financial data for the purposes of affordability decisions. Even so, this option would represent a step change in the regulatory landscape for BNPL providers.
Submissions for this consultation will close at 5pm on Thursday 16 December 2021. A survey has also been issued for consumers to share their experiences with using BNPL products.
If you would like further details on the proposed changes, or assistance in making submissions, please get in touch with the authors or your usual Bell Gully adviser.