Consumer groups have united to call for Federal Government regulation of buy now pay later (BNPL) services to protect consumers and put all credit providers on a level playing field.

Today the Australian Finance Industry Association released a self-regulatory code of conduct for BNPL providers. While it’s positive to see the industry introduce a code with contractually enforceable commitments, it is not a substitute for adequate regulation by Government under Australia’s credit laws.

BNPL is credit and should be regulated like other credit products.

Organisations at the coal face of consumer complaints and hardship - Financial Rights Legal Centre, Financial Counselling Australia, Consumer Action Legal Centre and CHOICE - are calling on the Government to follow the lead of the United Kingdom which just last month announced it would regulate the BNPL industry.

Consumer groups see the harm BNPL services cause first-hand. This includes an increasing number of people who end up in unaffordable debt through using them, poor industry hardship practices and excessive late fees.

While the promise of BNPL is that they do not charge interest, for some people the cost of late fees or account keeping fees can be just as expensive as a credit card.

BNPL providers also charge a fee to retailers of between 3% - 6%. These costs will be passed on to all consumers.

A 2020 report by the Australian Securities and Investment Commission (ASIC) found that one in five people had missed payments on their BNPL debts. Worryingly, one in five people had also gone without essential items, such as food, in order to make a payment.

It also found 55% of users had at least two BNPL contracts on the go at once.

BNPL services are not currently required to hold a credit licence1 and are not subject to consumer protections under the National Consumer Credit Protection Act 2009, despite the fact that some of these services loan large amounts up to $30,000.

This means that ASIC cannot take compliance and enforcement action for breach of lending standards by BNPL providers. The code only requires BNPL providers to assess if a borrower can make the first payment - there is no requirement to assess whether the subsequent payments are affordable.

1. Comm Bank offers a BNPL product through a partnership with international BNPL provider Klarna and therefore has a credit licence. Klarna is not part of this code.

Quotes attributable to Financial Rights Legal Centre Chief Executive Officer Karen Cox

These services are growing at a breathtaking rate, and ASIC’s research has shown that at least one in five consumers are missing payments. As this industry continues to grow, we will see increased debts and increased financial hardship.

Sadly, many people including Aboriginal and Torres Strait Islander people who are lured into BNPL are becoming embroiled in unsustainable, long-term debt. BNPL companies use a simple but seductive psychological trick to attract customers. Spreading out the cost of an item makes it feel less expensive, but that doesn’t mean you can afford it.

Right now, there is no obligation for BNPL providers to assess a person’s ability to repay debt or handle a consumer’s complaint fairly. We are glad to see the new Code requires membership in AFCA, but that is no replacement for proper regulation.

Quotes attributable to Financial Counselling Australia Chief Executive Officer Fiona Guthrie:

BNPL providers run a mile at the mention of the word “credit”, telling their customers the service is all about better budgeting. What they tell retailers however is much closer to the truth – that BNPL encourages people to spend more.

What BNPL providers are really doing is turning a loophole in the law into a gaping hole. It is worth remembering that BNPL is available from just a few hundred dollars to $30,000 and the code contemplates even higher amounts.

If it looks like a duck and quacks like a duck, it is a duck. We should ditch ideology and recognise that BNPL is credit and should be regulated like other credit. If we fail to act, more and more Australians will be harmed.

Take Susan*, a client of a financial counsellor who was spending 40% of her income on BNPL debts and didn’t have enough money left for day to day living expenses, including rent. Or John, a pensioner with early signs of dementia who was signed up to $14,000 of dodgy solar panels using BNPL when a salesman called at his home.

Quotes attributable to Consumer Action Law Centre Chief Executive Officer Gerard Brody:

The Financial Services Royal Commission Final Report identified the limits of self-regulation including inadequate standards, lack of compliance, weak monitoring and enforcement and no consequences for breaches. Too often self-regulation is just a fig leaf – while there are some standards, unfortunately this code does not require every BNPL loan to be suitable and affordable for the individual customer.

So-called innovation in the financial services sector is too often focused on exploiting regulatory loopholes. Innovation that benefits the community should be able to comply with consumer protection laws to enhance people’s financial wellbeing.

The unregulated BNPL market has grown substantially in the last few years, including substantial growth during 2020. There is no doubt that this unrestrained growth poses potential harms to consumers and it needs to be brought within regulation to both protect consumers and ensure it is sustainable.

Quotes attributable to CHOICE, Director of Campaigns and Communications, Erin Turner:

Self-regulation of the Buy Now, Pay Later sector will not be enough to fix the issues we’re seeing like high fees, inappropriate lending and pushy marketing of debt to Australians.

The Buy Now Pay Later sector is now selling debt for dental treatments, solar panels and other large purchases. It is credit in everything but name so the consumer protection laws for credit should apply in full, not a weak industry code.

The Code will see businesses that fail to comply with basic standards face “naming and shaming” rather than the penalties or legal action other lenders face for significant breaches of consumer credit protections. This sets an inappropriately low bar for a growing industry.