Treasury releases 'Buy Now, Pay Later' Regulatory Reforms for consultation 

What you need to know

On 12 March 2024, the Treasury released for consultation a package of long awaited reforms introducing a new framework to regulate Low cost credit contracts (LCCCs), which include Buy Now, Pay Later (BNPL). The package comprises a proposed amending Bill, Treasury Laws Amendment Bill 2024: Buy Now, Pay Later (the Bill) which amends the National Consumer Credit Protection Act 2009 (Cth) (Credit Act) and proposed Regulations, and the explanatory memorandum and statement.

The new regulatory framework is designed to:

• ensure that LCCCs are a form of credit regulated under the Credit Act and are included under the Credit Code;
• require providers of LCCCs to hold and maintain an Australian credit licence;
• modify the existing Responsible Lending Obligations (RLO) framework by introducing a new opt-in RLO framework; and
• establish anti-avoidance protections to prevent LCCC providers from structuring their business models to avoid regulation.

Submissions on the reform package are to be made by 9 April 2024.

Objectives of the Reforms

The objective of the Bill is to regulate LCCCs by bringing them within the scope of the Credit Act and the Credit Code.

The proposed reforms incorporate the activities of LCCC providers within the Credit Act and will:

• make LCCC providers subject to the licencing requirements in Chapter 2 of the Credit Act. That means:

LCCC providers who do not hold an Australian credit licence will need to obtain one;

LCCC providers who have an existing Australian credit licence will need to apply for a variation of authority to allow them to provide LCCCs;

• introduce a new opt-in modified responsible lending regime, intended to scale with risks posed to consumers;
• prohibit credit providers from engaging in behaviour that could result in the restructuring of their credit activities such that they fall outside the regulatory framework for LCCCs under the Credit Act;
• require LCCs and LCCC providers to comply with the Credit Code (although the requirements relating to interest and interest rates and charges will only apply to LCCC providers that charge interest on the provision of credit); and
• exclude the LCCCs from the definition of 'short term credit contract', ' small amount credit contract' and 'medium amount credit contract'.

They also expand the default notice requirements in section 87 of the Credit Code beyond direct debt to ensure that they cover a more extensive range of payment types (including creditor initiated charges on a credit card).

While the regulatory framework has been set up to apply to BNPL contracts and arrangements, the future intention is that the framework will be able to capture other classes of LCCC (such as wage advances).

Not all requirements of the Credit Act will apply, including :

• LCCC providers will not be required to comply with the Reference Checking and Information Sharing Protocol or the comparison rate provisions of the Credit Code; and
• Credit Representatives of LCCC providers will not have to meet requirements relating to sub-authorisation and associate reporting, credit guide provision and AFCA membership (unless they are engaging in debt collection).

There are proposed limits on fees and charges for LCCCs. In particular:

• fees and charges (other than default fees or charges) that are, or may be, payable under the contract in a 12 month period must not exceed $200 for the 12 month period commencing when the debtor enters into the contract and $125 in any subsequent 12 month period during which the contract is in effect ; and
• default fees or charges that are, or may be, payable under the contract in a month of the contract must not exceed $10.

However, if when the contract was entered into the consumer has another LCCC with that provider or its associate or had one in the last 12 months, the maximum amount that can be charged in both cases is zero.

This reflects the current limitation on fees applying under Section 65(5) of the Credit Code, with the addition of a maximum limit on default fees and charges.

Responsible lending - modified RLO framework

LCCC providers will be able to elect to:

1. comply with the current 'full' version of the RLOs; or
2. comply with the modified RLO framework for LCCCs, which allows for the scalability of requirements based on certain risk factors.

LCCC providers must make their election in writing. Different elections can be made for different LCCC products.

Assessing suitability under the Bill

The core obligations to make reasonable enquires as to the requirements, objectives and financial situation of the consumer, and to take reasonable steps to verify their financial situation will still apply.

However, the modified RLO framework allows the LCCC provider to take into account various risk factors (termed relevant matters) in determining what is reasonable. These risk factors are discussed below:

• the nature of the product;
• the target market for the product (including whether it contains financially vulnerable persons);
• whether the consumer belongs to a class of persons whose members are likely to be financially vulnerable;
• whether the licensee has in place any policies that reduce the risk of the licensee providing credit to a consumer on terms that are not affordable for the consumer;
• whether the licensee has in place any policies that mitigate the harm that may be caused to a consumer if the licensee provides credit to the consumer on terms that are not affordable for the consumer;
• any other matters prescribed by the Regulations.

The draft Explanatory Memorandum provides that:

1   relevant matters relating to product design that may influence what is required may include:

the amount of credit made available; and

other terms of the contract including the amount of any default fees (and circumstances in which are payable) and the time provided for making repayments.

2   Other relevant factors include whether the target market includes certain classes of financially vulnerable consumers, as well as data (such as bad debt
      rates, arrears, hardship arrangements and complaints on unaffordability) in relation to vulnerable cohorts.

Consumer information to be obtained by LCCC licensee

The Regulations provide that an LCCC licensee must seek to obtain:

1. information about: the income of the consumer, the consumer's expenditure; and details of any other LCCCs, small amount credit contracts, or consumer leases that the customer has entered into. It is open to the LCCC provider to determine how and where it obtains this information; and
2. the following information from a credit reporting body about the financial situation of a consumer (described in the Explanatory Statement as aligning with a negative credit check):

Identification information (as defined in the Privacy Act 1988 (Cth) (Privacy Act).

Details of any information requests (as defined within Privacy Act) that have been made in relation to the individual.

Payment information (within the meaning of the Privacy Act) about the individual.

Personal insolvency information (within the meaning of the Privacy Act) about the individual.

Information about the individual that is information covered by paragraph 6N(k) of the Privacy Act (which covers certain kinds of publicly available information).

New arrangement information (within the meaning of the Privacy Act) about the individual.

Court proceedings information (within the meaning of the Privacy Act) about the individual.

In addition, if the value of the LCCC is $2000 or greater, the LCCC licensee must also obtain from the credit reporting body information about consumer credit (within the meaning of the Privacy Act).

Prepare and review unsuitability assessment policy

Under the modified option, LCCC licensees must have and review a written policy (unsuitability assessment policy) that sets out how they will assess whether the contract is unsuitable. The Regulations require an LCCC licensee to prepare and conduct regular reviews of its unsuitability assessment policy (s28HAF(1)). LCCC licensees are also required to make changes to their unsuitability assessment policy if they have identified that such changes are necessary (s28HAF(5)).

What you need to do

The package has been released for consultation, so there is a window of opportunity to have input on the reforms. To make submissions, you'll need to review the package carefully and make submissions by 9 April 2024.

Authors: Narelle Smythe, Partner; and Ankita Rao, Lawyer.