Fri. Sep 22nd, 2023

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Financial Regulator

Australia Set to Launch ‘Buy Now Pay Later’ Code of Conduct

4 min read

The code makes AFCA membership compulsory and incorporates ASIC’s new design and distribution obligations regime.

The AFIA (Australian Finance Industry Association) is formally launching a code of conduct for the BNPL (buy now pay later) sector, which takes effect on Monday (1 March).

The AFIA first proposed the release of a code of conduct last November, to codify a range of existing practices to ensure a minimum standard across the industry, while pushing all BNPL providers to improve monitoring of existing customers.

Dr Michael Schaper, a former deputy chairman of the ACCC (Australian Competition and Consumer Commission), was appointed in November to chair the BNPL Code Compliance Committee, which governs the code. He is joined by industry representative Craig Pudig and consumer advocate representative Jillian Brewer.

The code of conduct, which the AFIA says is a “world-first” for the BNPL sector, has been prepared in consultation with ASIC (Australian Securities and Investments Commission) and drafted by BNPL providers under AFIA’s guidance.

The providers involved in drafting the code represent over 95 percent of the BNPL market, including Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co.

The BNPL Code Compliance Committee is going through an accreditation process with each of the eight signatories to ensure they can meet the standards contained in the code.

“We cannot comment in detail on what each one does and the changes they have made as part of the accreditation process,” said Diane Tate, Chief Executive of the AFIA.

“But we do understand that, when looking at the initial assessment, the ongoing monitoring, complaint handling, hardship and collections, they have all had to make changes to ensure they will be compliant.”

The code makes AFCA (Australian Financial Complaints Authority) membership compulsory and incorporates ASIC’s new design and distribution obligations regime, which takes effect on 5 October.

The code is a direct response to ASIC’s review of the BNPL sector, which found 21 percent of BNPL customers had missed a payment with some of them skipping meals to pay their bills.

In addition, an inquiry conducted by the Senate Economics Reference Committee recommended the development of a BNPL Code of Practice to improve safeguards for customers.

The Senate FinTech and RegTech Inquiry’s September 2020 interim report also strongly supported the BNPL industry’s efforts to self-regulate and raise standards. It called out the code as a clear example of industry working constructively together to respond to stakeholder concerns.

The code, having already undergone public consultation, will also be examined by the FCA (Financial Conduct Authority), which is seeking to tighten regulation of the BNPL sector in the UK.

Tate said the code “threads the needle to sew together strong consumer protections, customer choice and industry innovation”.

Consumer groups had previously pushed the industry to toughen credit checking commitments by providers offering large facilities.

Under the code, interest-free loans above AUD 2000 will  require more checking, using customer information or credit bureaus as data sources. These checks will be more stringent when loans are sought for purchases above AUD 15,000.

Under the code, operators must ensure customers can make their first payment upfront, and BNPL providers will be prohibited from offering services to minors and allowing additional purchases when a customer is already late on any repayment.

Under the code, BNPL providers also have to commit to setting up processes for customer complaints and to not initiate bankruptcy proceedings against customers.

ASIC commissioner Sean Hughes recently told an AFIA risk event that the design and distribution obligations and code of conduct should help address consumer harms, but that further consideration is needed on how it can address concerns around late fees.

Critics of the code have reportedly said that the self-regulated code does not go far enough. For instance, it does not require existing providers to do anything more than they already do when deciding whether to take on a new customer.

Consumer groups – including Financial Rights Legal Centre, Financial Counselling Australia, Consumer Action Law Centre and CHOICE – have said it was “positive” to see the industry code include enforceable commitments, however 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,“ they said in a joint release.

The consumer groups said they see the harm BNPL services cause first-hand, including “an increasing number of people who end up in unaffordable debt through using them, poor industry hardship practices and excessive late fees”.

“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,” said Karen Cox, CEO of Financial Rights Legal Centre.

Meanwhile, Erin Turner, director of campaigns and communications at CHOICE, said self-regulation by the BNPL sector “won’t be enough to fix the issues like high fees, inappropriate lending and pushy marketing of debt to Australians”.

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