Need to know
- The Australian Government is currently considering options for regulating the buy now, pay later industry
- Some jurisdictions such as the United Kingdom have already announced how they plan to regulate the sector
- Elsewhere such as in the United States and Europe, reform has been slower
As the Australian Government continues to mull over the best way to regulate the buy now, pay later (BNPL) industry, other jurisdictions are trying different approaches to reducing consumer harm.
In November last year, the Australian Treasury invited views from stakeholders on three different options for regulating the BNPL credit market.
The weakest option, from a consumer-protection standpoint, was to bolster the voluntary BNPL code of conduct with an industry-designed affordability test. The strongest option was to bring BNPL fully under the Credit Act and treat it like other forms of credit. In the middle was the option of bringing BNPL under the Credit Act, but with scalable suitability tests for users, depending on the size of the loan.
The United Kingdom: Bringing BNPL into line with other forms of credit
Australia has been referred to as one of the birthplaces of BNPL, due to the industry's early emergence and rapid growth here. But policymakers in Canberra aren't the first to have faced the difficult question of how to regulate these products.
In February 2021, Chris Woolard, formerly the interim chief executive of the United Kingdom's Financial Conduct Authority (FCA) published a review of BNPL products commissioned by the FCA that explored how they might be regulated in the market.
Woolard says the scale of BNPL use in the UK, which has grown rapidly in the last two years, made regulation inevitable.
"When you have a product that is that widespread, the absence of regulation is always going to be a problem ," he tells CHOICE.
It will bring BNPL into line with most other types of credit, so what you will have is affordability checks, you'll have access to the financial ombudsman for complaints
Former interim chief executive of the FCA, Chris Woolard
Woolard says the UK's laws needed to be changed in order to bring BNPL into line with other forms of credit. Despite the slow pace of reform, he expects the legislative amendment, already agreed upon by the regulator, to pass later this year.
"It will bring BNPL into line with most other types of credit, so what you will have is affordability checks, you'll have access to the financial ombudsman for complaints. All the rules and regulations that ensure the contracts are fair," he says.
"We have gotten to a place in the UK where what is being proposed is proportionate to the market we are talking about. It has all the core protections you need in any UK credit reporting regime. It is possible to reach that place between what consumers need in terms of protections and what the industry needs to operate."
The United States: Lagging behind
In the United States, Benedict Guttman-Kenney, a researcher on consumer behavior and household debt from the University of Chicago, says BNPL was outside the purview of the Federal Reserve, but recent moves to bring it under their jurisdiction may indicate some form of regulation is coming.
"The Consumer Finance Protection Bureau (CFPB) signaled in their report last year that they were worried about the fact that BNPL isn't reported to credit bureaus, " Guttman-Kenny says.
"The Federal Government and regulators haven't made any new specific rules for BNPL or anything … They are definitely way behind what the UK is doing," he says.
Some individual states in the US do have forms of regulation.
These products are similar to credit cards and should be regulated as such
Consumer Reports programs director of advocacy, Chuck Bell
Chuck Bell, the programs director of advocacy for the US consumer rights organisation Consumer Reports, says the industry's position against regulation has held some sway in the US for many years. He says regulation hasn't been a priority for a busy Treasury Department, but he hopes that renewed attention from the CFPB and the Federal Reserve will lead to more regulation later this year.
"The CFPB report from last September was pretty clear that, if it walks like a duck and quacks like a duck, it's a duck. These products are similar to credit cards and should be regulated as such," he says.
Europe and New Zealand: Still evolving
Some European countries have stricter regulation around BNPL products than others.
Although regulations are the same in principle across the European Union, each country has the option to introduce differing provisions within their national laws, leading to potential variations in implementation across different member states. Mateusz Ordyk, partner at Deloitte Legal Poland says this has led some countries, such as Poland, to strictly regulate BNPL products, while other countries have taken a less stringent approach.
"Generally there is a consumer credit directive, it creates some frameworks, but each country has some flexibility to adjust to the local environment, it may be different from country to country. European legislators have recognised that this approach may not be most efficient and they are working on a revision of that directive to further tighten the rules of consumer lending" he says.
Meanwhile, across the Tasman in New Zealand, draft legislation to regulate the industry under its credit act has been released that includes a $600 regulatory threshold for BNPL purchases.
Our goal is not to kill off buy now, pay later, it's to make it a safer product for consumers
Elizabeth Kim, Consumer NZ legal advisor
It means transactions under $600 won't need to go through the same level of affordability checks as larger purchases. Elizabeth Kim, legal advisor at Consumer NZ, says the organisation considers the threshold far too high to protect vulnerable consumers.
"This is not an easy conversation, we have industry saying if you impose these heavy compliance requirements as a mandatory requirement, then this will kill off buy now, pay later in the market because it won't be sustainable," Kim says.
"Our goal is not to kill off buy now, pay later, it's to make it a safer product for consumers," she adds.
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