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Lawmakers in Australia have enacted new legislation that will regulate buy now, pay later (BNPL) products as credit, with providers required to obtain an Australian credit licence.

On Friday (November 29), lawmakers in both houses of parliament passed the .

The bill extends the application of the National Consumer Credit Protection Act 2009 (the Credit Act) to BNPL products, and establishes “low-cost credit contracts” (LCCCs) as a new category of regulated credit.

LCCCs are to be defined as continuing or non-continuing contracts for the provision of credit to consumers on a low-cost basis. As  by the Treasury, this will mean that most BNPL contracts will be regulated as LCCCs.

The Treasury said the main aim of regulating LCCCs as credit is to provide “appropriate and proportionate” protections to consumers, while maintaining the benefits of speed and accessibility offered by BNPL.

“These new laws strike the right balance between giving Australians access to innovative products and ensuring they are protected from potential harm,”  Treasurer Jim Chalmers.

“The underlying obligation for BNPL services to not provide credit unless it’s affordable has not changed.”

CHOICE, Australia’s largest consumer advocacy group, welcomed the new legislation, calling it a long overdue intervention in the previously unregulated sector.

“We congratulate the government on passing these very important laws that will help make BNPL loans safer and fairer," said Ashley de Silva, CEO of CHOICE.

"The new laws will greatly reduce the risk of people being signed up to unaffordable BNPL loans that leave them worse off.

“It also ensures customers can take disputes with BNPL providers to the financial complaints body and have their complaint fairly heard." 

New responsible lending obligations

Several licensing requirements will be modified for LCCCs, to ensure that regulation is proportionate to the “relatively low” risk posed by this type of credit, the Treasury said.

For example, the bill amends the Credit Act to establish a new modified set of responsible lending obligations (RLO) for LCCCs.

The modified RLOs require each LCCC provider to develop and review a written policy on assessing whether an LCCC would be unsuitable for the consumer.

Under these provisions, BNPL providers are required to make “reasonable inquiries” as to the “requirements and objectives” of the consumer and their financial situation.

Providers should also take “reasonable steps” to verify the consumer’s financial situation. 

For larger LCCCs (those over A$2,000), this assessment must be completed prior to entering an agreement.

For smaller LCCCs (those under A$2,000), the contract is assumed to be suitable, and the provider can enter into the agreement prior to conducting a suitability assessment.

However, the provider must carry out a suitability assessment within 90 days of entering into an agreement.

The same rules also apply to credit increases — if the proposed increase would bring the credit limit to less than A$2,000, the contract is assumed to be suitable based on the prior assessment.

But if the proposed increase takes the credit limit beyond A$2,000, a suitability assessment must be conducted before the contract is agreed to, and is valid for up to two years.

It should be noted that compliance with these modified RLOs is “optional”. However, the other option is to comply with the existing RLOs outlined in the Credit Act.

An end to the BNPL loophole

Previously, BNPL had remained unregulated in Australia due to exemptions in the Credit Act for low-cost and short-term credit contracts.

As noted by the Treasury, the growth of the BNPL market was not contemplated by lawmakers when those exemptions were designed.

“Innovation in technology and business models has resulted in new credit products operating under these exemptions, with far greater accessibility, convenience, immediacy and volume than originally envisaged,” the Treasury said.

“In consequence, poor consumer outcomes are being observed at sufficient levels to justify regulatory intervention.”

According to the Reserve Bank of Australia (RBA), the of BNPL transactions during the 2022-23 financial year was around A$19bn, equivalent to about 2 percent of all card transactions.

Similarly, Chalmers noted that there are around 7m active BNPL accounts in Australia, which have produced a disproportionate amount of consumer harm.

In 2022, a by the Australian Securities and Investments Commission (ASIC) found that 19 percent of BNPL customers showed two or more indicators of financial stress, such as cutting back on essential items or missing payments on other bills.