The buy-now-pay-later sector has developed a draft code of practice which could see sweeping changes to the industry, including late fee caps and a tougher customer vetting process.
BNPL players which participated in forming the code include Afterpay, Zip Co, Brighte, flexigroup, Latitude, Openpay, and Payright – representing more than 95 per cent of the market. The voluntary code applies only to firms signing up to it.
It is a world-first for the evolving BNPL sector, which serves about 30 per cent of Australian adults, according to the Australian Financial Industry Association, which consulted the sector on the code.
The code is a direct response to the Australian Securities and Investments Commission’s review of the BNPL sector in November 2018, as well as a Senate Economics Reference Committee inquiry in February 2019, which recommended the BNPL sector to develop a code of practice.
At the time, ASIC concluded that using BNPL services can “cause some consumers to be financially overcommitted and liable to paying late fees”.
The Commission also found that one in six users had either become overdrawn, delayed repayments or borrowed more money than they otherwise would because they were using BNPL.
As BNPL companies charge “late fees” instead of interest, they are not classified as credit providers and so are not regulated by the National Credit Act. Institutions under this Act are legally obliged to run credit checks to make sure a customer can pay back what they have borrowed.
AFIA’s chief executive officer Diane Tate said while BNPL providers are “not unregulated” and already comply with consumer laws, the draft code “goes above and beyond existing laws”.
The code, which is under public consultation, could be implemented as early as July 2020.
Some of the safeguards the code could provide to consumers, if implemented, include:
- screening customers before providing BNPL services to them, and only doing business with customers who are assessed to be capable of repaying over time.
- capped and “fair” late fees.
- a two-month notice period before changing fees.
- limit BNPL services to people aged 18 years and over.
- send repayment reminders and notifications before charging late fees.
- never filing bankruptcy proceedings against a customer and providing support to customers in financial difficulties.
- stop sending promotional material to customers behind on repayments and customers in financial hardship.
- making key information, such as terms and conditions and details on how to close an account, clear and easy to understand.
- free access to Australian Financial Complaints Authority’s (AFCA) external dispute resolution scheme.