Background
As discussed in our prior client alert, in November 2022, the Treasury released an options paper seeking submissions on three different approaches to regulate the BNPL industry. In May 2023, the Treasury announced that Option 2 would be pursued, which is to regulate BNPL products as credit products (see client alert here). Consequently, on 12 March 2024, the Australian Government released an exposure draft bill on BNPL products for public consultation. For more information on the exposure draft, please refer to our previous client alert here.
In more detail
Low-cost credit contracts (LCCCs) and BNPL
- The BNPL Act, as contemplated in the exposure draft, regulates low-cost credit contracts (LCCCs) under the Credit Act.
- Under Schedule 2 of the BNPL Act, an LCCC is defined as a contract where credit is, or may be, provided under the contract and all of the following conditions are satisfied:
- The contract is a BNPL contract, or a contract of a kind prescribed by the regulations
- The period during which credit is, or may be, provided under the contract is no longer than the period (if any) prescribed by the regulations
- The contract satisfies any other requirements prescribed by the regulations, including those that relate to fees or charges payable under the contract.
- Also as outlined in the exposure draft, BNPL contracts are defined as contracts that form part of BNPL arrangements involving clients, BNPL providers and merchants. Where credit is provided by the merchant and not by a third person (being the BNPL provider), the arrangement is not captured as a LCCC.
- Relevant requirements and exemptions currently relied upon by BNPL providers will be disapplied to ensure that BNPL contracts are subject to the governance of the Credit Act.
Obligations of LCCC providers
The BNPL Act imposes a range of obligations on LCCC providers, including:
- Licensing requirements: instead of being exempted from the requirement to hold a credit licence, the BNPL Act modifies the Credit Act to apply to BNPL contracts and LCCCs, requiring that providers of those products must:
- Hold and maintain a credit licence,
- Comply with the relevant licensing requirements and licensee obligations.
- Modified responsible lending obligations (RLOs): LCCC providers are required to take appropriate and proportionate steps to assess the suitability of the products for the consumer prior to entering an LCCC or increasing a consumer's credit limit. LCCC providers may, in writing, elect to apply either the original version of the RLOs under the Credit Act or the modified RLOs, which impose a reduced regulatory burden on LCCC providers.
- Presumption of suitability of LCCCs: the BNPL Act creates a rebuttable presumption that LCCCs with a credit limit lower than AUD 2,000 (subject to change) are not unsuitable for the consumer.
- Pre-contractual disclosure: LCCC providers are obliged to provide consumers with a precontractual statement and an information statement that complies with relevant requirements prior to entering into a LCCC.
Next steps
BNPL providers should start compiling their credit licence application documents as, in order to be covered by the transitional arrangements which allows BNPL providers to continue providing BNPL credit contracts, the BNPL providers must have applied for (or applied to vary) a credit licence and become a member of AFCA before 11 June 2025 (being the date six months after royal assent or an earlier date if fixed by Proclamation).
In addition, BNPL providers should commence drafting their unsuitability assessment policy, precontractual disclosure statement and information statement as well as reviewing contract documents and statements of account for applicable variations effective from 11 June 2025.
Our team is ready to provide assistance on this new regime to BNPL providers.
