Lending professionals are requesting that the law be clarified before the buy now pay later sector is subject to those rules for the first time because there is still a lot of confusion about the type of borrower checking that must be done to fulfil obligations under the Credit Act.
The Australian Securities and Investments Commission was one of several organizations that urged the strictest regulatory model in their submissions to Treasury’s buy now, pay later regulation review, published last week. The National Consumer Credit Protection Act’s detailed responsible lending checks would be applied to those operators as part of this.
However, it is still being determined what checks would be necessary for practice and what information might be used to satisfy the law. Despite the now-famous “wagyu and shiraz” case, in which the dispute centred on whether checks on borrowers’ expenses were appropriate, the corporate regulator sued Westpac in court in 2017.
However, this case did not ultimately establish a legal standard that other lenders could rely on.
According to several submissions to a Treasury investigation, the Albanese government’s desire to regulate the “buy now, pay later” sector presents an opportunity to reframe perceptions about the checking appropriate for various shapes and sizes of loans.
The goal of the credit law and the regulatory guidance provided by ASIC is to enable lenders to scale the questions and actions they take to verify a customer’s financial situation by what is reasonable.
Buy Now Pay Later – Risk of acquiring new clients
Although Westpac sought to use a risk measurement algorithm that streamlined the process for borrowers with good credit scores, ASIC’s regulatory action against Westpac has After pay concerned that it will be required to carry out prescriptive affordability assessments. This would hinder its capacity to acquire new clients, slow growth rates, and necessitate an expensive redesign of its technological infrastructure.
Buy now, pay later Providers contend that a $500 loan with a six-week payback period requires a less thorough investigation than a $5,000 credit card limit, which should be less than a $500,000 mortgage.
If fuller income and expense checks are necessary, Afterpay is eager for the “open banking” customer data-sharing procedure to be used to enable ultra-fast checking. In addition, afterpay is uncertain whether it could verify a digital credit score is above a threshold to allow a customer onto the platform; if this is the case, it would like to use the “open banking” customer data sharing regime.
One of Australia’sAustralia’s biggest start-up successes, Afterpay, which introduced the concept of “buy now, pay later” to the rest of the world, claims that the lack of need for credit card-style credit checks is due to the service’sservice’s low loss rates and a high percentage of repeat customers who exhibit good repayment habits.
When the National Consumer Credit Protection Act was “blanket application” ” to the buy-now, pay-later industry, Afterpay expressed concern to Treasury, claiming that this ” represents a disproportionate and causing damage reaction that is not reflective of the evidence of user harm in the BNPL sector.”
The application of the NCCP Act would inevitably raise the costs of compliance; it said, “even though commentators have suggested that the [law] already takes a principles-based approach and applies the concept of scalability about affordability assessments.”
“To prevent unintended consequences, any changes to the framework for evaluating affordability should be calibrated carefully. For example, credit checks should not be required for low-cost, low-risk BNPL products with safeguards built into the product design.
Unknowingly, the hardline model would reduce the incentive for buy-now, pay-later suppliers to use or offer low limits, forcing providers to raise their limits and provide interest-bearing products given the necessary affordability assessment work, it was added.
ASIC knows responsible lending requirements for buy now, pay later financing could be modified as Treasury considers the best model for regulating the industry.
According to the bespoke model and relative levels of harm that they do or may cause, more consideration will be required regarding whether different modifications for different types of buy now, pay later models should be made.
According to the Australian Banking Association, the regulations governing “buy now, pay later” transactions lack details regarding how responsible lending obligations will be implemented. The banks are also concerned that “the options paper does not adequately address the inclusion of BNPL in the mandatory comprehensive credit reporting regime.”
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Buy Now Pay Later – Call for credit reporting to include all industries.
According to the reporting regime, lenders must send information to credit bureaus about credit limits and late payments so that others can use it to determine credit risk. However, because buy now, pay later providers are omitted, banks still choose whether potential customers have such debts.
In addition, Kadre is urging the government to regulate the industry by bringing it under comprehensive credit reporting. The group asserts that the “buy now, pay later” regulation cannot be examined separately from the anticipated 2024 review of the credit reporting framework.
To formalise how the credit laws applied to it, the industry created its industry code in 2021. The code permitted lenders that accept payments now but require repayment later, such as Afterpay, to accept new customers without confirming their ability to pay. Afterpay has small initial credit limits and no revolving credit.
More prominent players like Brighte, who offer substantial interest-free loans for solar panels, must go through a more thorough verification process, much like they would for a credit card or personal loan. To create a more effective regulatory framework, Afterpay and the Australian Retailers Association urge the government to adopt a strengthened code.
Although After pay has urged for a “safe harbor” that considers how its business model differs from credit cards if the Credit Act is incorporated, it has also cautioned that “additional requirements should avoid creating unnecessary regulatory uncertainty.”
A regime that acknowledges the lower risk of harm to customers from innovative products could be created, according to Kadre, and it warned that if confusion persists, credit costs could rise.
According to Kadre, “many lenders took a conservative approach to credit assessment resulting in more complex processes, greater customer friction, and higher costs.” This was due to perceived compliance requirements and the threat of regulator action.
Although the regulatory guidance was altered due to the [ASICv.Westpac] case’scase’s findings, the question of scalability is still up for debate.