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Buy now pay later (BNPL) loans and other financial products that fall outside of ASIC’s regulatory regime are damaging pubic financial health and may harm the broader economy if left unregulated, warns Chief Executive of the Consumer Action Law Centre, Gerard Brody.
The last few years have seen a significant growth in uptake of these loans and Brody has seen first-hand the damage they are causing.
“BNPL loans are now racking up a considerable consumer base, along with a commensurately sizeable level of national debt – $903 million according to ASIC’s analysis,” Brody told Informa ahead of the Responsible Lending & Borrowing Summit 2020.
“They are an easier line of credit to obtain than traditional bank loans or credit cards and are more commercially enticing, given their interest free component.
“But what consumers don’t tend to realise is that the loss of any potential revenue that could be acquired through interest repayments is recouped in other ways. And that these lenders aren’t beholden to responsible lending obligations – legal or regulatory. Ultimately this means consumers aren’t protected should they default on their repayments.
“We and other consumer agencies have received more and more complaints from BNPL consumers who have fallen into hardship and are struggling to meet their repayment obligations.”
According to ASIC’s analysis one in six BNPL consumers had either overdrawn, delayed repayments or been forced to borrow additional money because of a BNPL arrangement.
Brody says these figures are particularly concerning, considering the demographic they target – with the average BNPL consumer typically aged between 18-34 years.
He believes the time has come to start regulating BNPL products in the same manner as other lines of credit.
“The stakes of non-regulation are high and there is no principled reason for them not to be regulated,” he said.
Australia’s existing responsible lending framework
As it stands, the National Consumer Credit Protection Act 2009 provides a comprehensive set of legal guidelines requiring lenders and brokers to make reasonable, verified enquiries to ensure consumers can meet their financial obligations if a loan is granted.
In addition, it gives consumers a cause of action to seek compensation against lenders or brokers where the statutory obligations are not met, usually after they have fallen into unmanageable debt.
Together with the Australian Consumer Law, the industry has had a robust legal framework from which to navigate its responsible lending practices; protect the financial health of the general public; and help guard against a national debt crisis which could harm the broader economy.
The recently revised RG209 guidelines add an extra layer of rigour, outlining ASIC’s expectations of lenders in relation to these laws. They include guidance on what affordability diagnostic tools are appropriate, among other prescriptions.
Legal loopholes
BNPL providers aren’t required to abide by these laws, nor be members of the Australian Financial Complaints Authority (AFCA). The reason for this being that they offer an interest free service and don’t purport to charge for their credit.
Brody says this legal loophole is dangerous. “I personally believe providers are deliberately packaging their products in this way to free them of responsible lending obligations. It’s a very tricky business model,” he said.
“Even if that were untrue, the interest free component is, in and of itself, a farce, given that cost of credit is being bundled into the product – you just can’t see it. There can also be hefty late fees that consumers don’t expect. This makes them deceptively enticing and affordable to consumers.”
Another line of credit that falls outside of the regulatory regime is small business credit that is packaged as consumer services, says Brody.
“Again, these lenders aren’t required to be AFCA members or abide by responsible lending laws,” he said.
“Like BNPL they are targeting a vulnerable group: people that can’t access credit through mainstream channels.
“It’s time we found a way to counter these legal loopholes and stomp out the kind of loose lending practices that were rife before the Royal Commission.”
Regulatory outlook
Though the rationale for broadening the legislation may be clear, Brody fears BNPL products could escape the next round of legislative and regulatory revisions, with the BNPL industry “lobbying hard” to maintain the status quo.
“It’s difficult to predict what will happen, but from my perspective, we do need to be more careful in terms of letting these products slip through the cracks.
“As an industry we have worked hard to get things back into order, from a responsible lending standpoint, and it would be a shame to revert so quickly back to old standards.”
Gerard Brody will talk more about this topic at Informa’s fourth annual Responsible Lending & Borrowing Summit 2020.
“I’m looking forward to hearing from the floor on what they see as the right course of action,” he concluded.
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