The increasingly popular “buy now, pay later” sector is promising better safeguards for vulnerable customers at risk of getting in over their heads with excessive credit
- The new code of conduct will screen the ability of customers to repay, and cap late fees
- Members may face sanctions from an independent committee if they breach the code
- The draft code will be subject to a six-week consultation period, but already seven providers have signed up
In a code of practice being released today, new and disruptive credit providers including Afterpay, Zip Co, Latitude and Openpay will commit to safeguards such as capping late fees, screening the ability of customers to repay and never initiating bankruptcy procedures.
Describing the code as a “world first”, the Australian Financial Industry Association — which represents companies in the buy now, pay later sector — said customers who are assessed as vulnerable could ultimately find themselves declined for finance.
Scrutiny from the Australian Securities and Investments Commission (ASIC) and a Senate committee forced the sector to introduce a code of conduct to head off the prospect of tighter government regulation.
Association chief executive Diane Tate told The World Today the sector wanted to protect vulnerable customers and eliminate irresponsible practices.
“We have heard criticisms that young people could lose control of their spending, so the code includes a clause which says buy now, pay later products won’t be available to people under 18,” Ms Tate said.
“There is another area of concern, which is about people getting over-committed, [so we’re] doing upfront assessment to make sure the customers are suitable for the product. And another area which is really important in this code also is putting in a cap on late fees.”
ASIC regulates buy now, pay later providers under the ASIC Act, which covers misleading and deceptive conduct, unfair contracts and privacy.
Ms Tate concedes pressure from both ASIC and the Senate inquiry was a catalyst for the industry agreeing on the need to lift standards.
If there is a breach, the customer may be paid back
Confronting concerns about self-regulation of the sector, Ms Tate said members could face sanctions from an independent committee if they breached the code.
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“The Code Compliance Committee can take action against a buy now, pay later provider for not meeting the standards within the code,” Ms Tate said.
“That can be issuing a warning, through to quite formal actions and, where there has been wrongdoing, to remediate the customers.”
But Consumer Action Law Centre chief executive Gerard Brody said an industry code was no replacement for an effective regulatory system that treated all forms of credit consistently.
“We know that a key problem in the buy now, pay later market is over-commitment and hardship,” he said.
“ASIC research found that one in six users are financially over-committed. It’s not clear the code deals with this, we find that some people prioritise repayment over buy now, pay later, so they don’t get kicked off the app, but default on other obligations.”
Mr Brody said there were loopholes in the draft code.
“For example, it says that providers do not have to check a borrower’s income and expenses/other debts,” he said.
“It gives lots of discretion to the provider.”
“The code also says fees will be capped, but doesn’t actually set a limit.”
Liberal senator Andrew Bragg, chair of the parliamentary inquiry into fintech and regtech, cautiously welcomed the draft code, agreeing there were lessons from the financial services Royal Commission.
“We want Australia to be a place where there is a lot more consumer choice and more competition,” Senator Bragg said.
But he said it was also important that technological change and innovation did not damage consumer protection.
“The Royal Commission did show that there were very significant and systemic problems in the financial sector,” Senator Bragg said.
“One thing that we want to do it to provide more competition and more choices.”
Industry says it is working towards a better culture
The rapidly growing buy now, pay later sector was in its infancy during the financial services royal commission in 2018, but Ms Tate said new players had acted based on examples of unethical behaviour from traditional lenders.
“I think the entire financial services industry had to look into the challenges around ensuring that the culture is what the community expects,” Ms Tate said.
She said the sector was working to correct perceptions that its products were mainly used by the under-25s.
“It is a bit of a myth. About 30 per cent of Australian adults are using buy now, pay later along with other options for their payments as well. I think that this is the way of the future,” Ms Tate said.
“We’ve got large Australian companies and large international companies in this space delivering good access to making payments, good convenient service and an alternative to other ways of paying for things.”
The draft code will be subject to a six-week consultation period, but already all seven providers have signed up and agreed to enforce the new standards.