We welcome the Options Paper recognising that not all BNPL products are the same and that different providers offer a range of diverse products.3 Our own observations of the market are that the nature, features, and customer use and experience differs from product to product, and from provider to provider.
The Options Paper notes that there are several ‘credit’ products that fall under exemptions included in the Credit Act.
As discussed in AFIA’s 2022 report The Economic Impact of Buy Now Pay Later in Australia, and for the avoidance of doubt, BNPL is not ‘payday lending’ or an online wage or salary advance product. BNPL is an improvement on traditional, point of sale retail finance and credit card offerings that is low cost and used widely by customers across all demographics.
Zip has long advocated that there are several credit products in the market that are exempt from the Credit Act although they offer large credit limits and represent a relative long-term credit commitment. Zip believes that regardless of product construct or fees, products that provide larger credit limits over longer terms should be subject to a higher level of regulation. Setting a threshold level would not be inconsistent with the AFIA BNPL Code which applies a scalable approach to a consumer’s ability to afford the BNPL credit.
Options for Regulatory Intervention
Zip’s response to specific questions raised in the Options Paper
Question: Are the guiding principles appropriate and fit for purpose to inform the development of a BNPL regulatory framework? What other factors should be considered?
While Zip is an ASX listed company, it is small compared with other well established financial services players in Australia. Despite its size and resource limitations, Zip engages with the following bodies and comply with various legislations and industry codes including:
- Australian Securities & Investments Commission Act 2001 and Regulatory Guide 234 — Advertising financial products and services (including credit);
- Anti-Money Laundering & Counter Terrorist Financing Act 2006;
- Privacy Act 1988 and Spam Act 2001;
- Corporations Act 2001;
- Regulatory Guide 271 – Internal and External Dispute Resolution;
- ACCC Debt Collection Guidelines;
- Modern Slavery Act 2018;
- Anti-Bribery legislation and the Criminal Code; and
- ASIC’s Design and Distribution Obligations (DDOs) and Product Intervention Powers (PIP) under the Corporations Act 2001; and
- AFIA’s BNPL Code of Practice.
As such, Australia has a complex framework for regulating credit. These provisions are contained in various laws and legislative instruments administered by ASIC, OAIC, AUSTRAC, the ACCC and APRA, as well as other departments, regulators and agencies such as RBA, Home Affairs, and Treasury for the BNPL sector.
Zip supports strong regulatory foundations and procedures that consider the existing regulatory arrangements for comparable regulated credit products (Principle 4).
Building on the existing provisions will assist in maintaining confidence and trust in the credit system. It will also ensure that the regulations are better understood and complied with by industry (Principle 5); allow for rapid market development and innovation (Principle 2); and facilitate competitive neutrality and a level playing field (Principle 3).
Zip would like to restate its support for greater regulatory coordination and collaboration between agencies and bureaucrats. Zip believes value could be added via more collaboration between bureaucrats, legislators and regulators so as to avoid regulatory overlaps and inconsistency and unnecessary overhead around conduct and compliance.
We also emphasise the following matters in relation to the other principles.
Zip’s highest priority principle is to improve consumer protections while continuing to ensure BNPL products are accessible to consumers for developing the proposed BNPL regulatory framework.
An example of Zip’s pro-consumer approach has been the good working relationships we have developed with consumer representatives, including Financial Counselling Australia (FCA) who meet quarterly with Zip’s executives and senior leaders to discuss customer issues, including:
- complaints received;
- customer hardship;
- customer satisfaction;
- engagement metrics; and
- industry and regulatory changes.
This is a forum that allows consumer groups to raise issues of concern directly with Zip executives and leaders, so that Zip can proactively manage any customer matters in an effective and efficient manner.
We also support the general principle that the regulations should be flexible enough to allow new BNPL providers into the market and for new and existing BNPL providers to bring new financial products onto the market (Principle 2). Zip has long advocated that it is essential that regulations should not stifle innovation or competition.
New regulations should be fit for purpose and tailored for the BNPL sector to ensure these products remain a viable alternative payment, as well as foster continued innovation and competition within the industry.
We also support the principle around the enforceable role of ASIC being cost effective and efficient so that it minimises the risk of avoidance behaviour while considering the existing regulatory framework of the self-regulatory BNPL industry code.
Question: Of the three options below, which option do you think is most appropriate? Would you change any aspects of that option?
Question: What do you think are the issues with the other two options?
We do not support Option 1 for the following reasons.
Zip strongly advocates that all BNPL providers should hold an ASIC Australian Credit Licence. Zip believes there should be minimum standards and requirements that all market participants within the sector adhere to, which is outlined with an ACL where there are consequences for participants should they not meet these requirements. This is a position that Zip has supported since January 2019.4
Credit licencing provides ASIC with an early view into a new provider entering the market. It ensures a baseline level of compliance, experience and systems are in place and will provide consumers with additional confidence and security.
Credit Licensees have general conduct obligations including:
- acting efficiently, honestly and fairly;
- being competent to engage in credit activities;
- having appropriate dispute resolution systems (including both internal systems and being a member of an external dispute resolution scheme);
- having appropriate and accessible hardship programs in place including set time frames in which to respond to a hardship notice from a consumer;
- having appropriate compensation arrangements in place (which for some will include holding professional indemnity insurance);
- having adequate resources (including financial, technological and human resources) and risk management systems; and having appropriate arrangements and systems to ensure compliance.
Option 1 suggests inclusion of bespoke provisions in the Credit Act to check that the BNPL product is not unaffordable for a person before offering it to them. We do not think this approach goes far enough to give protections to vulnerable customers and those who are already in hardship or cannot afford the repayments. We note that Option 1 only requires income and expenses information to be considered against a risk assessment if a person is identified as a risky borrower. Furthermore, it does not contain a hard requirement for a credit score check to be undertaken in every situation, nor is there a requirement to verify a customer’s financial situation or check if the provision of credit aligns with a person’s needs or objectives. We caution that this approach may not effectively address the consumer harm that Treasury is committed to eradicating.
While Option 1 proposes the introduction of bespoke affordability provisions, which is an improvement on the BNPL Industry Code, Option 2 ties the obligations of the BNPL industry with the responsible lending obligations contained in the Credit Act. This is a much stronger position to take in addressing suitability assessment and subject to appropriate scaling that acknowledges the lower risk profile of BNPL products. As such, our support is for Option 2.
We note that Zip has conducted the Zip Pay product customer origination and credit management process since inception in a manner broadly consistent with Option 2 – including the provision of identity and credit checks on all customers, and affordability checks on the majority of accounts. Technology allows for these verifications to be performed in real time, with a simple customer experience, and even with the inclusion of these additional consumer protections, Zip’s Australian business has been profitable for 5 years.