Buy now pay later sector to be brought under the Credit Contracts and Consumer Finance Act. Sector's merchant service fees to be 'monitored'

Oversight of the buy now pay later (BNPL) sector is to be brought in line with purveyors of other forms of consumer debt, with BNPL transactions to be treated as consumer credit contracts under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).

Commerce and Consumer Affairs Minister David Clark says the government is moving to develop regulations to do this, with BNPL currently not subject to CCCFA consumer protections. 

BNPL services allow consumers to purchase and obtain goods and services in-store or online immediately, but pay through installments over time. While there are no interest charges, there are penalty fees for late payments.

Clark says affordability checks will apply to BNPL loans above a certain threshold, which is proposed to be $600, meaning borrowers get the same kind of protections as borrowers using other credit contracts, such as credit cards and personal loans, do.

The Ministry of Business, Innovation & Employment (MBIE) is to consult on the proposed $600 threshold. 

Smaller loans, under $600, won't have to go through the same process, but comprehensive credit reporting via a credit reporting agency such as Equifax, Centrix or Illion, will be required. Additionally they'll have to disclose the repayment schedule and late fees when every purchase is made using BNPL, not just when the consumer credit contract is first entered into.

The key revenue source for the BNPL sector is the merchant service fees retailers who offers their BNPL services are charged. These exceed the merchant service fees charged by banks. As it begins oversight of merchant service fees under the Retail Payment System Act, the Commerce Commission says it will be monitoring BNPL networks. The focus is on Mastercard and Visa credit and debit networks subject to interchange fee caps.

Feedback sought

MBIE is seeking feedback on two options for what affordability assessments will be required above the $600 threshold. These are;

♦ Requiring a full affordability assessment in accordance with the process in the Credit Contracts and Consumer Finance Regulations, or;

♦ Requiring an affordability assessment in accordance with the CCCFA’s principle-based requirement to make reasonable inquiries into the affordability of a loan, but not the detailed process prescribed in the regulations.

Additionally the government's proposing to introduce some further disclosure obligations on BNPL providers designed to reduce the risk of consumers falling into financial hardship, as a result of using BNPL products.

All BNPL service providers will need to have hardship processes in place and belong to a dispute resolution scheme. Directors and senior managers will also need to be certified as "fit and proper" by the Commerce Commission.

“While for many, BNPL can be a useful way to spread the cost of large household purchases, we are trying to stop vulnerable people getting into a spiral of debt if lenders allow them to take on more than they can afford," Clark says.

“The BNPL sector is clearly a popular innovation. The amount of money spent with BNPL in New Zealand grew to $1.7 billion in 2021, up from $755 million in 2020. This is why we need to make sure these products and the companies that offer them are serving consumers properly, and that they can be held accountable,” Clark adds.

“We will strike the right balance between protecting consumers and enabling continued access to low-cost credit by applying the CCCFA in a proportionate way,” says Clark.

The government aims to finalise regulations in 2023.

MBIE says other key requirements that will apply to BNPL include:

• General lender responsibilities, including assisting borrowers to make informed decisions, and treating them reasonably and ethically.
• Borrowers will be protected from unreasonable default fees.
• Borrowers facing unforeseen hardship can apply to the lender to have their repayment contract varied.
• Consumers will be able to receive compensation and statutory damages from lenders who breach relevant CCCFA rules.
• BNPL lenders will be required to provide information to borrowers who miss payments about financial mentoring services.
• BNPL lenders will have to disclose key information about credit contracts and any variations.
• Directors and senior management will be subject to due diligence duties.

Times getting tougher

Confirmation of government regulation comes at a time when things aren't looking as rosy for the BNPL sector as they previously have. Earlier this week credit bureau Centrix reported BNPL enquiries fell 25% in September.

And some BNPL companies themselves have been coming under financial pressure. For example the Australian unit of Klarna, in which ASB's parent Commonwealth Bank of Australia is a shareholder, had a net asset deficiency of more than A$70 million on 31 December 2021 after posting a 12-month net loss of $56 million, BankingDay reports. This came as merchant and consumer commission revenue tumbled 71% to A$3.1 million in 2021. Klarna also operates in NZ.

A year ago a government consultation paper looking at the the triggers of financial hardship caused by the BNPL sector floated three possible options to address them. The options included the status quo, meaning BNPL providers remaining free from consumer protection measures other debt providers face giving them a competitive advantage. Secondly, the Government establishing incentives for BNPL providers to have an industry code that addresses the triggers of financial hardship. And thirdly, applying the CCCFA to regulate BNPL products.

In its submission to the consultation paper the Commerce Commission suggested BNPL contracts could be brought under the CCCFA as revolving credit contracts.

In March Consumer NZ joined consumer advocate groups from eight other countries seeking regulation of BNPL services to protect vulnerable borrowers.

Overseas Britain has also moved to regulate the BNPL sector.