On 12 March 2024, the Australian Treasury released for consultation an exposure draft legislative package that proposes to amend the current regulatory framework to regulate low cost credit contracts (LCCCs), including Buy Now Pay Later (BNPL) arrangements and other types of credit contracts. These changes are designed to be flexible, adaptable and proportionate to the risk of consumer harm.

The package includes the draft bill and is accompanied by various explanatory materials. Together, the exposure draft legislative package:

1. Brings LCCCs Into the Existing Regulatory Framework

   LCCCs will be regulated under the National Consumer Credit Protection Act 2009 (Credit Act) and covered by the National Credit Code as set out in Schedule 1 to the Credit Act (Credit Code).

   Initially, this will apply only to BNPL contracts, however other types of credit contracts will be brought within scope over time.

   Currently, many BNPL products are exempt from the requirements of the Credit Act and Credit Code.

2. Extends Obligations to LCCC Providers

   LCCC providers will be required to hold an Australian credit license and comply with relevant licensing obligations.

   In addition, LCCC providers that charge interest will be subject to mandatory disclosure obligations.

3. Modifies Responsible Lending Obligations

   LCCC providers will have discretion to choose whether to comply with the existing responsible lending requirements in the Credit Act or a ‘modified’ Responsible Lending Obligations (RLO) framework for LCCC providers, for each LCCC product they offer.

   Under the ‘modified’ RLO framework, the current ‘reasonable steps’ requirements in the Credit Act will be modified to allow for scalability depending on specific consumer risk factors. In addition, LCCC providers will be required to develop and maintain a written unsuitability assessment policy. Interestingly, where the credit limit of the LCCC is less than US$2,000 there is a rebuttable presumption that the contract is not unsuitable.

   It is not clear how practical the ‘modified’ RLO framework (in its current form) will be, especially for those offering both LCCCs and currently regulated consumer credit products.

4. Establishes Anti-Avoidance Protections

   LCCCs will be included within the application of the anti-avoidance provisions of the Credit Act to prevent LCCC providers from structuring their activities to circumvent regulation.

It is important to note that the proposed regulatory regime will be in addition to the current obligations applying to BNPL under the Australian Securities and Investments Commission Act 2001, including design and distribution obligations and consumer protections.

The exposure draft legislative package is open for consultation until 9 April 2024.

Ben Kneebush also contributed to this article.