Buy-now-pay-later (BNPL) giants such as Afterpay could be forced to obtain credit licences and check whether their customers can afford loans under a crackdown being mulled by the government.

In an options paper published on Monday, Treasury flagged a new approach to the rapidly growing BNPL sector amid fears many consumers are being buried under mountains of debt.

Advocates said proposed changes, which could be implemented by the end of next year, would help bring BNPL into line with traditional banks without restricting access to lower-cost credit.

“We are regularly seeing people experiencing significant harm associated with these loans,” said Consumer Action Law Centre chief executive Gerard Brody.

“People are losing control of their financial situations.”

But it’s still unclear exactly where the reforms, led by Assistant Treasurer Stephen Jones, will land, with Treasury canvassing three options that would drive varying levels of new regulation.

Voluntary code hasn’t worked

Under current laws, BNPL companies are not required to obtain credit licences or comply with responsible lending obligations, meaning they don’t need to do full credit checks.

Consumer groups argue such loose rules are driving consumer harm, and the research agrees.

About one in five BNPL users are missing loan repayments, while about 19 per cent have told the corporate regulator ASIC they have cut back on essentials to meet their BNPL repayments.

Anecdotal stories of hardship were aired at a Senate hearing last month, with some financially vulnerable Australians even being signed up to multiple hefty BNPL debts at the same time.

The industry did set up a voluntary code of conduct in 2019 to assuage community concerns, but Treasury says that approach hasn’t worked and that a tougher crackdown is needed.

Treasury is plotting a crackdown on BNPL giants. Photo: AAP

In an options paper on Monday, Treasury said there has been poor complaint handling under the code and that currently there’s not enough hardship assistance for customers doing it tough.

“The relatively looser regulatory environment combined with the rapid growth of the BNPL industry may be contributing to poor consumer outcomes,” Treasury said.

“Unaffordable or inappropriate lending practices are contributing to financial stress and hardship, and other types of consumer harm.”

Outlining its proposed crackdown on the BNPL industry, Treasury suggested three options:

• Regulate BNPL fully: Bring the industry into the Credit Act with full responsible lending obligations that would require credit licencing and traditional loan suitability testing.
• Regulate BNPL partially: Force BNPL players to obtain credit licences and comply with scaled-back, responsible lending rules that requires them to identify unsuitable users.
• Strengthen the BNPL industry code: Insert a new clause into the existing industry code that would require individual affordability assessments before giving a loan.

Calls for toughest option

Of these three options two would require legislative change, while the other is a lighter touch approach that experts said would see the status quo largely continue.

RMIT University associate professor Angel Zhong said the strongest version of the changes should be pursued because it best recognises that BNPL products are consumer credit.

“BNPL services are no different than credit cards, personal loans and other borrowing services,” Associate Professor Zhong said.

• Tide going out on BNPL giants

“You sign up for the services and use BNPL to pay for goods and services. Then you make repayment. These repayments are termed ‘interest-free’, but if you miss repayments, the late-payment fees are heavy.”

Dr Zhong said requiring BNPL providers to do responsible lending credit checks will help ensure fewer consumers are handed unaffordable loans, while reducing bad debt across the industry.

“It is important for BNPL providers to undertake credit checks so that BNPL services are only available to those who can afford [them],” she said.

Mr Brody agreed, saying the government should opt against the lighter touch option because it wouldn’t fix the issues Treasury has identified with the current voluntary industry code.

“This is highly urgent, we need to ensure people are not becoming over burdened, particularly at this time when there are cost-of-living stresses,” he said.

Rebecca James, chief executive at BNPL outfit Humm Group, said she supported enhanced regulation for the industry, including credit checks.

“We also believe it is important that the final legislation does not have the unintended consequence of denying consumers the significant benefit of buy-now-pay-later finance as an interest-free alternative to more expensive forms of finance,” she said on Monday.

“We are encouraged to see that reflected in the draft issues paper which demonstrates that the government is considering a proportional and balanced approach to regulation.”