A proposed crackdown on the buy now, pay later (BNPL) industry may not deliver desperately needed consumer protections, say advocates, with announced reforms called “disappointing”.

Assistant Treasurer Stephen Jones announced on Monday that the federal government will pull BNPL giants like Afterpay and Zip Co. into the Credit Act, requiring companies to undertake “unsuitability tests” on customers in a bid to stop people falling into debt spirals.

“[We] will protect people from the spirals of harm that unregulated, unrestricted lending can cause,” Mr Jones said on Monday.

But a coalition of financial counsellors and consumer advocate groups stated the crackdown will not apply the full breadth of responsible lending rules.

“It is good to see that BNPL providers will be required to be licensed under the Credit Act,” Financial Rights Legal Centre chief Karen Cox said.

“It is disappointing BNPL will not be treated the same as all other credit.

“Great attention will be needed in the drafting of these obligations to make sure they address the harms we see every day. Small amount, low-cost credit does not equal safe or sustainable lending.”

Fiona Guthrie, chief executive of Financial Counselling Australia, said she was concerned the reforms won’t go far enough and will fail to protect vulnerable consumers from buy now, pay later harms.

“It’s risky if they’re going to pare it [responsible lending rules] back, it’s really concerning if, for example, they won’t be required to verify a customer’s financial needs or credit reporting is going to be voluntary,” Ms Guthrie told The New Daily.

“It’s not clear yet, but if both those things happen the laws will not be worth the paper they’re printed on.”

Loan distress increases

The BNPL crackdown comes amid fears a growing number of Australians are falling into debt traps amid the cost-of-living crisis, with financial counsellors warning of an uptick in loan distress.

Consumer Action Law Centre chief Stephanie Tonkin said people are regularly calling into their frontline services with BNPL debts they could “never afford to repay”, echoing harrowing stories heard at a Senate inquiry into the industry last year.

“In the cost-of-living crisis, callers to our services report using multiple BNPL accounts – often more than five accounts at once – to afford essentials like food and energy,” Ms Tonkin said.

“With over 20 per cent of BNPL users reported to have missed a payment in 2019, the amounts borrowed can quickly spiral with late fees and charges.”

In a bid to address these concerns, the Albanese government wants to extend a tailored form of responsible lending obligations to the industry, which will require them to obtain credit licences, cap their late fees and ensure customers aren’t unsuitable for loans.

Treasurer Jim Chalmers said on Monday there would be “appropriate transition arrangements”.

“We want people who can afford to participate in buy now, pay later to be able to access it, but there needs to be the right rules and regulations around it,” he told ABC radio.

Not far enough?

There are fears that the crackdown doesn’t go far enough.

Advocates say the model proposed by the government could exempt buy now, pay later firms from some verification checks and requirements to check whether loans align with financial goals.

This pared-back version of responsible lending rules would be “scaled to the level of risk of the BNPL product or service”, according to a government consultation paper released last year.

Choice chief executive Alan Kirkland said the changes must include strong requirements for BNPL companies to ensure loans are suitable – regardless of how big or risky a loan is seen.

“We will be particularly concerned about how the safe lending provisions of these reforms are drafted,” he said on Monday.

Angel Zhong, an associate professor in finance at RMIT University, said the government’s proposed crackdown will deliver a customised version of responsible lending for BNPL.

“Until the details are announced later this year in the regulation, we won’t know with clarity how this will work,” she said.

“[It] strikes a good balance of ensuring consumers’ financial wellbeing, but at the same time still enabling financial innovations to move forward.

“[It’s] definitely tougher than the current state of play where there is no regulation. But compared to how other credit products are regulated, it appears to be less stringent.”

The BNPL industry, having escaped the spectre of tougher regulations under the former Coalition government in 2019, has broadly supported the government’s proposed changes.

Zip Co chief executive Peter Gray welcomed the pared-back responsible lending rules on Monday, telling ABC radio his company is already compliant with the proposed crackdown.

BNPL player Humm group echoed those views in its statement on Monday about the plan.

“[We’re] particularly supportive of the requirements for BNPL companies to hold a credit licence, conduct scalable lending checks tailored to risk, and have complaints and hardship policies in line with regulated products,” a Humm spokesperson said.