Australia has become the first country to implement industry standards for the buy now, pay later (BNPL) sector, designed to ensure safe practices and “name and shame” dodgy lenders.
The new code drafted by the Australian Finance Industry Association will come into effect on Monday and is the first pledge by the emerging sector to improve safeguards for customers.
Companies such as Afterpay, Klarna and Zip will have to adhere to new rules such as caps on the number of late payments a person can accrue, and mandatory financial checks before purchasing.
The BNPL code is in response to a report from the corporate regulator and a Senate inquiry which called for greater self-regulation within the industry, after incidents where customers were being lobbed with high late fees, or instalment plans were approved for people under age.
The consumer-focused code consists of nine commitments that signatories make directly to the people using their products and services.
AFIA chief executive Diane Tate said the code would simultaneously protect consumers and allow the emerging sector to flourish.
‘The growth and diversity of the products and services enhances consumer choice,” Ms Tate said.
“It brings to life the concept that innovation and competition are for the everyday person and that this can be achieved while codifying strong consumer protections.”
BNPL disputes under the code will be administered by Australian Financial Complaints Authority, where a designated committee will have the power to name and shame companies providing shoddy lending to customers.
The code also prohibits providers from allowing people under the age of 18 to use a BNPL product, or for a lender to place additional pressure on someone in financial hardship.
Companies will also be forced to take some partial payment upfront before offering a service.
The introduction of the code comes after the coronavirus pandemic saw a surge in the use of BNPL services, particularly among young people, both as a budgeting tool and an alternative to credit cards.
Ms Tate noted the code is subject to ongoing reviews and is designed to provide safe practices for a number of lending practices, ranging from a pair of jeans to at-home solar panels.
“The BNPL sector includes a broad range of business models so customers wanting a BNPL option can choose the right one for them depending on their payment preferences, the purchase type and their circumstances,” she said.
“BNPL is a way to budget and manage your money effectively. You pay for your purchases in instalments and without the burden of interest.”
AFIA’s code was prepared in consultation with the Australian Securities and Investments Commission and garnered criticism from consumer groups during its draft consultation phase for being too vague.
Ms Tate said the final version of the code is more specific to the sector.