Regulation of Buy Now Pay Later
Introduction
Buy Now Pay Later (BNPL) credit for consumer purposes will become regulated under the National Credit Code (Code) from 10 June 2025 and as a result, BNPL providers will require an Australian credit licence under the National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) to engage in this credit activity, and must comply with the responsible lending obligations under the NCCP Act.
The BNPL changes were introduced by the Treasury Law Amendment (Responsible Buy Now Pay Later and Other Measures) Act 2024 (Cth) (the BNPL Act) and the National Consumer Credit Protection Amendment (Low Cost Credit) Regulations 2025 (Cth) (the BNPL Regs).
In this article we overview how BNPL will be regulated under the NCCP Act and the Code.
No charge credit becomes regulated
One of the requirements for a credit contract to be regulated by the Code has been that a charge is made for the provision of credit. Charging interest is the most common way that a charge is made for providing credit. Before the BNPL Act changes, most BNPL products managed to avoid regulation under the Code because they did not charge for the credit being provided (although many did impose other charges such as late fees).
The BNPL Act abolishes this condition for BNPL contracts, which means that a credit contract can potentially be regulated by the Code even when there is no charge for the provision of credit.
In the BNPL Regs, a specific exemption is made for a medical financing arrangement at no cost to the consumer, where a medical provider provides treatment and funding via separate legal entities to enable the patient to claim Medicare reimbursement before paying for the treatment.
What is a BNPL contract?
A BNPL contract is part of a BNPL arrangement. A BNPL arrangement involves:
a merchant supplying goods or services to a consumer;
a third party (the BNPL provider) paying the merchant part or all of the price for those goods or services; and
the BNPL provider extending credit to the consumer to cover the cost of the goods or services.
A BNPL contract is the agreement between the BNPL provider and the consumer that provides this credit as part of the BNPL arrangement.
How are BNPL contracts regulated?
Like other forms of credit, a BNPL contract will only be regulated by the Code if it is for a consumer purpose and the debtor is an individual or a strata corporation. BNPL for business purposes will not be regulated by the Code.
The BNPL Act creates a two-track system for regulation of BNPL contracts under the Code.
If the fees charged under the BNPL contract are under a threshold set in the regulations, then the contract is classified as a “low cost credit contract” (LCCC) and is subject to a lighter regulatory regime.
If the BNPL is not a LCCC, then it will be regulated like any other credit contract under the Code.
If a contract meets the conditions for a LCCC but would also meet the definition of a small amount credit contract (SACC) or a medium amount credit contract (MACC) under the Code, then it is regulated as a LCCC and not as a SACC or a MACC. However, if a LCCC would fall within the definition of a continuing credit contract or a credit card contract under the Code, it must still meet the requirements for continuing credit contracts or credit card contracts as applicable, in addition to the requirements for LCCCs.
LCCC fee caps
The BNPL Regs introduced fee caps for LCCCs into the National Consumer Credit Protection Regulations 2010 (Cth).
There are different fee caps for default fees and for non-default fees. Default fees could include fees such as late payment fees. Non-default fees could include fees such as an establishment fee or a monthly account fee.
The fee caps apply to a “fee period” of 12 months and are set at a customer level rather than account level. For example, if a customer pays out one LCCC during a fee period and then takes out another LCCC with the same credit provider in the same fee period, the fee period does not reset.
The fee caps are set out below.
Default fees: If the only fees charged under the LCCC (and any other LCCC with the consumer) are default fees, the default fee cap is $320 for the first fee period and $245 for following fee periods. Otherwise, the fee cap is $120 in any fee period.
Non-default fees: The fee cap is $200 for the first fee period and then $125 for following fee periods.
Generally a fee period will start when a customer first becomes a debtor under a LCCC. However for existing LCCC customers when the BNPL changes come into effect on 10 June 2025, the first fee period will commence on that date.
Responsible lending obligations for LCCCs
The BNPL Act and the BNPL Regs have introduced modified responsible lending obligations (RLOs) for LCCCs.
Opting in
A credit licensee can opt in to the modified RLOs for LCCCs, or it can choose to apply the standard RLOs in the NCCP Act. If the licensee opts in, it must make the election in writing, stating if it will apply to all LCCCs or only certain LCCCs that are specified in writing. It must keep a written copy of the election until 6 years after it ceases to be in force. The credit licensee can also revoke the election in writing.
If the licensee has opted in to the modified RLOs, it must include a statement in each affected LCCC such as:
The licensee has complied with the modified responsible lending obligations under Part 3-2 BA of the National Consumer Credit Protection Act.
Common requirements
The modified RLOs, like the standard RLOs, require a credit licensee to make reasonable inquiries about the consumer’s requirements and objectives and financial situation, take reasonable steps to verify the consumer’s financial situation, and assess whether the credit contract is unsuitable. The differences are set out below.
Time period for RLOs
Under the modified RLOs, the licensee can make its inquiries, verification and assessment for up to 120 days beforehand, which is more than the standard RLO period of 90 days.
Reasonable inquiries and verification
When working out what are “reasonable” inquiries and steps to verify for a LCCC, a licensee using the modified RLOs must have regard to several factors:
the nature of the LCCC (including the terms of the contract and the type and amount of credit provided under the contract);
if there is a target market determination (TMD) for the LCCC - the nature of the target market for the LCCC, as described in that TMD;
whether the consumer is financially vulnerable;
whether the licensee has any procedures in place to reduce the risk of the licensee providing credit to a consumer on terms that are not affordable for the consumer; and
whether the licensee has any procedures in place to mitigate the harm that may be caused to a consumer if the licensee provides credit to the consumer on terms that are not affordable for the consumer.
Mandatory inquiries
For the modified RLOs, a licensee must seek to obtain information that it reasonably believes to be substantially correct about the consumer’s income and expenditure and any LCCCs, SACCs or consumer leases to which the consumer is currently a party.
The modified RLOs also mandate a requirement to seek to obtain a credit report on the consumer from a credit reporting body. If the value of the LCCC being entered into, together with the value of other LCCCs the consumer currently has with the licensee, is less than $2,000 at the time the LCCC is entered into or after the credit limit is increased, the licensee must seek to obtain the information from what is commonly known as a “negative credit check” about the individual. Otherwise, the licensee must seek to obtain the information known as a “partial credit check”, which includes the negative credit check information plus information about the individual’s consumer credit liabilities.
Presumption of suitability – requirements and objectives – credit limit up to $2000
Under the modified RLOs it is presumed that LCCCs with a credit limit of $2,000 or less meet the consumer’s requirements and objectives. This is a “rebuttable” presumption, which means that it can be disproved.
However, there is no presumption for assessing whether the consumer would be able to comply with their financial obligations, or could only comply with substantial hardship: the licensee must therefore still assess the consumer’s ability to comply with their financial obligations under the contract for these low value products.
Future credit
The modified RLOs also permit a licensee to conduct inquiries and an assessment for an amount of credit larger than the amount first offered to the consumer, which covers any subsequent credit limit increases up to that amount for a period of up to two years (subject to certain conditions).
Suitability assessment policy
A licensee that has adopted the modified RLOs must have a written policy that sets out how it will comply with assessments of unsuitability. The policy has to include processes for ensuring compliance with the licensee’s obligation to assess whether a contract or credit limit increase is unsuitable, and its obligation to assess a contract as being unsuitable if the conditions for unsuitability are met.
A licensee must ensure that, if the policy is followed, it is likely that it would comply with the RLOs.
The policy must be regularly reviewed and should be reviewed and updated when events or circumstances suggest that the policy is no longer effective. The licensee must look at evidence that it reasonably believes to be accurate and that provides an appropriate basis for assessing the policy and identifying any changes to the policy that are necessary. At a minimum, this should include write off rates, arrears, relevant complaints data, and hardship data.
If a licensee identifies changes that would better facilitate compliance, it must revise its policy to include those changes as soon as practicable.
Other modified obligations for LCCCs
The BNPL Act introduces some other modifications to the obligations of credit licensees as they apply to LCCCs.
Electronic communications: Documents and information can be given exclusively by electronic means to the consumer.
AFCA: Credit representative of the licensee are only required to be members of AFCA if they collect payments under the LCCC on behalf of the credit provider.
Sub-authorisations: A body corporate credit representative that sub-authorises a credit representative for LCCC activities does not have to notify ASIC of the sub-authorisation.
Precontractual disclosure: Under the Code, a precontractual statement and an information statement must be given to the debtor before the LCCC is entered into, as is the case for other credit contracts, but regulations can prescribe mandatory inclusions in the information statement, and ASIC is also given power to determine any requirements for the statement in a legislative instrument (as long as they are consistent with the regulations).
Contract disclosure: The Code requirements for disclosures in a credit contract are modified for LCCCs.
Disclosures relating to interest will not apply to a LCCC that does not charge interest, but the contract will need to state that interest charges are not payable.
For disclosures of repayments, there is no option with a LCCC to disclose a minimum repayment amount that can be used in the case of a non-LCCC that is a continuing credit contract.
If statements under a LCCC are to be given electronically, the contract document must contain information about how the statement of account will be given. (There is also a regulation making power to exempt LCCC providers from giving statements of account, but regulations have not been made).
Advertising: LCCC advertisements do not have to include a comparison rate.
First default: The existing provisions in the Code that require notice to be given of a first direct debit default in a prescribed form are modified for LCCCs. The LCCC requirement applies not only to direct debit defaults but to the first payment default by any payment method, and there is no prescribed form to be used.
Licensing requirements
From 10 June 2025, those involved in credit activities with LCCCs or BNPL contracts must hold an Australian credit licence with appropriate authorisations, but there are transition arrangements for unlicensed providers discussed below.
Transition
Currently unlicensed persons who have a licence application or variation lodged and accepted by ASIC by 10 June 2025, and who are a member of AFCA, may engage in BNPL related credit activity while ASIC is determining the application. During this transition period, the NCCP Act will not apply to the BNPL related credit activity, so that the unlicensed provider can continue to issue BNPL contracts.
As well as the transition requirements for licensing, the BNPL Act deals with how the new regime will apply to existing BNPL contracts on commencement of the BNPL amendments on 10 June 2025.
The new BNPL provisions will apply to pre-commencement LCCCs as well as to LCCCs entered into on or after commencement. For pre-commencement LCCCs, however, the RLOs will not apply, except in the case of credit limit increases on or after the commencement date.
Anti-avoidance
Anti-avoidance provisions the NCCP Act prevent licensees from structuring products like SACCs or consumer leases to evade regulation. The BNPL Act amends the NCCP Act to include LCCCs in the anti-avoidance regime, effective from the commencement of the BNPL amendments.
ASIC guidance
On 8 May 2025 ASIC issued its Regulatory Guide 281: Low cost credit contracts which includes its guidance on the new LCCC regime, with a focus on the modified RLOs.
Need help with BNPL regulation?
If you need assistance complying with the changes to BNPL, please contact us.