Buy-now-pay-later [BNPL] lenders are staring down the barrel of regulation as vulnerable consumers get badly into debt. According to credit reporting bureau Centrix, BNPL arrears sat at 9.2% in February.

The largely unregulated BNPL industry, which offers loans to consumers for everything from pork chops to mag wheels, falls outside the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and its responsible lending code. They are credit contracts, just not consumer credit contracts.

With consumers falling into arrears to BNPL lenders, the government announced in October 2022 that it would regulate them. But it’s still working on whether the CCCFA will apply in full or in a modified way, says Victoria Stace, senior lecturer faculty of law at Victoria University.

The Ministry of Business Innovation & Employment (MBIE) has just closed a consultation round and the final regulations are expected to be made available later this year. With other forms of lending, says Aaron Gilbert, head of department – finance, at AUT, lenders need to ensure the customer has the capability to repay loans. “At the moment, there’s no obligation for [BNPL providers].”

To get approval, customers mostly need to show only their] driver’s licence at the checkout in a store offering BNPL. They often take out multiple BNPL loans with different providers, then get into financial trouble, according to social agencies such as the Salvation Army. The issues, Stace says, are:

• What is the appropriate threshold at which the affordability assessment obligation comes into play? Cabinet is proposing a threshold of $600 but is still consulting on this.
• For BNPL transactions above whatever the threshold, what should the affordability obligations on lenders be? It could be full compliance with the regulations, which are quite prescriptive. Or it could simply be compliance with the principles-based requirement in the CCCFA, in effect leaving it largely to lenders to work out how to ensure the transaction is affordable to the consumer.

The CCCFA never anticipated credit contracts that didn’t charge interest but made money instead from late payment fees and merchant charges. When BNPL lenders entered New Zealand in 2014, they were able to take advantage of that loophole.

The loophole should have been closed in earlier rounds of consultation, says Alex Sims, associate professor of commercial law at the University of Auckland Business School. “They are legitimate schemes, but they were exploiting a loophole that should never have been there.”

MBIE’s consultation outlined three potential options:

• keeping the status quo, which involves a voluntary code;
• the government establishes appropriate incentives for BNPL lenders to develop an industry code which goes further and addresses the triggers of financial hardship; or
• it applies the CCCFA to regulate BNPL products. Many industry players argue that full regulation would be too onerous and they should be allowed to self-regulate. On the other hand, budgeting organisations see considerable harm arising from this unregulated form of lending.

Whatever option MBIE chooses, consumer advocates and others are up in arms at the proposal that a $600 threshold be set and only loans above that amount would be subject to regulation. Both Sims and Stace say a $600 threshold makes no sense. “Other loans don’t have a limit,” Sims says.

In its submission to MBIE, Fincap, which represents budget advisers (aka financial mentors), says whānau should not be missing meals because of the lack of a requirement for robust affordability assessments for BNPL lending. “MBIE and the Minister of Commerce and Consumer Affairs must not overlook the significant harm occurring in our communities and in other jurisdictions and accordingly apply the CCCFA to these loans with urgency,” Fincap said.

Financial mentor David Verry, of North Harbour Budgeting Services, sees the harm on the ground. “The hardest hit are those using BNPL for basics. Think Mad Butcher – essentially borrowing for something that will be gone tomorrow but needs to be paid for over several more weeks. “More and more will opt to keep food on the table, pay the rent and other interest-bearing debts ahead of BNPL, despite nonpayment penalties.”

MBIE’s dilemma

Bringing it under the umbrella of the CCCFA would likely kill the model where consumers can put even $1 reserve auctions on TradeMe on BNPL. That means MBIE has a dilemma. With the BNPL industry entrenched in New Zealand, the government is not necessarily willing to enact regulation that will put it out of business.

The largest player, Afterpay, argues that as new business models are created through innovation, regulation needs to be attuned to the different economic drivers of those heterogeneous business models. In its submission to MBIE, it outlines a system, including an industry code, which it argues would be effective. The situation the government finds itself in is creating difficulties in finding a solution that meets the needs of vulnerable consumers but is not being overly burdensome, Stace says.

Government cowering

Sims says it was a mistake not to bring BNPL under the CCCFA last time it was reviewed with the Credit Contracts Legislation Amendment Bill. The industry lobbied hard at that time. She cites a 2019 interest.co.nz article which said Afterpay threatened to pull out of New Zealand if it were forced to comply with the government’s then-proposed changes to consumer finance laws.

Sims says: “Afterpay jumped up and down [then] and the government cowered. It does that every time. The government should have held out. [Afterpay] was saying ‘we’re going to leave’, and the government goes ‘oh okay’.”

More entrenched

Since then, financial harm has grown. At the same time, BNPL models have become even more entrenched, with the government not wanting to upset existing business models, Sims says. Regulating BNPL out of business might not go down well, including with customers who love their buy now and pay later. “[Governments] in New Zealand and other places with strong rule of law, don’t really like taking rights away. If you hadn’t ever had the rights in the first place, it’s not an issue. But once you’ve been given them, [governments] shouldn’t be seen as depriving people’s rights. I think that’s part of an unwritten explanation of why [MBIE is treading carefully].”

In general, Sims says, the lack of a federal system in New Zealand means the country can’t experiment. “I know there’s a lot of wrong in the United States, but with their federal system, you can get states trying something out. If it works, other [states] say okay, we’ll copy this’. “Here, as we’ve seen with this is, if it goes wrong, it’s really hard to back-pedal because people are used to it.”

Making the environment too tough, however, because individuals might get hurt will result in no innovation. “It’s a bit of a balance. That is probably one of the reasons why MBIE is treading a bit carefully because you don’t necessarily want to shut everyone out just because some people are spending money inappropriately.” She suggests if there is major change, providers should be given time to transition to a new model.

Easy debt

Stace says the lack of friction when signing up for BNPL is one of the main reasons customers get into financial trouble. She says a $600 threshold would not protect the most at-risk consumers. “The main problem arises with [people] who get into debt with multiple buy-now-pay-later transactions. There’s no visibility.” A second or third provider isn’t aware that a customer may already have multiple BNPL loans, Stace says. “They don’t have a full picture of this person’s financial commitments.”

Self regulation

The industry is working with Centrix on a product called Pay Watch, which is central to the self-regulation model. Keith McLaughlin, managing director at Centrix, says when it’s up and running BNPL providers will load arrears at the end of each day. “That will appear on our database, and it will be flagged that the customer is in arrears.” It’s then up to other providers to choose whether they will lend.

Sims, however, doesn’t buy the argument that self-regulation will work. “If they were going to be responsible, they would have already done that. It’s a bit late now,” she says. “I know from practical experience from being on the Telecommunications Dispute Resolution [board], when it’s voluntary the worst offenders are not members. “[Voluntary self-regulation] may reduce [harm to consumers overall], but it won’t eliminate it.” It’s likely as well that customers refused by one BNPL lender would gravitate to another provider that wasn’t a signatory.

Another issue, Stace says, is that self-regulation would capture only arrears. It might not capture whether the consumer can really afford a loan in the way that a full affordability assessment under the CCCFA would do. “The question becomes, ‘well, what would that do to the industry?’” She adds that it shouldn’t be taken at face value that BNPL is a good innovation and therefore should not be killed.

“The financial mentors say the industry will evolve. They [might] have business models that will allow, buy-now-pay-later only for bigger transactions, for example. Or they’ll figure out other ways of doing it. “There [may be] other ways and means of achieving the same thing that don’t have these same risks for vulnerable consumers.”

The final word goes to AUT’s Aaron Gilbert who says: “Buy-now-pay-later has some benefits to it, particularly for a portion of the population that is locked out of more conventional credit. So, from a regulation perspective, I think we need to be a little careful that we don’t throw the baby out with the bathwater.” ■