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Buy Now, Pay Later (BNPL) contracts will be treated as “consumer credit contracts” under draft regulations that were released for consultation by the Ministry of Business, Innovation and Employment (MBIE).
When the BNPL regulations come into force, BPNL lenders will have extensive new obligations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA), but the draft regulations propose modifying the affordability assessment requirements for them.
Merchants offering a BNPL service will not have any direct CCCFA obligations, but may be required to obtain more information from customers and complete additional processes to ensure the BNPL lenders comply with their CCCFA obligations.
We summarise below the CCCFA obligations that are expected to apply to BNPL lenders, along with the modified affordability assessment requirements contained in the draft regulations.
BPNL lenders should begin to understand their new CCCFA obligations, consider their practical implications, and create action plans now to ensure they are compliant when the new regulations come into effect.
Chapman Tripp has extensive experience in this area. We can help you prepare.
When will the new regulations come into force?
No date has been set yet. We expect the timing will be announced when MBIE publishes its response to the consultation comments.
Main CCCFA implications for BNPL lenders
When the regulations come into force, BPNL lenders will be required to comply with the CCCFA’s lender responsibilities, which include:
- Complying with the advertising standards;
- Ensuring contracts and their variations are in plain language;
- Assisting borrowers to make an informed decision; and
- Making reasonable inquiries so as to be satisfied that:
- The finance provided under the BNPL contracts will meet borrowers’ requirements and objectives; and
- Borrowers can make the contract payments without suffering substantial hardship (the draft regulations propose to modify these affordability requirements for some BPNL contracts: see below).
Other requirements BPNL lenders will need to meet include:
- Publishing certain standard form contract terms and fees on their website, and having them available on their business premises;
- Disclosing specified information before a BNPL contract is entered into and periodically throughout its term, including variation, continuing, financial mentoring and dispute resolution scheme disclosures;
- Ensuring BNPL contracts contain required content, including relating to restrictions on fees, rules in respect of payments, borrowers’ rights to apply to have their loan contracts amended on the grounds of unforeseen hardship, and borrowers’ rights to cancel for a short period after the initial disclosure;
- A due diligence duty on the BNPL lender's board and senior managers;
- Updating the BNPL lender’s registration on the Financial Service Providers Register to cover being a creditor under a consumer credit contract, and to be certified by the Commerce Commission (as part of this process, the BNPL lender’s board and senior managers will need to pass a fit and proper persons test); and
- From 30 June 2024, providing the Commerce Commission with an annual return for each year, covering certain information about the number and value of BNPL contracts and "material changes" to those contracts (i.e. credit limit increases and making unexpected additional advances).
Some of these obligations as they apply to BNPL contracts may be modified if, as a result of submissions on the draft regulations, MBIE is persuaded that the compliance burden would be unreasonable and would unduly restrict BNPL availability.
Any significant modifications would likely be the subject of further consultation.
CCCFA non-compliance consequences vary widely, including:
- Contracts being unenforceable until the breach is remedied with the recovery of fees over this period being permanently prohibited;
- Enforcement action resulting in statutory damages, orders and injunctions; and
- Liability for infringement and criminal offences and pecuniary penalties.
Modified affordability assessment requirements
Reflecting the Government’s decision that requiring full CCCFA compliance would not be a proportionate response and might unduly reduce BNPL availability, the draft regulations propose modifying the affordability assessment requirements for BNPL lenders.
Exemption for BNPL contracts under $600
Where the total credit limit on all BNPL contracts between the lender and the borrower is $600 or less, BPNL lenders will be exempt from conducting any affordability assessment, provided that they:
- Obtain a comprehensive credit check with a credit reporting agency, such as Equifax, Centrix or Illion, before entering into the BNPL contract; and
- Disclose the repayment schedule and any potential default fees (including how and when they would become payable) at the time each purchase is made using BNPL (not just when the BNPL contract is first entered into).
Affordability assessments above the $600 threshold
In the draft regulations, MBIE sought comment on two possible options for BNPL contracts which do not fall within the $600 threshold exemption:
- Option 1: BNPL lenders must carry out an affordability assessment, but need not comply with the assessment process prescribed in existing regulations.
- Option 2: BNPL lenders must comply with the existing affordability assessment process prescribed in the current regulations.
Depending on the consultation comments, MBIE may adopt a modified version of either option, if MBIE considers that would achieve a better balance between achieving greater consumer protection while not unduly reducing BNPL availability. Similarly, MBIE may adjust the proposed $600 threshold.
Existing CCCFA obligations to continue
Existing obligations in relation to making debt collection disclosure and the potential for contracts to be reopened on the grounds of oppression will continue to apply to BNPL contracts.
Chapman Tripp comments
Chapman Tripp understands the political need for action to enhance consumer protections in respect of BNPL contracts. The proposed $600 threshold exemption is a pragmatic approach, which provides a balance between the additional compliance burden on BNPL lenders (and the related inconvenience to some customers) and the benefit of the proposed protections for those at risk of (or already facing) financial hardship.