The Government's proposing to apply checks to 'Buy Now, Pay Later' (BNPL) loans above $600 to avoid consumers landing themselves in debt traps.
How the checks will be carried out is still being worked on, but the Government's seeking feedback on requiring affordability assessments similar to what's required for other credit contracts like credit cards and personal loans. It's proposed that the checks will kick in for loans over $600.
BNPL, like Laybuy or Afterpay, is short-term unsecured credit to pay for goods and services. It's often used for larger purchases like appliances. Interest isn't charged, but providers do have late fees for consumers who miss a payment.
"While for many, BNPL can be a useful way to spread the cost of large household purchases, we are trying to stop vulnerable people getting into a spiral of debt if lenders allow them to take on more than they can afford," said Commerce and Consumer Affairs Minister David Clark.
"The BNPL sector is clearly a popular innovation. The amount of money spent with BNPL in New Zealand grew to $1.7 billion in 2021, up from $755 million in 2020. This is why we need to make sure these products and the companies that offer them are serving consumers properly, and that they can be held accountable."
Currently, BNPL services aren't subject to the Credit Contracts and Consumer Finance Act 2003 (CCCFA), which provides consumer protection by requiring lenders to look into the affordability of loans.
But Clark believes the CCCFA can be applied in a "proportionate way" to strike a balance between protecting consumers and enabling continued access to low-cost credit.
The Ministry of Business Innovation and Employment (MBIE) is looking to consult on the proposal from later this year with final regulations made in 2023.
It will seek feedback on the $600 threshold and what checks will apply above it. That could be a full affordability assessment required under current regulations or a less detailed check than what is currently prescribed.
While the Government's not proposing to apply checks to loans under the $600 threshold, it still wants comprehensive credit reporting to occur. Providers will also be required to have hardship processes in place and belong to a dispute resolution scheme. Directors and senior managers will have to be certified by the Commerce Commission.
An Afterpay spokesperson said the provider has "always advocated for regulation that drives strong consumer outcomes, is fit-for-purpose, and proportionate".
"We welcome the Government's recognition that BNPL is distinctly different from traditional credit and that different regulation is appropriate.
"Achieving the right regulatory balance will mean that consumers are not driven back towards credit cards and payday loans - products that profit from people revolving in debt. We will continue advocating for the Government to adopt this approach.”
Laybuy managing director Gary Rohloff said the provider supports an "enhanced regulatory framework that recognises the unique features of BNPL, but also protects vulnerable consumers and ensures they are not taking on a debt that they cannot afford".
"While we still need to work through the details of today’s announcement, we already check every new customer, utilise the services of an independent dispute resolution agency and have a robust hardship policy in place.
"We look forward to engaging with the Government through the consultation process and to ensure that the regulation strikes the right balance and allows consumers to continue enjoying the benefits of BNPL."
There was some trouble with the implementation of amendments to the CCCFA that came into effect in December last year.
Intended to protect vulnerable borrowers from loan sharks lending money without considering the recipient's ability to repay, the changes meant banks had to take a forensic lens to prospective borrowers' spending habits to ensure they could actually pay back a loan.
It was followed by a "significant drop in mortgage activity", according to CoreLogic, with people complaining their home loans were being declined due to spending on takeaways and gifts.
The Government moved in to make adjustments in March, including clarifying that lenders don't need to inquire into current living expenses from recent bank transactions if a detailed breakdown of future living expenses is provided.
