Australia's buy now, pay later (BNPL) sector has agreed to a code of practice that came into effect on Monday.
Developed by the Australian Finance Industry Association (AFIA), the code [PDF] is touted as being a "proactive approach to increasing consumer protections" that goes "beyond current regulatory obligations for BNPL products or services".
BNPL is the name for a kind of credit payment that allows for the purchase of goods without having to pay immediately. Instead, users can pay for the purchased goods later or in instalments.
BNPL is offered by fintechs such as Afterpay, zipPay, and Klarna, but it's also a service customers of the likes of Amazon can use when purchasing through its online marketplace.
Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright, and Zip Co are currently accredited to the code.
Shadow Assistant Treasurer Stephen Jones said the code is the first step towards an appropriate regulatory regime for the emerging sector.
"This is a genuine attempt by the industry to set sensible and fair rules around conduct in an emerging sector of the financial services sector," he said. "The financial services industry needs to show it has learned the lessons of the Banking Royal Commission and ensure that these code provisions are rigorously enforced."
The goal of the code is to: Promote a customer-centric approach to the design, marketing, and distribution of a BNPL product or service; promote high industry standards of service for customers and build best practices across the BNPL industry; and support compliance with legal and industry obligations.
The code's vows include a focus on the customer, including taking into consideration any vulnerabilities they may have; the promise to be "fair, honest, and ethical" in a company's practices, which includes a commitment to the Australian government's Artificial Intelligence Ethics Principles; and ensuring that a product is suitable before signing up a customer.
Existing customers will also be privy to the code's directions and ongoing review of a product or service's suitability when undertaken.
The accredited organisations have also promised to keep customers informed about products and services, such as being clear about repayment expectations and not setting unrealistic late fees. The code also includes the requirement to ensure advertising and promotional material is clear and not misleading or deceptive.
"Furthermore, our terms and conditions will be distinguishable from our marketing material and we will comply (where relevant) with ASIC's (Australian Securities and Investments Commission) best practice guidance on advertising," the code says.
Early repayment fees will be abolished, although notice periods may still apply to some products or services.
Complaints will be taken seriously, the code says, and complaint resolution procedures will comply with the same ASIC standards and requirements that Australian Financial Service Licensee holders must comply with, as a minimum.
BNPL providers will be members of the Australian Financial Complaints Authority and subject to its rules. In complying with the code, companies and their agents will also comply with the debt collection guidelines from the Australian Competition and Consumer Commission and ASIC.
BNPL providers will also be required to disclose information for the purposes of complying with the law, such as for example anti-money laundering obligations.
Afterpay in October was given the all-clear by the Australian Transaction Reports and Analysis Centre (Austrac) after it ordered the appointment of an external auditor into Afterpay's Australian operations.
Specifically, Austrac asked for the examination of Afterpay's compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).
"In response to the findings and recommendations identified in the external audit report, Afterpay has uplifted its AML/CTF compliance framework and financial crime function, and completed all remediation necessary to ensure compliance," the regulator said at the time.
"After considering the report and the response by Afterpay, Austrac has decided not to undertake further regulatory action."
Speaking last month before a Senate committee, Afterpay co-founder and CEO Anthony Eisen said in order for Australia to stay competitive in the fintech space, the country needed a regulatory culture that could better deal with competition issues and provide more certainty and support for emerging fintech businesses.
"A lot of new business models don't fit in one particular box and the ability to deal with businesses that don't fit into a particular box has been a real challenge for regulators in Australia," he said. "A holistic approach to regulation is probably required.
"As a new company, in a new industry, when you're dealing with regulators that have an interest in parts of your model, but not all of your model, it becomes quite challenging to know how to navigate your path forward."
ASIC and the Reserve Bank of Australia have also been looking into the BNPL space, with RBA financial system assistant governor Michele Bullock saying previously that the concern with BNPL wasn't the consumer side, but rather, the payments system.
"The issue we're looking at is really based around no-surcharge rules, which is an issue to do with competition and level playing fields. So that's the issue we're focused on," she said.
Afterpay last month reported its results for the first half of 2021, making a net loss after tax of AU$79.2 million at the end of the six-month period. On the same day, Zip Co reported a net loss of AU$453.8 million for the same period.