On 25 March 2021, the Parliamentary Joint Committee on Corporations and Financial Services opened an inquiry into mobile payment and digital wallet financial services. The inquiry, as stated in the Terms of Reference, has examined imbalances of bargaining power, implications for competition and consumer protection, and the adequacy of the existing regulatory framework, among other issues.
The recommendations of the report ought to be directed towards solving policy problems, rather than addressing hypothetical issues.
To that end, recommendations 6, 7, and 13 impose an undue burden on the Buy-Now Pay-Later (BNPL) sector and innovation in the Australian economy. When considered in light of the current regulatory environment for these participants, these recommendations are not directed towards resolving issues identified in the terms of reference. I respectfully dissent from recommendations 6, 7, and 13.
The Regulatory Environment
The existing regulatory environment in Australia has been regularly reviewed and recently reformed. The report identified seven actors administering a regulatory framework which largely consists of seven regulatory instruments. As noted in the Final Report at 4.6:
The multi-regulator model has led to perceptions of complexity and regulatory overlaps, as well as possible gaps in the regulatory framework.
Submitters described the environment as ‘inconsistent and complex’, ‘overly burdensome’, and ‘very confusing’. EY described the environment as ‘one of the most highly regulated financial services ecosystems in the world’.
These issues are compounded for new market participants and have thus been a major obstacle for the BNPL sector. I do not agree with proposals which would increase the regulatory burden for the BNPL sector without clarifying and rationalising existing settings. The case has not been made in this report or elsewhere.
Given the significant obstacles already faced by this sector, such an impost would be inappropriate. Moreover, this does not account for completed and ongoing reviews into this sector, such as the Review of Retail Payments conducted by the Reserve Bank of Australia and the Senate Inquiry into Financial Technology and Regulatory Technology.
The level of scrutiny applied to this sector may create a ‘regulatory chill’ factor which could have an adverse impact on competition in payments and financial services, in addition to constraining investment and jobs.
Overview of the BNPL Sector
The BNPL market is experiencing rapid growth in Australia providing an agile, low-cost alternative to traditional banking services. The value of BNPL transactions increased by 55% in 2019-20 and increased threefold over the previous two financial years. For many younger people, BNPL has created a new set of options as an alternative to major banking groups.
For a country like Australia, this type of innovation in FinTech is terribly important due to the concentrated banking market. More choice, lower prices and more agency has been the result of BNPL.
The BNPL market remains relatively small. It makes up only around 1.7% of the broader payments sector. In 2020, the largest market participant, Afterpay, engaged 48,000 Australian merchants and 3 million customers. This included 38,000 small and medium-sized businesses.
The Recommendations
Recommendation 6. The committee recommends the Australian Finance Industry Association continues to monitor the effectiveness of the Buy Now Pay Later (BNPL) Code of Practice and ensure the Code is updated as and when necessary.
I agree that the Australian Finance Industry Association should continue to monitor the effectiveness of the BNPL Code of Practice. But that is not something that needs to be mandated by federal Parliament.
The committee process exists to resolve issues of public policy by aiding the legislative process. As a voluntary code governing the relationships between market participants, the committee should not be directing enforcement in a way which extends the remit of Parliaments’ core legislative functions.
Recommendation 7. The committee recommends that Australian Securities and Investments Commission be given the power to make the ePayments Code mandatory for all industry participants.
The ePayments Code is an ASIC-managed but voluntary code which has been adopted by Banks, Credit Unions, Building Societies and a small number of non-bank financial institutions.
Voluntary codes fill an important regulatory function. Regulatory innovation is possible where participants may opt-out if the code is unduly burdensome or inconsistent with their business practices. Regulators can be responsive to innovation and change. Given this, mandating the code may be inconsistent with the content of the code. This could be especially injurious to the BNPL sector.
Moreover, mandating the Code by fiat would effectively confer lawmaking functions upon ASIC. The case for this has not been conveyed. I cannot support it.
Recommendation 13. The committee recommends the committee consider an inquiry into the Buy Now Pay Later industry 18 months after the Industry Code of Practice came into effect.
The evidence received by this committee does not support a further review of the BNPL sector. The BNPL sector has been scrutinised by numerous government agencies and Parliamentary committees since its emergence.
The report at 6.130 noted that the ‘BNPL sector has largely fallen outside the scope of regulators in Australia’. I respectfully disagree. The BNPL sector has been subjected to a significant level of scrutiny. The report itself notes that the environment where the BNPL sector operates is ‘one of the most highly regulated’ in the world. Risks to justify a higher regulatory burden have not been made out to a sufficient standard. This could destroy innovation and jobs in Australia.
Moreover, the BNPL Code of Practice is a voluntary code established by the Australian Finance Industry Association. It was formulated by, and will be implemented by, market participants in response to market issues. Reviewing this code is thus outside the core legislative remit of this committee.
If consumer issues emerge, then a review can be conducted. But the Parliament should not be flagging future reviews without a demonstrable problem to solve. That would only undermine Australian dynamism.