‘Buy now, pay later’ stars like Afterpay, Zip don’t need regulation, Senate inquiry into fintech says
Consumers don’t need to have legal protections when they use “buy now, pay later” services like Afterpay and Zip, because those companies can just self-regulate, according to a Senate inquiry into fintech.
With more consumers shopping online during the COVID-19 crisis, millions of Australians are turning to buy now, pay later services as an alternative form of debt to credit cards.
Platforms like Afterpay and Zip have been especially popular with millennials who may not be eligible for credit cards.
Some buy now, pay later services, such as Afterpay, don’t even require customers to do credit checks — people simply sign up and spend.
Afterpay argues no credit checks are needed because the company caps late fees and stops consumers from spending once they fall behind on a payment.
Consumer advocates had wanted these companies to be regulated under national consumer credit laws.
This would have ensured they face the same legal obligations as other financial services providers like credit companies, and that consumers are protected under those laws.
But the Senate Select Committee on Financial Technology and Regulatory Technology, chaired by Liberal senator Andrew Bragg, disagreed that regulation was the best way forward.
In its interim report, tabled in Parliament on Wednesday night, the Committee said: “Because innovation like ‘buy now, pay later’ often occurs on the fringes of regulation, it is inappropriate to force each innovation into a one-size-fits-all approach.”
It said, “industry self-regulation provides an initial framework to protect innovation which can later be backed up by a policy statement” by the Federal Government.
But a dissenting report from Labor senators said self-regulation under a voluntary code could fail to properly protect consumers.
It suggested the inquiry listen to calls from consumer groups for there to be additional safeguards including requiring platforms to run identity checks, cap late fees, limit multiple accounts and restrict use by minors.
The dissenting report said while these companies do not necessarily need to be regulated under consumer credit laws, they should have adequate hardship provisions for when people get into trouble.
Afterpay, Zip say no regulation means they can grow
Afterpay, which now has 10 million active customers globally and has seen its share price soar in recent months, had argued during the inquiry that regulation shouldn’t impede fintechs from being able to compete with the big banks.
Afterpay co-founder Anthony Eisen had told the inquiry that regulation could be “dangerous” as it would “stifle innovation and competition”.
On Wednesday evening, after the release of the report, Mr Eisen told ABC News that “existing regulatory structures would not deliver fit-for-purpose regulation” and the company was glad they could continue with self-regulation under a voluntary code of conduct.
“Our regulatory frameworks need to embrace and foster this [innovation] if Australia is to compete on an international level,” Mr Eisen said.
Zip co-founder and chief operating officer Peter Gray said, “the committee is absolutely spot-on in its recognition that innovation is too important to be smothered with a one-size-fits-all approach to regulation”.
“Zip is pleased to see the committee acknowledge the importance of self-regulation and the need to create a culture of innovation in Australia,” Mr Gray said.
Senator Bragg also told ABC News there was no evidence of consumer detriment in the buy now, pay later space and he did not want to see the growth of fintechs impeded because of regulation.
“You’ve got to be careful not to put more power into the hand of the big banks,” Senator Bragg said.
The report had relied heavily on evidence from the lobby group that represents the finance sector, the Australian Finance Industry Association, that hardship cases were low.
It noted that even at the peak of financial hardship requests from consumers in March and April, across the buy now, pay later industry the percentage of customers “approved for hardship” was less than 1 per cent.
Consumer advocates fear self-regulation won’t work
But consumer advocates have reported increasing numbers of consumers reaching out after getting into debt with various buy now, pay later providers.
Consumer Action Law Centre chief executive Gerard Brody said the banking royal commission proved that self-regulation does not work.
“Buy now, pay later needs to meet consumer protections in law if they’re going to be delivering innovation that benefits the community,” Mr Brody said.
Financial Counselling Australia’s Fiona Guthrie said all forms of credit should be regulated the same way.
“Self-regulation isn’t working — people get into financial trouble because of buy now, pay later,” Ms Guthrie said.
The Senate’s interim report is likely to influence where regulators such as corporate watchdog the Australian Securities and Investments Commission (ASIC) land on the issue.
ASIC is currently reviewing the industry as a follow-up to its November 2018 report that found the products “can cause some consumers to become financially over-committed”.
ASIC’s previous report found one in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now, pay later arrangement.
The Senate Committee said in its interim report that while it was “appropriate that ASIC and the RBA undertake reviews into various regulatory issues, the policy in this space must be set by the Parliament”.
Technology to play a greater role post-COVID-19 crisis
The Senate Committee made a number of other general recommendations for the wider fintech industry, looking at the impact the COVID-19 pandemic has had on the sector.
It recommended that the Corporations Act be amended to allow companies to decide the best format for holding their annual general meetings and to communicate with shareholders electronically.
It said digital signatures and videoconferencing for legal purposes and changes to enable electronic execution and witnessing of legal documents should be made permanent.
It also noted telehealth had been “embraced by patients and doctors alike” and recommended that “Medicare telehealth items introduced during the pandemic be made a permanent feature of the Australian healthcare system”.
It called on “the federal government plan to fast-track the implementation of electronic prescriptions to be rolled out as quickly as possible” and to ensure “an open and accessible market for ePrescription services in Australia”.
The committee also supported the existing move towards a digital identity ecosystem, which would include continuing to expand the range of federal government services accessible under myGovID.
This digital ID allows citizens to verify their identity when applying for passports, driver’s licenses, Medicare cards and access to government services.
But in its dissenting report, Labor said it did not want to see this change rushed out, especially since the infrastructure to enable it was not yet adequate and the community still had concerns.
It noted feedback on the Government’s COVIDsafe app showed that the Digital Transformation Agency — which is the same agency behind the planned rollout of a digital identity — “[doesn’t] consult well with the broader tech community”.
Labor also did not support allowing companies to exclusively do virtual meetings after the pandemic.
Law Council of Australia president Pauline Wright said the report had “lit a path toward enabling technology to play a greater role in corporate regulation in the wake of the COVID-19 pandemic”, but called for safeguards.
“There must also be measures in place to protect against fraudulent activities that may accompany an increased reliance on the electronic execution of documents,” Ms Wright said.
Make R&D tax incentive easier, support start-ups
The Senate interim report also looked at the problems surrounding people being able to claim the R&D tax incentive.
It noted getting the tax break was “long, difficult and resource-intensive, making it especially challenging for early-stage fintechs which are time and resource-poor”.
It said the committee had “heard significant concerns around the [Australian Taxation Office’s] “retrospective action” against R&D tax incentive claimants.
It noted rebates were being clawed back from companies, in some cases several years after initial payment.
“The Government needs to provide clearer guidance on this issue and limitations on the ability for payments to be clawed back retrospectively,” the report said.
It also suggested that early to mid-stage start-ups be supported through payroll tax concessions and non-salary-based incentives used to attract skilled talent such as the use of employee share schemes.
It said there was merit in investigating how the vast pool of capital available in superannuation funds can be invested more widely, including in Australian startups.
And it recommended the Federal Government explore including “outplacement training” for start-ups as being eligible under the Fringe Benefit Tax exemption.
In relation to access to “open banking” data, the committee recommended that the Australian Competition and Consumer Commission (ACCC), or a new proposed national Consumer Data Right (CDR) body, finalise the rules for third-party access to such data by late 2020.
It said consumer awareness on the impending rollout of open banking was currently low and there should be further education, including information to help protect vulnerable customers.
On the issue of digital data capture or “screen scraping”, the committee noted the strong views expressed by both supporters and opponents of the technology, but said ASIC had “found no evidence of consumer harm as a result of these practices”.
“As such, the committee considers that an outright ban on screen scraping is not prudent at the present time,” it said.
But Labor’s dissenting report said it disagreed that screen scraping should be freely allowed, noting fears that consumers may be held liable for cases of fraud after providing their banking details to third parties via digital data capture.
It noted evidence given by consumer groups to the inquiry that payday lenders were using consumer data to keep dishing out loans to vulnerable people when they got low on cash.
The inquiry received more than 200 written submissions and the committee will present a final report by April next year.