Cries for regulation in the currently self-regulated Buy Now Pay Later (BNPL) sector are nothing new. Financial services providers and consumer rights groups have long expressed concern that these services enable financial overcommitment from vulnerable Australians. But are we reaching a point where the size and scale of these businesses, the emergence of several new market entrants, and the disruption to traditional credit markets is forcing the Government’s and regulators’ hands? This article looks at the current situation for BNPL FinTechs in Australia, how insurers currently view their risk exposures, and how this may change if regulations are introduced.
THE CURRENT STATE OF PLAY
In 2018, digital laybuy platform Afterpay and the BNPL sector avoided regulation when ASIC reported it was not looking to bring them under the National Credit Act. In late 2020, a Senate Committee on Financial Technology and Regulatory Technology backed the BNPL sector’s code of practice, saying self-regulation helped to protect innovation. This code is currently being finalised by The Australian Finance Industry Association (AFIA) in collaboration with its BNPL members. It aims to have the BNPL industry Code of Practice operating by 1 March 2021.
Recently, however, a report provided to the UK’s financial regulator, the FCA, following a review of the unsecured credit market, has made the strongest case yet for implementing regulation within the BNPL sector, at least in the UK.
HOW WILL THIS IMPACT THE AUSTRALIAN MARKET?
The BNPL sector is never far from the sights of ASIC, which released an industry update in November 2020. ASIC currently holds Product Intervention Powers (PIP) over BNPL products which provides a regulatory tool to address any significant harm to consumers. Come October 2021, the Design and Distribution Obligations (DDO) legislation will also apply to most ASIC regulated products, which will include BNPL products.
Whether these regulatory controls, complemented by industry self-regulation, will provide consumers sufficient protection without stifling innovation remains to be seen. What is certain, however, is this topic remaining hot for a while yet. According to IBISWorld, the market is predicted to maintain strong growth, with Australian BNPL revenue forecast to grow from AUD 680M (USD 488M) in FY20 to AUD 1.1BN by FY25, with users set to double to 4M within three years.
INSURING BNPL FINTECHS IN AUSTRALIA
FinTechs are a blend of technology and financial businesses, exposing them to risks common in both sectors, where insurers’ appetites are commonly limited.
Examples of such risks include:
- Technology risk – tech failures leading to 1st and 3rd party financial loss
- Financial and credit risk
- Financial crime, fraud, and identity risk
- Cybersecurity and Data Privacy – 1st and 3rd party losses
- Directors & Officers Liability
- Public & Products Liability
- Regulatory Investigations and Statutory Liability
- Money Laundering risk
Although some do, BNPL FinTechs are not required to hold an Australian Credit Licence (ACL). Thus, in the eyes of insurers, they do not have the same responsibilities and obligations as ACL holders under the National Consumer and Credit Protection Act. This lack of regulation makes insurers nervous, and securing adequate insurance is therefore challenging. It will be interesting to see whether insurers’ risk appetites change if regulation is introduced into the BNPL sector – as recommended in the UK.
We’re with you all the way
With significant experience in the financial, technology and FinTech sectors, Honan welcomes the opportunity to assist all businesses operating in this space. Feel free to reach out at any time to discuss your insurance needs.
Head of Client Service – Corporate Insurance & Risk Solutions
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