Consumer groups have welcomed the Federal Government’s initiative to open a consultation on the draft legislation to regulate the Buy Now, Pay Later (BNPL) sector in the same way as other credit providers.

BNPL adds as much as $18.4 billion to Australia’s gross domestic product, Assistant Treasurer and Minister for Financial Services Stephen Jones.

However, the minister noted that since the scheme is not subject to any regulatory framework, it can result in poor product disclosure, insufficient dispute resolution processes, excessive default fees and unaffordable lending practices.

Draft legislation seeks to treat BNPL as credit, which if implemented, will require its providers to hold an Australian Credit Licence and comply with existing requirements under the Credit Act – much like banks.

“Today is a positive day for Australian consumers with the government proposing draft legislation to treat Buy Now, Pay Later as what it really is – credit,” said the CEO of Financial Rights Legal Centre, Karen Cox.

“Removing this regulatory loophole and capturing Buy Now, Pay Later under the Credit Act will go a long way towards bringing these products within acceptable guardrails – helping people spread their expenses without getting into problematic debt.”

While the proposed law would require BNPL providers to ask about a borrower’s income, some consumer groups maintain that is still not enough.

“The one area we are looking at closely is what this will mean for accounts under $2000. Financial counsellors see clients with multiple, small amount accounts and these are getting some people into debt spirals,” said Financial Counselling Australia co-CEO Domenique Meyrick.

“We welcome the government’s consultation on draft legislation to regulate BNPL as credit, however the proposed framework does not appear to require BNPL providers to verify income, catering too much for fast credit approvals over accurate ones,” added Choice CEO Tom Abourizk.

Submissions for the draft legislation will remain open until April 9.