Senate inquiry says Zip Co and Afterpay can regulate themselves

A culture of self-regulation is imperative to support the emergence of new Australian fintech models, according to an interim report from a Federal Senate Committee.

The report says the growth of buy-now pay-later (BNPL) companies would be stifled if mandatory and specific laws were introduced to govern them.

In addition, the Committee says BNPL companies like Afterpay (ASX: APT), Zip Co (ASX: Z1P) and FlexiGroup (ASX: FLX) have managed to develop innovative new products and protect consumers under the guidance of self-regulation.

The recommendations were released this week by the Select Committee on Financial Technology and Regulatory Technology.

"The committee considers that in many instances, industry self-regulation can be an efficient way for innovative products in the financial services sector to emerge, while ensuring adequate protections for consumers," says the Select Committee.

The interim report points to the development of an industry code of practice in the BNPL sector as an example where the sector is working constructively to respond to stakeholder concerns and achieves appropriate regulation that benefits consumers.

"The committee notes evidence from the Australian Finance Industry Association that even at the peak of financial hardship requests from consumers in March and April 2020, across the BNPL industry the percentage of customers approved for hardship was less than 1 per cent," says the Select Committee.

Further, the committee says the Australian Government should support instances where self-regulation can be utilised appropriately in financial services more broadly.

"Although it is appropriate that ASIC and the RBA undertake reviews into various regulatory issues, the policy in this space must be set by the Parliament," says the Select Committee.

"It is therefore appropriate that the regulatory landscape for innovative products like BNPL be set out by a clear policy statement from the elected Parliament.

"Because innovation like BNPL often occurs on the fringes of regulation, it is inappropriate to force each innovation into a one size fits all approach. Industry self-regulation provides an initial framework to protect innovation which can later be backed up by a policy statement or a form of co-regulation."

The Select Committee's recommendation has been welcomed by Zip Co co-founder and COO Peter Gray today.

"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," says Gray.

"On this point, Zip is pleased to see the committee acknowledge the importance of self-regulation and the need to create a culture of innovation in Australia.

"Zip also notes the committee's reference to the robust performance of the Buy Now Pay Later sector during COVID, which the committee says saw less than 1 per cent of customers approved for hardship relief, which is significantly better than other traditional sectors and business models."

Similarly, Afterpay co-founder and CEO Anthony Eisen says existing regulatory structures are not a good fit for emerging fintech companies.

"We welcome the report and its support for products that introduce new business models and provide much-needed competition in the marketplace, which in turn offer greater customer choice and help to raise standards," says Eisen.

"We welcome the premise that existing regulatory structures would not deliver fit-for-purpose regulation and would be happy to see the BNPL Code of Conduct recognised and used as the basis of more formal regulation in the future.

"What this report recognises is that customers are responding positively to innovation that delivers better outcomes for them, and that our regulatory frameworks need to embrace and foster this if Australia is to compete on an international level."

BNPL shares slump

Shares in Afterpay (ASX: APT) and its smaller rival companies have been tumbling over the last four days following the announcement that PayPal was entering the BNPL space.

Afterpay fell by nearly 10 per cent between 31 August and the close of market yesterday, but is on the up this morning by 0.65 per cent.

Similarly, FlexiGroup (ASX: FXL), which operates a BNPL offering for larger purchases called Humm, witnessed an 8.2 per cent dive over the same period.

Zip Co saw the largest drop out of the three, down 22.93 per cent over the three day period since PayPal's announcement.

PayPal's new BNPL offering will be a direct competitor to both Zip and Afterpay's model, giving customers the option to delay payments for purchases of between $30 to $600, repayable in four instalments over six weeks.

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