ob体育 made an interim stop order on 25 May 2023 preventing Humm BNPL Pty Ltd (Humm) from issuing its buy now pay later (BNPL) product because of deficiencies in its target market determination (TMD). The order was revoked by ob体育 on 26 May 2023 following immediate corrective action by Humm to address the design and distribution obligation (DDO) deficiencies identified by ob体育.
The Humm stop order intervention and corrective action is an outcome of ob体育鈥檚 recently completed targeted review of BNPL compliance with their design and distribution obligations.
This intervention is ob体育鈥檚 second credit related DDO stop order, following ob体育鈥檚 stop order on credit for rent product One Card Credit in February 2023 (refer to 23-031MR). Notably, ob体育鈥檚 first civil penalty case alleging breaches of DDOs and commenced in the Federal Court in 2022, concerns two credit cards issued by American Express Australia Limited (AMEX) (refer to 22-338MR).听听听
The interim stop order prohibited Humm from issuing its BNPL product for a period of 21 days after the order was made, or until the order was revoked. The order was subsequently revoked on 26 May 2023.
Humm鈥檚 BNPL product allows consumers to borrow up to $2,000 for 鈥楲ittle things鈥� or up to $30,000 for 鈥楤ig things鈥�. It also included access to a feature allowing consumers to use the product to defer the payment of bills.
ob体育 was concerned that the TMD for Humm鈥檚 BNPL product was deficient in a number of key areas. First, it failed to appropriately define the target market. Humm鈥檚 target market only excluded a narrow subset of consumers who may find it difficult to make payments. Further, ob体育 was concerned that Humm did not specify details about the bill payment feature of the product, or the financial situation of consumers who intended to use this feature to pay bills, resulting in the TMD being deficient.
Second, the TMD did not contain appropriate distribution conditions to ensure the product was directed towards the target market. In particular, it did not contain details of how Humm, or its distributors, would assess whether a consumer meets the product鈥檚 eligibility criteria. The TMD also failed to explain how Humm's origination and application processes would ensure that the product was likely to reach consumers in the target market.
Finally, Humm鈥榮 TMD did not contain specific review triggers to monitor consumer outcomes in relation to consumers missing payments.
To address ob体育鈥檚 concerns with the TMD, Humm removed the bill payment feature from the product and amended its TMD by:
- defining the target market by describing the key features and attributes of the product that are consistent with the likely objectives, financial situation and needs of the class of consumers;
- providing greater clarity on how Humm and its distributors determine whether consumers meet the eligibility requirements to ensure the product is likely to reach consumers in the target market;
- including an explanation of Humm's systems, which seek information to establish whether the consumer meets the eligibility requirements; and
- setting out more clearly who is excluded from using the product.
Buy now pay later industry review
As part of ob体育鈥檚 ongoing monitoring of compliance with design and distribution obligations (DDO), ob体育 has been reviewing the product governance arrangements of a group of BNPL providers. The review analysed how TMDs were developed, as well as the data and metrics that informed review triggers. Providers were selected based on their market share, key attributes of their BNPL offering, and amount of credit offered.
ob体育 identified four areas for improvement:
Product descriptions
Most of the TMDs ob体育 reviewed lacked sufficient detail in describing features and attributes of the product. As set out above, ob体育 has intervened in one instance where we considered a key attribute of a product was not described in the TMD. Additionally, a number of TMDs mentioned fees as a key attribute of the product without specifying the numerical values of the fees.
TMDs could be improved by more clearly setting out the key attributes of the product and how they are consistent with the likely objectives, financial situation, and needs of the class of consumers in the target market.
Defining target markets
TMDs used descriptions that were too broad, making it difficult to ascertain the class of consumers comprising the target market. A BNPL provider who has a broad description of the consumers who comprise its target market, without that having appropriate consideration of the key attributes of the product, is at risk of including consumers who should not be in that target market. For example, a broad description of the target market that does not include references to financial hardship or the ability of consumers to make repayments is at risk of including vulnerable consumers in the class of consumers that comprise the target market. The class, or classes, of consumers that comprise the target market for a product should be defined with objective, tangible parameters so that it is clear which consumers form part of the target market.
Setting review periods
Most BNPL providers we reviewed nominated an ongoing review period of at least annually following the initial review. However, some providers indicated a period of at least two years.
A reasonable review period requires BNPL providers to consider the risk of detriment to consumers if the TMD is not reviewed promptly. In making this decision, the provider should consider the term and nature of its product and the market in which it is sold, including the way in which the product is distributed. For example, for providers that offer shorter term BNPL arrangements, such as repayment periods of six weeks, conducting a review every two years is unlikely to be frequent enough to satisfy themselves that the TMD remains appropriate.
Setting review triggers
Many of the TMDs did not contain appropriate review triggers for BNPL provider to determine whether the product remains appropriate for the target market. This is particularly in relation to some of the harms identified in REP 600 Review of buy now pay later arrangement and REP 672 Buy now pay later: An industry update such as incidents of consumers missing payments and becoming overcommitted when using BNPL.
Additionally, none of the BNPL providers ob体育 reviewed included clear data-based review triggers in their TMDs. Instead, the review triggers referred to subjective thresholds such as a 鈥榤aterial increase鈥� or a 鈥榮ignificant increase鈥�. Subjective thresholds make it difficult to determine whether the review triggers are adequate to reasonably suggest that the TMD is no longer appropriate.
Review triggers that are specific and based on objective measures 鈥� such as a level or rate of change that suggests there is a need for a review 鈥� will help BNPL providers ensure the TMD is likely to remain consistent with consumers鈥� likely objectives, financial situation, and needs.
As part of this review, ob体育 will now provide both general and individual feedback to the BNPL providers. It is ob体育's expectation that the providers will review the feedback and consider any action that may be required to ensure they comply with their obligations under DDO.
As ob体育 continues to monitor industry compliance with DDO, common trends continue to arise across numerous sectors. These include deficiencies in defining target markets, setting vague review triggers, as well as poor descriptions of key features and attributes of specific products.
ob体育 reminds financial product issuers that under the DDOs, they must define target markets for their products accurately and with appropriate detail, having regard to the risks and features of their products. Issuers also need to consider how their product will reach their target market and have appropriate distribution conditions in place to ensure the product is directed towards the target market. Entities must also establish review triggers in events and circumstances that would reasonably suggest that the target market may no longer be appropriate.
Background
ob体育鈥檚 review into BNPL is part of a broader effort to monitor and address industry compliance with DDO, including in respect of TMDs. Previously released findings include:
- 22-236MR Super trustees urged to improve effectiveness of target market determinations
- REP 754 Target market determinations for small amount credit contracts
- REP 762 Design and distribution obligations: Investment products
To date, ob体育 has made 42 interim stop orders under the DDO due to deficient TMDs. Of these, 34 interim stop orders have been lifted following actions taken by the entities to address ob体育鈥檚 concerns or where the products were withdrawn, and 8 remain in place.