The buy now, pay later (BNPL) industry’s easy regulatory run is coming to an end as the government looks to apply more strict rules that would, at a minimum, legally require BNPL companies to check if people can afford to take on credit.

BNPL services currently operate within a light touch regulatory framework involving their voluntary agreement to an industry code of practice which, as Treasury pointed out in a consultation paper published on Monday, hasn't been agreed to by all BNPL players– including the Commonwealth Bank and Paypal, both of which announced BNPL products last year.

Treasury noted that the industry code is “not enforceable” and doesn’t result in fines or other penalties when a signatory misbehaves.

Assistant Treasurer Stephen Jones said on Monday morning that it was time to start properly regulating BNPL to minimise potential harm for people taking on extra credit.

“A lot of people have got not one, not two but three or four buy now, pay later accounts and it appears that there is a small percentage of the market where people are getting into hot water,” he said.

“We want to ensure that this product is operating safely.”

Jones added the government wanted to avoid "the bad old days of the credit market” when people would sign onto multiple credit cards, find themselves unable to pay, and end up in a “credit downward spiral”.

“We want innovation,” he said. “We want people to have access to these great products but we want to ensure that there’s proper guardrails in place.”

Treasury has proposed three options for BNPL regulation.

The first would extend the industry code in collaboration with the government and also update the Credit Act to require BNPL providers run affordability checks on customers.

The second option would bring BNPL providers further under the Credit Act by requiring them to hold a Credit Licence (or represent a licensee) and comply with “most general obligations” of a credit license.

The third option would treat BNPL as any other credit service, requiring them to comply with the entirety of the Credit Act.

Both the second and third options would also see a strengthened industry code to cover issues that aren’t covered by the Credit Act.

It’s the first major sign of a changing landscape for BNPL providers which were given something of a free pass during a period of high growth that led up to Square's acquisition of BNPL originator Afterpay for a whopping $39 billion last year.

Consumer groups and financial advisors have long expressed their concern, however, that BNPL products – which sees consumers pay for products in a set of interest-free instalments – risks people falling into debt traps.

A report from Financial Counselling Australia late last year noticed a massive spike in people taking on BNPL debt, including for essential items.

Indeed, Monday's Treasury paper notes the expansion of BNPL products advertising to pay for groceries and utility bills which creates risk for vulnerable Australians who are just looking to make ends meet.

Analysis by Curtin University last year found BNPL tended to have regressive fee structures in which late fees on smaller purchases incur greater percentage fees than those on large transactions.

The result can be costs that are effectively higher – over 200 per cent in some cases – for BNPL products than typical credit card interest rates.