Described as a 'world first' for the buy now, pay layer (BNPL) sector, the code of practice drafted by the Australian Financial Industry Association (AFIA), comes after a Senate inquiry and an ASIC review of the sector.
Under the terms of the code, due to be implemented on July 1, BNPL providers cannot push customers into positions of financial hardship, such as initiating bankruptcy proceedings against a customer or referring them to a third-party debt collector.
They will also not be allowed to charge late fees to customers who have flagged they're under financial hardship, and late fees must be "fair, reasonable and capped".
Along with controls on late fees, customers will be assessed upfront to ensure a product is suitable, and prevented from spending more when they're behind in their repayment obligations to make sure customers don't over-commit.
Consumers will also have access to the Australian Financial Complaints Authority (AFCA) to make complaints against BNPL providers if they're unable to resolve a dispute.
In recent years, the BNPL sector has been accused of pushing young people into high levels of debt with little to no credit checks, and raking in revenue from late fees.
According to ASIC, one in six BNPL users had become overdrawn, delayed bill payments or had to borrow additional money to make their repayments.
The percentage of revenue from missed repayment fees rose from just 2% in 2016 to 14% in 2018.
AFIA CEO Diane Tate said the code is being developed to strengthen consumer protections.
"BNPL providers are not unregulated, they already comply with numerous laws that protect customers," Ms Tate said.
"However, this draft code goes above and beyond existing laws by increasing safeguards for customers, including upfront assessment of customers to ensure the product will be suitable for them, product limitations to ensure customers don't over-commit, and access to AFCA's external dispute resolution scheme.
"Approximately 30% of Australian adults (5.8 million) now use BNPL services, so this is a good time for the industry to develop an industry code to set the standards and drive good practices.
"While our intent is to get the code right from the outset, we welcome all feedback. For instance, ASIC's latest BNPL review is due soon. Depending on the timing of the release, it may inform the code's development prior to implementation."