Anxious times ahead for investors in Afterpay Touch Group Ltd (ASX:APT)

The big rebound in the share price of Afterpay Touch Group Ltd (ASX: APT) following its brutal sell-off could come under threat on a media report that the government regulator will be releasing a report on the non-bank consumer lending sector in December.

The Australian Securities and Investments Commission (ASIC) is investigating if new laws need to be imposed on the fledging buy now pay later sector and the Australian Financial Review reports that ASIC is putting the finishing touches on its report.

Tough new rules will be an added headwind that Afterpay doesn’t need at the moment as it tries to overcome the perception that its stock is too expensive and won’t live up to the hype.

While the stock has slumped 22% from its August record high of $21.13, Afterpay is still boasting a 400% gain over the last two years compared to a 3% increase in the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

ASIC’s investigation will also likely impact on FlexiGroup Limited (ASX: FXL) and Zip Co Ltd (ASX: Z1P) but it’s Afterpay that is under the spotlight due to past media reports on consumers exploiting the service – such as underaged customers using the service to buy alcohol.

However, I think any weakness in Afterpay’s share price is a buying opportunity as I think fears of tougher regulations are overblown.

The New Zealand government had investigated the industry due to similar concerns, but the report suggested there was no need for any new laws to be enacted although it is leaving the door open on this front due to the fast-changing nature of the fintech industry.

But there is a risk that ASIC may overreact in the wake of the Banking Royal Commission. ASIC is under pressure as it was seen to be too soft and slow to act on financial institutions with Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and AMP Limited (ASX: AMP) likely to face criminal prosecution – no thanks to ASIC.

The regulator may feel compelled to show that it’s changing its ways and come down harder on Afterpay and friends than it normally would.

This is a risk factor that makes me more nervous about Afterpay than other issues – including valuation. If anything, I think demand for the company’s service, which offers consumers an interest-free instalment plan, will increase as interest rates and inflation rises.

This particularly bodes well for its aggressive US expansion given strong employment and robust consumer sentiment ahead of the all-important Christmas shopping season.

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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO and National Australia Bank Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and National Australia Bank Limited. The Motley Fool Australia has recommended FlexiGroup Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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