Consumer Leases and Credit Contracts

Is your business compliant?

Does your business issue goods leases, such as leasing out equipment or hire purchase agreements, to individuals? If so, then you need to know whether or not the National Consumer Credit Protection Act 2009 (the "Act") may be impacting on your business.

Since the introduction of the Act, we have found that many businesses that fall within the application of the Act - because they rent out equipment or issue hire agreements to individuals - are actually unaware of their obligations and lack compliance. Unfortunately, these businesses find out about their obligations when it's too late.

The Act regulates the form and disclosure obligations of businesses when issuing credit contracts to individuals. Further amendments to the Act are proposed to commence on 1 July 2012 that specifically relate to consumer leases and credit contracts.

This article highlights the key differences between a consumer lease and a credit contract, as applicable to goods leases. It will tell you why this identification is important and summarise the proposed amendments to the Act that are applicable to these types of contracts.

Does your business issue Consumer Leases and/or Credit Contracts?

The table below outlines the differences between consumer leases and credit contracts as defined by the Act:

For the purposes of this article, these definitions are not intended to be exhaustive and you are encouraged to seek legal advice to determine whether or not your documents fall within the scope of either of these two scenarios.

Current obligations

All businesses that issue either a consumer lease or a credit contract as defined by the Act must ensure that their documents comply with the requirements set by the Act, which include:

• the form of the written contract;
• specific matters that must be included in each type of contract including pre-contractual and post-contractual disclosure requirements, all of which are different depending on whether the contract is a consumer lease or a credit contract.

In addition to these requirements, all credit contracts must comply with the maximum percentage of interest that the credit provider may charge the customer pursuant to the Act.

Proposed amendments to credit contracts and consumer leases

A summary of the key changes that are likely to commence on 1 July 2012 from the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Cth) are as follows:

• additional disclosure requirements are proposed to consumer leases so that they will be regulated more like credit contracts. This means more paperwork and administration for businesses!
• a new regulatory regime is proposed, which relates to small amount credit contracts of $2,000 or less. It is proposed that this new regime will include specific requirements of a maximum establishment fee and a maximum monthly charge that may be imposed on contracts that fall within the definition of a small amount credit contract. This means that new rules will apply to all of your daily contracts issued to individuals from the commencement date of the new amendments;
• there will be a need to expressly specify in credit contracts that the maximum 'cost rate' including interest and charges and fees to third parties (such as brokers) is 48% per annum. With this proposed change and without much clarity or assistance from authorities as to how the cost rate formula is actually calculated in practice means this area remains complex and unclear. Many businesses affected by this will need guidance on how to deal with this;
• new hardship provisions for hirers giving your customers more consideration for their financial position and hardships;
• the time for giving direct debit default notices is extended from 10 business days to 14 business days; and
• whereas before your business could take enforcement action after 14 days of default by the customer, now there are new provisions that postpone the businesses ability to take such action.

Penalties for non-compliance

The following penalties apply to businesses that fail to comply with their obligations under the Act:

As a responsible business owner, what should you do?

1. Consider whether or not your goods lease is a consumer lease or a credit contract as defined by the Act.
2. If the goods lease is a consumer lease or a credit contract, we strongly recommend that you have your leasing and credit documents reviewed for compliance with:

• your current obligations specified by the Act; and
• any applicable proposed amendments to the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.