An exposure draft of the Finance Broking Bill has been released. The draft bill introduces the long anticipated national regulation of finance brokers.
Comments are invited on the draft bill by 15 February 2008. A copy of the draft bill can be obtained by clicking here.
The following is a short summary of the proposals. The law may change prior to implementation, and there is no commencement date yet proposed.
Who Needs To Be Licensed?
A business conducting finance broking is required to be licensed. Finance broking includes:
- providing advice or assistance to the consumer, or
- acting as an intermediary between the consumer and a credit provider
for the purpose of securing 'credit' for the consumer. Credit includes both UCCC regulated and unregulated loans.
Big Business Exemption
"Big business" transactions are completely excluded from the regime. The exemption applies when the loan is provided for business purposes and either the loan exceeds $2 million or the number of people employed in the business exceeds 100 (in the case of a manufacturing business) or 20 (in any other case).
If the credit is to purchase a single dwelling for investment purposes, it is not taken to be provided for business.
Up The Line Exemption
Intermediaries who do not deal directly with the borrower, or deal directly with the borrower but only in relation to incidental matters relating to the loan, are wholly exempted from the regime.
This means that aggregators, trust managers, and securitisation managers who do not deal direct with the public will not need to be licensed and will not be subject to the legislation.
Exclusive And First Choice Exemption
Brokers who do not hold themselves out as finance brokers and offer branded loans will need to be licensed but will not need to enter a finance broking contract.
What Is Required To Obtain A Licence?
An individual must:
- belong to an EDR scheme
- have an approved insurance policy
- be resident in Australia
- have the prescribed qualifications (there will also be ongoing education and training requirements)
- be a fit and proper person
- not be a disqualified person (ie not be mentally incapacitated, prohibited from managing a company, or declared to be a disqualified person as a result of a complaint under this licensing regime).
Companies and partnerships can obtain a licence. Companies must have a director or an employee who is licensed. Partnerships must have a partner or an employee who is licensed.
A company and a partnership must not have a disqualified person as a director or partner respectively, even though some other individual may be the licensee.
A licensed finance broker can appoint a representative. For example, aggregators can require sub-originators to hold their own licence or aggregators can appoint sub-originators their broker representative.
The licensee is responsible for the conduct of its broker representatives. We suspect that generally this will mean aggregators will want their brokers to be licensed in their own right.
Credit Provider's Liability
To encourage compliance, any lender who provides credit through an unlicensed intermediary will be responsible for that person's conduct. However, this only applies if the borrower could reasonably be expected to have relied on, and did in fact rely on, the conduct of that intermediary.
Finance Broking Contract
Before providing a finance broking service, the broker must:
- give written notice of the broker's details
- ascertain both the borrower's credit requirements and the borrower's capacity to repay
- (enter a finance broking contract and give a copy to the borrower.
The finance broker's details must include the panel of lenders (limited to the top 20 with whom the broker conducts business), referral fees, commissions, and details of the broker’s EDR scheme.
Small Business Exemption
The requirement to provide a finance broking contract will not apply to business loans if before the broking service is provided, the finance broker informs the borrower (whether orally or in writing) of any fees, charges or commissions that will be payable by the borrower. The finance broker must give written notice confirming the amount of the fees and charges within 48 hours after the service is provided.
This exemption is designed to permit business finance to be provided on an urgent basis.
Brokers To Verify Ability To Repay
Brokers will be required to verify the borrower's capacity to repay. This is to be ascertained by reference to the borrower's financial circumstances including income and expenditure, credit history, and future prospects. This capacity then has to be verified by inspection of documents and an enquiry of such third parties as is practicable. The broker cannot rely on a declaration by the borrowers that they can afford the loan.
Reasons For Recommending A Product
The FBC will need to specify:
- if more than one proposal is put forward - a comparison of the costs and benefits of each proposal
- if one of the proposals is recommended - the broker's reasons for making such recommendation
- for refinances - a comparison of the costs and benefits against the existing arrangements and a statement of the costs to convert.
Stay Of Enforcement Action
If there are proceedings before a court or an EDR scheme between the borrower and the broker, the borrower can apply to the Supreme Court to require the mortgagee to cease any action. In deciding whether to make an order, the court must consider:
- whether, if the borrower's case was successful, it would prevent the need for the mortgage to be enforced
- whether the borrower can make payments to the mortgagee while the proceedings are on foot so that there will be no irretrievably adverse affect on the lender's interest.
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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.