The Rudd Government has released its draft National Consumer Credit Protection reforms for public discussion. The new laws will transfer the regulation of consumer credit to the Commonwealth with ASIC becoming the national credit regulator.
Based substantially on the FSR regime style of licensing which has now been in place since 2001, the reforms extend the consumer credit protections to residential investment property and certain instalment contracts but overall do not significantly alter the nature of credit contracts caught by the consumer credit laws.
The most significant change to be introduced in the reforms is the extension of the consumer laws to credit service providers and to those who are acting on behalf of credit providers. Also of significance is the introduction of the responsible lending regime which will impact on the processes required in the pre-loan stage, and place onerous responsibilities on the credit providers and the providers of credit services.
The following is a summary of the draft National Consumer Credit Protection reforms.
The existing definition of consumer credit has been expanded. The reforms apply to credit provided (and to credit contracts and related matters) by a person who is in the business of providing credit for a charge and it is provided to a natural person or strata corporation for:
- personal, domestic or household purposes; or
- to purchase, renovate or improve a residential investment property.
Credit provided for business or investment use is excluded except for residential property. This is a deliberate policy decision on behalf of the Government to include credit contracts over residential investment property.
Deemed credit contracts will include:
- Contract for hire of goods with a right or option to purchase where the hire charge exceeds the cash price of the goods.
- Contracts for sale of land by instalments where the purchaser becomes entitled to possession before the transfer of title.
- Contracts for the sale of goods by instalments where the price exceeds the cash price of the goods.
- Contracts for the sale of goods by instalments under a related contract where the credit finances the sale of the goods by amounts payable by instalments and the credit provider is the supplier of the goods or a related body corporate.
The National Credit Code is incorporated in the National Consumer Credit Protection Bill 2009 and the related regulations.
Credit providers, finance brokers and intermediaries will be required to register with ASIC from 1 November 2009 until 31 December 2009 and must obtain an Australian Credit Licence (ACL) by 30 June 2010. All persons engaging in credit activities for the first time on or after 1 January 2010 will require an ACL before commencing business.
Activities for which ACL authorisations will be required include credit contracts, credit services (i.e. the provision of credit assistance and acting as an intermediary), consumer leases, mortgages and guarantees.
- Entry standards for registration and licensing will allow ASIC to refuse an application where a person does not meet its standards.
- The licensing regime is very similar to that which applies to Australian Financial Services licences required for Chapter 7 of the Corporations Act.
- Licensing requirements include membership of an external dispute resolution body and adequate compensation arrangements.
- Employees and directors of an ACL are able to engage in the relevant credit activities of the ACL.
- ACL's may appoint credit representatives to act on their behalf. This is a similar concept to authorised representatives appointed by AFS licensees.
- There is no exemption for banks, ADIs and AFS licensees as the ACL licensing is a distinct licensing regime. APRA regulated entities will have some streamlining.
Who will need a licence?
The reforms will apply to a person who engages in credit activities. This includes credit providers who provide credit or providers of consumer leases as well as activities in relation to mortgages and guarantees taken to secure or guarantee obligations under a credit contract.
The need to be licensed covers pre contractual conduct and negotiations as well as the collection of money under a credit contract or lease. This means that the credit provider will need to remain licensed so long as they are a party to the credit contract.
Entities requiring a licence include:
- Credit providers, mortgage managers, the beneficiary of a guarantee that guarantees the obligations of a borrower or a person that performs the obligations or exercises the rights in relation to a guarantee.
- A person who receives by assignment the rights of a credit provider or lessor who will be regarded as engaging in credit activities when they exercise those rights. This is likely to capture debt collection agencies as well as factoring.
- Persons who provide credit services where they either:
- Provide credit assistance such as when they suggest that the consumer:
- Apply for credit in respect of particular credit contract or lease.
- Apply for an increase in a credit limit of a particular credit limit.
- Remain in a credit contract or lease.
- Assist the consumer to apply for credit or apply for an increase in a credit limit.
- Act as an intermediary between the credit provider and the consumer including but not limited to:
- Finance brokers who arrange the credit.
- Aggregators acting as a conduit between an individual broker and a credit provider.
- Mortgage managers involved in arranging the credit and then managing it after it has been provided.
- Persons referring consumers to another person when this is done for the purposes of securing credit.
Excluded from credit reforms
Exclusions from credit reforms include:
- Margin loans - these will be regulated by Chapter 7 of the Corporations Act, 2001 (Cth).
- Short term credit by an ADI of less than 62 days.
- Credit provided by pawn brokers and trustees of estates.
- Credit provided under bill facilities.
- Certain employee loans.
- Credit under continuing credit charge in certain circumstances.
- Credit of less than $50.
- Student loans.
Responsible lending requirements
'The responsible lending laws will make it illegal for a lender, known as a credit provider, to extend credit for a consumer that is unsuitable based on their needs and their financial capacity.'
Senator Nick Sherry, Minister for Superannuation and Corporate Law.
It will be illegal for credit service providers such as brokers and other intermediaries to suggest credit for a consumer that is unsuitable based on their needs and their financial capacity. There is no existing law that regulates responsible lending in Australia so these requirements will impact on all ACLs.
The responsible lending requirements have four key components:
1. Licensees must assess the consumer's capacity to repay a
credit contract or credit proposal.
2. Licensees must ensure that the contract is not unsuitable for the credit purposes of the consumer's objectives, financial circumstances and needs.
3. Licensees must disclose key details to consumers about the credit lender, broker or adviser before providing any services.
4. Licensees must ascertain and disclose fees payable by the consumer as well as commissions to be paid to the service provider before the service or the credit is provided.
These obligations are imposed on any licensee who:
- Enters into credit contracts.
- Suggests the consumer enter unto a particular credit contract with a particular credit provider.
- Assists a consumer to apply for a particular credit contract with a particular credit provider.
- Provides services such as :
- Entering into new credit contracts.
- Applying to increase the limit of an existing contract.
- Suggesting the increase on a credit contract.
- Assisting a consumer to apply for an increase in a credit limit.
- Advising a consumer to stay in an existing consumer credit contract.
A credit guide must be provided to a consumer when it becomes apparent to a credit assistance provider than they are likely to be providing such services to the consumer or the consumer's agent. This document will be similar to the Financial Services Guide ( FSG) provided by financial services providers but requires the disclosure of key obligations of the credit assistance and the rights of the consumer to be included as well as information on fees and charges.
Before providing any credit assistance a licensee must provide a consumer with a written quote setting out the maximum fees payable for the assistance and any other charges to be included.
A credit contract must be assessed as unsuitable for the consumer if at the time of making the assessment it is likely that:
- the consumer will be unable to comply with the financial obligations under the contract, or could only comply with substantial hardship;
- the contract will not meet the consumer's requirements and objectives; or
- prescribed circumstances set out that the contract must be assessed as unsuitable.
The possible range of factors that may need to be established in relation to a consumer's capacity to repay credit could include:
- The consumer's current income and expenditure.
- The maximum amount the consumer is likely to have to pay under the credit contract for the credit.
- The extent to which any existing credit contracts are to be repaid, in full or in part, from the credit advanced.
- The consumer's credit history, including any existing or previous defaults by the consumer in making payments under a credit contract.
- The consumer's future prospects, including any significant change in the consumer's financial circumstances that are reasonably foreseeable (such as a change in the amount the consumer has to pay under the credit contract for the credit or under any other credit contract to which the consumer is party).
Greater care will need to be taken in regard to inquiries about the consumer's financial situation when the consumer is refinancing, especially if they are refinancing because they are unable to meet the repayments of an existing credit contract. Refinancing may incur transaction costs and fees and charges, including fees for moving from one credit contract to another. All costs of moving credit contracts are expected to be taken into account when assessing the consumer's ability to meet the obligations of the new credit contract over a reasonably foreseeable term.
Suggested plan of action
Given the similarities to the AFS licensing regime the ACL licensing application process and ongoing compliance obligations are also likely to be similar to that required of AFS licensees. This process requires the preparation of document proofs that set out various processes in place within the licensee to ensure compliance with the law and the ACL obligations.
Project teams (one for licensing and one for responsible lending) formed now can help in meeting the deadlines for registration and licensing.
The FSR reforms uncovered many financial products and distribution channels that were unknown to some key areas of organisations. While the reforms are still in draft format it is important to identify potential credit contracts and contract services now rather than later.
While many aspects of the new consumer protection regime will be familiar there is a danger that terms are defined differently to common industry usage. This was a particular problem during the early days of the FSR reforms. All consumer contracts and consumer leases will need to be identified and reviewed to identify changes that need to be made. New documents meeting the prescribed wording and requirements will need to be developed and this process should commence as soon as possible.
How we can assist
DLA Phillips Fox has worked with FSR from its inception and has an extensive Australia-wide knowledge of how this form of licensing system works as well as the requirements for the type of disclosure regime being introduced. We can assist in identifying the areas where the reforms extend the existing consumer credit laws and also with the documentation required for licensing as well as for presentation to the consumers. We can also assist in the review of documentation and the drafting of new documents aligned with the new credit regime requirements.
In the immediate future we can help you identify whether or not your business is caught by the reforms, assist in briefing project teams and executives as well as help in the preparation of licence applications and responsible lending requirements. It is important not to underestimate the level of planning and work that will be required to implement this new regime especially in the new areas of responsible lending which have no counterpart in the existing Uniform Consumer Credit Code. We can help you negotiate through this maze.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.