On 27 April 2009, senator Nick Sherry, the Minister for Superannuation and Corporate Law, released a draft of the National Consumer Credit Protection Bill 2009. The implications of the Bill will be wide ranging and affect any person involved directly or indirectly in the provision of consumer credit. It is intended that the proposed changes will operate from 1 November this year with the Federal Government currently calling for submissions on the draft Bill to be submitted before Friday 22 May 2009.
The Bill requires all persons who engage in credit activities to hold an Australian Credit Licence (ACL) issued by ASIC. On the current drafting of the Bill, all persons engaging in credit activities will firstly need to register with ASIC by 31 December 2009 and then apply for a licence in order to continue their involvement in the provision of consumer credit.
A draft copy of the Bill can be found on the Consumer Credit website.
What are the important dates?
|1 November 2009 to 31 December 2009||All persons engaging in credit activity must apply to be registered with ASIC.|
|1 January 2010 to 30 June 2010||All persons engaging in credit
activity must have obtained a licence from ASIC or be registered
and awaiting a licence.
Persons engaging in credit activity for the first time on or after 1 January 2010 cannot be registered and will need to apply for and receive a licence before commencing business.
|1 July 2010 to 30 June 2011||All persons engaging in credit
activity will need to have obtained a licence from ASIC or be
registered and awaiting a licence and not have had their
Any person who has registered and applied for a licence can continue engaging in credit activities unless and until they get notice of ASIC's decision not to grant a licence.
|1 July 2011 onwards||From this date all persons engaging in credit activities must be holders of a licence issued by ASIC.|
Will this affect my business?
The licensing requirements under the Bill extend to any person who engages in credit activity. There are two broad categories of what constitutes engaging in credit activity. These are:
Lenders and providers of consumer leases
Lenders and providers of consumer leases will engage in credit activity whenever they are a party to a contract for the provision of credit. The National Consumer Credit Code defines 'credit' as credit provided for personal domestic or household use or credit used in association with a residential investment property. The Bill also extends the definition to the activities of mortgagees and beneficiaries under a guarantee in relation to mortgages and guarantees that secure or guarantee the obligations of a borrower under a credit contract.
Providers of credit services
This category includes finance brokers and other intermediaries where they have a role in relation to securing credit for a consumer. Credit services extend to suggesting a consumer apply for or remain in certain credit products or acting as an intermediary between a credit provider and consumer. This includes assisting consumers apply for an increase in their credit limit and advising a consumer to remain in a particular credit contract. A person may provide credit services regardless of whether they deal directly with a consumer or the consumer's agent.
How do I register and obtain a licence?
In order to become registered a person must apply to ASIC by lodging an application in the approved form. The obligations imposed at registration include requiring a registered person to:
- do all things necessary to ensure that the credit activities are engaged in efficiently, honestly and fairly
- comply with any conditions imposed by ASIC on the registration
- take reasonable steps to ensure that its representatives comply with the credit legislation
- be a member of an approved external dispute resolution scheme
- take reasonable steps to ensure that clients of the registered person are not disadvantaged by any conflict of interest that may arise in relation to credit activities engaged in by the registered person.
A registered person must lodge an application for a licence electronically with ASIC not later than 30 June 2010. ASIC must grant the licence if the following requirements are satisfied:
- the application was made properly, that is, in the approved form and with all supporting information
- ASIC has no reason to believe that the applicant is likely to breach the obligations that are imposed on a licensee
- ASIC has no reason to believe that the applicant is not a fit and proper person to engage in credit activities.
In addition to the ongoing obligations detailed above for registration further obligations are imposed when a licence is granted. These include requiring a licensed person to:
- comply with any conditions imposed by ASIC on their licence
- maintain the competence to engage in the credit activities authorised by the licence
- ensure that its representatives are adequately trained and are competent to engage in the credit activities authorised by the licence
- have an internal dispute resolution procedure that complies with standards or requirements made or approved by ASIC
- have compensation arrangements for loss or damage as a result of breaches of their obligations
- have adequate arrangements and systems to ensure compliance with legislative obligations and a written plan which documents those arrangements
- have adequate resources to engage in the credit activities and have adequate risk management systems, except where the licensee is a body regulated by APRA.
A failure to comply with the above obligations during the registration period may adversely affect the prospects of ASIC granting a licence. A registration or licence can also be revoked, varied, or suspended by ASIC at any time. If a person's application is rejected by ASIC then their registration is automatically cancelled and they can no longer legally engage in credit activities unless they make a fresh application approved by ASIC. The Australian Credit Licence requirements are structured in a similar manner to those requirements applicable to an Australian Financial Services Licence (AFSL) which are also administered by ASIC. The importance of compliance both during registration and upon granting of a licence cannot be overstated.
Responsible lending obligations
Another significant development arising from the Bill is the responsible lending obligations that will apply to a licence holder. This is a significant change to the law as there is no existing legislation that regulates responsible lending. These obligations will be placed on any licence holder who:
- enters consumers into credit contracts
- suggests a consumer enter into a particular credit contract
- assists a consumer to apply for a particular credit contract
- suggests that a consumer remain in an existing credit contract
- suggests a consumer increase the limit on a credit contract or assists a consumer to apply for an increase in a credit limit.
The obligations that a licence holder must comply with include:
- providing the consumer with a written quote when providing credit assistance
- conducting a preliminary assessment of the loan's suitability for the consumer, which includes making reasonable inquires about the consumer's financial situation
- taking reasonable steps to verify the consumer's financial situation
- assessing whether the customer has the capacity to meet financial obligations under the contract without substantial hardship
- providing a credit guide to consumers that contains key information early in the transaction.
Australian Consumer Law – unfair contract terms
In addition to the Bill, the Commonwealth Government's proposed reform to consumer protection legislation will also have a significant impact on the consumer credit landscape.
The Australian Consumer Law, being developed by the Minister for Competition Policy and Consumer Affairs, Chris Bowen, is expected to be in operation by early 2010 and will regulate unfair terms in consumer contracts.
Under the proposal, a term in a standard form contract between a supplier and a consumer will be susceptible to challenge where it is 'unfair', in the sense that:
- it causes a significant imbalance in the parties' rights and obligations
- it is not reasonably necessary to protect the legitimate interests of the supplier.
The Government's Consultation Paper on the proposed reforms says that terms which allow the supplier to unilaterally vary contractual terms, which oust pre-contractual negotiations or representations or which require the payment of early termination fees, will all come under the spotlight.
Victoria currently has a similar unfair contract terms regime, however consumer credit contracts are explicitly excluded. Consumer credit, which is routinely provided pursuant to standard form documentation, appears to be squarely in the sights of the proposed Australian Consumer Law.
Therefore, in addition to ensuring they comply with the Government's new licensing regime, credit providers will have to review, and potentially amend, their standard form contracts, in light of the changes proposed by the Australian Consumer Law.
The Consumer Credit Protection Bill requires all businesses that participate in credit activity to obtain a licence. The registration and licensing process that is conducted by ASIC places significant compliance obligations on any person wishing to participate in credit activity. The law also regulates responsible lending for the first time. Forward planning, timeliness and an understanding of the licence obligations are paramount to ensure a seamless transition to the provision of credit under the new licensing regime.
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.