1. First Stage Changes To Take Effect 1 July 2010

The regulation of credit providing is about to undergo significant changes in Australia.  The new National Credit Code will be effective from 1 July 2010 and will result in uniform credit regulation across Australia, with ASIC becoming the sole national regulator. 

2. Small Business Lending

Of particular interest for small business is that the second stage of the process may result in lending to small business being regulated by the National Credit Code, along with other proposals, such as the imposition of interest rate caps, regulation of reverse mortgages and point of sale credit assistance.  However, the terms of the second stage of the process are not yet certain.

3. Licensing – Are You Involved In Credit Activities?

All persons involved in "credit activities", or as a provider of credit, will need an Australian Credit Licence from ASIC.  This is a new requirement, particularly for businesses that provide services ancillary to lending, such as brokers, sub-aggregators, aggregators, mortgage managers, program managers, debt collectors and mortgage insurers. 

As a first step, between 1 April and 30 June 2010 such persons must apply to register with ASIC, and applications for a licence can be made from 1 July 2010.  From 1 July 2010, a person engaging in credit activity must be registered with ASIC and have applied for a licence.  From 1 July 2011, such a person must hold an Australian Credit Licence.

4. No Cap On Level Of Credit Subject To The Code

The new regime will cover the provision of credit as part of or incidental to a business of a credit provider to a natural person or a strata corporation.  The use of credit for the purchase, renovation or refinance of residential investment property is an additional regulated type of credit.  Other regulated credit is credit for personal or domestic purposes, credit for a consumer lease or credit provided as a terms contract of real estate.

5. Significant Changes

Consumers will be able to request a change to credit contracts on the grounds of hardship for loans up to $500,000 (an increased threshold). 

A business purpose declaration will no longer be conclusive evidence that the credit is not for personal or domestic purposes and it will be an offence to procure a false business purpose declaration. 

There will be new restrictions on taking security over essential household property.

6. Responsible Lending Obligations

New responsible lending obligations will apply to license holders who suggest, assist or actually enter into credit contracts with consumers.  The obligations also cover a suggestion, assistance or actual increase in a consumer's credit limit. 

As part of the responsible lending obligations a credit guide must be provided to the consumer.  However, the more onerous obligations are that the credit provider must make reasonable enquiries about a consumer's requirements, objectives and financial situation and must assess whether the credit contract is unsuitable for the consumer. 

7. Related Changes To Trade Practices Act And Corporations Act

The Trade Practices Act is being amended to introduce a national unfair contracts regime across all industry sectors, including financial services, which will apply to standard form consumer contracts.

The Corporations Act is also being extended to cover margin lending with the addition of responsible lending obligations in relation to margin loans provided to retail clients.

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.