On 27 April 2009, the Commonwealth Government released the National Consumer Credit Reform Package for public comment.
National Consumer Credit Reform Package
The new reform package includes the National Consumer Credit Protection Bill 2009 and the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 which were released as exposure drafts. The reform package can be accessed from the Australian Government's Consumer Credit website.
The Bills are expected to be introduced into Parliament by mid-2009, to take effect from 1 November 2009. There will be a transitional period for some aspects of the new legislation such as licensing.
The Government is seeking submissions from the public by Friday, 22 May 2009.
What does this mean for you?
The proposed changes will impact on your consumer credit (including residential property investment loans), consumer lease, finance broking or debt collection business. Deacons is able to assist you in making a submission. We can also provide a detailed analysis of the proposed legislation, tailored to your business. We will be holding a series of breakfast briefings on the impact of the new form package. If you are interested in attending please contact Natalie Schroeder on (03) 8686 6997.
Key dates for existing credit providers and credit assistance providers
Under the new legislation, to be known as the National Consumer Credit Protection Act (the new Act), existing credit providers and credit assistance providers will need to apply to ASIC to be registered between 1 November and 31 December 2009. They will need to then apply for an Australian Credit Licence by 30 June 2010 and will be required to hold a licence by 30 June 2011 when registration will be cancelled.
The New Act is expected to apply from 1 November 2009 with some exceptions.
Key changes under the reform package
The new Act will:
- contain the National Credit Code, which replaces the current state/territory based Uniform Consumer Credit Code (UCCC)
- introduce a national licensing regime for all credit providers (including providers of consumer leases), finance brokers and certain other intermediaries
- impose responsible lending requirements to protect consumers from being offered loans that are unsuitable for them or they cannot afford to repay
- impose additional disclosure obligations on credit providers and impose disclosure obligations on finance brokers and certain other intermediaries
- increase the maximum threshold for mortgage hardship cases from the current $312,400 to $500,000
- give the Australian Securities & Investments Commission (ASIC) as the national regulator power to enforce specific provisions of the legislation and take action against licensees
- provide improved access to consumer remedies, including streamlined court procedures for claims under $20,000 or for hardship application
- impose criminal penalties (imprisonment up to 5 years) and civil penalties (fines of up to $220,000 for individuals and $1.1 million for corporations) for certain breaches.
Who will be required to be licensed under the new legislation?
A person who engages in a credit activity will be required to hold an Australian Credit Licence. Persons who engage in credit activity will include:
- providers of regulated loans and consumer leases and persons who perform the obligations of or exercise the rights of the credit providers or lessors (including debt collectors and mortgage managers where they manage the credit contract on behalf of the credit provider)
- assignees of the rights of a credit provider or lessor where they exercise those rights
- those who provide credit assistance or act as intermediaries between credit providers or lessors and consumers (including finance brokers, aggregators and mortgage managers)
- mortgagees of regulated mortgages and any person who perform the obligations or exercises the rights of the mortgagees
- beneficiaries of regulated guarantees and persons who perform the obligations or exercise the rights of a beneficiary.
There will be a streamlined application process for Authorised Deposit-taking Institutions and WA finance brokers holding an 'A' or 'B' class licence.
Employees and directors of licensees will not be required to be licensed.
Licensees will be able to appoint credit representatives. A credit representative will be similar to the concept of an authorised representative under the existing financial services regime. A licensee will be required to notify ASIC of the appointment of a person as a credit representative.
A key issue which will need to be determined is which entities in the chain of credit activity will hold a licence in their own right and which entities will be appointed as a credit representative of a licensee.
Key obligations to be imposed on licensees
Licensees will be required to:
- ensure any credit activities are carried out efficiently, honestly and fairly
- ensure that they comply with credit legislation
- ensure that their representatives are trained and are competent to engage in credit activities
- have an internal dispute resolution system
- be a member of an approved External Dispute Resolution scheme
- undertake continuing education
- have a compliance plan
- have risk management plans and adequate resources (unless regulated by APRA)
- include their licence numbers on certain documents
- report significant contraventions of the credit legislation to ASIC within 10 business days of becoming aware of such contraventions.
Disclosure regime
Credit providers
Credit providers will be required to give potential borrowers a credit guide as soon as practicable.
A credit guide must set out the following:
- a credit provider's name and contact details
- a credit provider's licence number
- EDR scheme membership
- information about compensation arrangements
- information about a credit provider's obligation to make an assessment as to whether a credit contract will be unsuitable, and that it will provide a copy of that assessment to a borrower on request
- notice of commission that employees, directors or credit representatives are likely to receive.
Credit assistance providers
Credit assistance providers will be required to give a credit guide as soon as practicable when it is likely that credit assistance will be given. A credit guide must set out the following:
- a credit assistance provider's name and contact details
- a credit assistance provider's licence numbers
- fees payable by borrowers and method of calculation
- commissions received
- EDR scheme membership
- the panel of credit providers that the licensee deals with (up to a maximum of 6)
- information about a credit assistance provider's obligation to make a preliminary assessment as to whether a credit contract will be unsuitable and that it will provide a copy of that assessment to a borrower on request.
A credit assistance provider will also be required to provide the following:
- a written quote to provide credit assistance
- a credit proposal disclosure document setting out commissions and fees (including third party fees) and the amount of credit available after deduction of fees.
Credit providers who are assignees, credit representatives and debt collectors
Credit providers who are assignees, credit representatives and debt collectors will also be required to provide credit guides.
Responsible lending obligations
Credit providers
Before providing credit or increasing existing credit, credit providers will be required to assess whether a proposed credit contract will be unsuitable for a borrower. Before making this assessment credit providers will be required to:
- make reasonable inquiries about a borrower's requirements and objectives
- make reasonable enquiries about a borrower's financial situation
- take reasonable steps to verify a borrower's financial situation.
A credit contract will be unsuitable if it is likely that a borrower will not be able to repay without substantial hardship or if the credit contract does not meet the borrower's objectives.
Credit assistance providers
Before providing credit assistance to a borrower, credit assistance providers will be required to conduct a preliminary assessment as to whether a proposed credit contract will be unsuitable for the borrower. Before making a preliminary assessment, credit assistance providers will be required to:
- make reasonable inquiries about a borrower's requirements and objectives
- make reasonable inquiries about a borrower's financial situation
- take reasonable steps to verify a borrower's financial situation.
Key changes to the UCCC
- regulated credit will be extended to credit that is provided to purchase, renovate or improve the value of a residential investment property
- the debtor's residency requirement will be replaced with a jurisdictional test that examines whether the credit provider carries on business in Australia
- the fees and charges limit for exempt short-term credit will capture fees and charges paid to parties other than the credit provider (this will capture broker-lender models for fringe lenders)
- the current conclusive presumption that credit is regulated if a business purpose declaration is provided will be changed to be a presumption only
- ASIC will have the power to represent individuals or classes of individuals and make an application to the Court in relation to unjust contracts, early repayment fees or hardship if it believes it is in the public interest
- mortgages over essential household property will be prohibited
- credit providers will be required to advise the outcome of a hardship application within 21 days of an application being made
- credit providers will be required to provide a notice of default of a direct debit arrangement
- default notices will be required to disclose further information
- there will no longer be a requirement to provide comparison rate schedules (comparison rate disclosure in credit advertisements will still be required).
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.
