National Consumer Credit Protection Reform Package

The Bills setting out the first stage of the Federal government’s National Consumer Credit Protection package were tabled in Federal Parliament on 25 June 2009.

While there have been some changes from the regime foreshadowed in April 2009, by and large the package remains the same.

Some details

Key dates

The reforms, including the changes to the existing Consumer Credit Code, are intended to commence from 1 November 2009. From that time, lenders, brokers and others involved in assisting consumers of credit will be required to undertake the various stages of licensing. So from 1 November until 31 December 2009 those engaged in credit activity will be required to register with ASIC. In order to continue their activities they will need to apply for a licence by 30 June 2010.

Between 1 July 2010 and 30 June 2011 a person engaging in a credit activity must be licensed, or registered and have applied for an Australian credit licence. Registrations will be cancelled on 30 June 2011 so that everyone engaged in a credit activity must be licensed from that date.

The provisions relating to responsible lending are not intended to commence until 1 January 2011, according to the press release of the Minister for Financial Services, Superannuation and Corporate Law. This is to permit sufficient time for lenders to put appropriate systems, training and processes in place to ensure compliance with this new set of obligations.

Who must be licensed?

All banks, credit unions, finance companies and other lenders, as well as mortgage and finance brokers, and other intermediaries who assist consumers to obtain credit must hold a licence. They will need to demonstrate they are a fit and proper person and they meet the legal obligations imposed on a licence holder.

ASIC will be able to look at the past activities of individuals associated with corporate applicants, down to the level of senior manager, to determine whether they are fit and proper.

A streamlined process will be available to ADI’s (authorised deposit-taking institutions).

The government is quite clear in its media releases that operators that do not or cannot meet the obligations will need to leave the industry.

According to the press release, as this is not mentioned in the Bills, point-of-sale retailers (for example, car dealerships and others) that facilitate credit assistance to consumers will be exempt from the licensing requirements. However, this arrangement, in the context of appropriate regulatory oversight, will be reviewed within 12 months.

According to ASIC the licensing process will be co-ordinated online, supported by a telephone and e-mail service.

What are the obligations?

The general obligations of a licensee are listed at s47 of the Bill.

“A licensee must:

1. do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly; and
2. have in place adequate arrangements to ensure that clients of the licensee are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives; and
3. comply with the conditions on the licence; and
4. comply with the credit legislation; and
5. take reasonable steps to ensure that its representatives comply with the credit legislation; and
6. maintain the competence to engage in the credit activities authorised by the licence; and
7. ensure that its representatives are adequately trained, and are competent, to engage in the credit activities authorised by the licence; and
8. have an internal dispute resolution procedure that:
   1. complies with standards and requirements made or approved by ASIC in accordance with the regulations; and
   2. covers disputes in relation to the credit activities engaged in by the licensee or its representatives; and
9. be a member of an approved external dispute resolution scheme; and
10. have compensation arrangements in accordance with section 48; and
11. have adequate arrangements and systems to ensure compliance with its obligations under this section, and a written plan that documents those arrangements and systems; and
12. unless the licensee is a body regulated by APRA:
    1. have available adequate resources (including financial, technological and human resources) to engage in the credit activities authorised by the licence and to carry out supervisory arrangements; and
    2. have adequate risk management systems; and
13. comply with any other obligations that are prescribed

Responsible lending

As mentioned earlier, provisions relating to responsible lending do not take effect until 1 January 2011.

The explanatory memorandum suggests that the responsible lending provisions are designed to address a short-coming in the existing Consumer Credit Code, in that it does not currently regulate whether it was responsible to lend to the consumer in the first place.

Accordingly, a prescribed set of disclosures and standards of behaviour are imposed whenever a licensee enters into a credit contract, or when they suggest a credit contract, or suggest a consumer remains in a credit contract rather than re-finance, or provide assistance to a consumer to apply for credit. One change from the earlier discussion draft of the Bill is that lenders who provide assistance with respect to their own products will not need to comply with the “credit assistance obligations” for those products.

The obligations under the Bill are designed to ensure that licensees do not provide or suggest credit to a consumer that is unsuitable. An assessment must be undertaken to determine whether the credit meets the consumer’s requirements and they have the financial capacity to repay. If these are not satisfied, then it is unsuitable. There is a presumption included in the Bill that a refinancing will be unsuitable if the consumer would have to sell their primary residence to meet the financial obligations of the new finance arrangements. This provision does not exclude reverse mortgages from its coverage.

While the over-riding obligation is to ensure the proposed credit is appropriate for a consumer, other disclosures are required that relate to credit costs, commissions, key rights of redress and the provision of the assessment to a consumer.

In summary the responsible lending provisions include obligations to:

• Provide a quote in relation to providing credit assistance, which is binding
• Assess whether the credit contract is unsuitable for the consumer

National Credit Code

The new Code is a schedule of the proposed Bill. As the new Code is not a direct copy of the existing “old” Code, section numbers have changed as well as some matters of substance.

As previously foreshadowed:

• Residential investment loans have been included within the coverage of the new Code
• The monetary limit for hardship has been set at $500,000
• The business purpose declaration rules have been changed to make it harder for unscrupulous lenders to avoid the application of the Code.

New restrictions have also been included on taking security over “essential household property”, the meaning of which is the same as in the Bankruptcy Act.

Default notice requirements have been prescribed with much more information required to be included. Additionally, lenders will now be required to give debtors and guarantors a notice within 10 days of the first direct debit payment failing.

ASIC + penalties and remedies

Under the legislation consumers will be able to access a streamlined court procedure for actions under $40,000. To facilitate the “streamlined” procedure there are presumptions against the need for legal representation and against the making of adverse cost orders. Informal rules of evidence and procedure may be permitted.

The court process is in addition to the internal and external dispute resolution procedures licensees are required to either implement or have access to.

ASIC’s armoury has been enhanced with criminal penalties available for licensee misconduct (fines of $220,000 for individuals and $1.1m for companies) plus possible imprisonment of up to two years. ASIC is also able to issue infringement notices itself.

The way forward

The intended commencement date is only 4 months away. While licensing will be an important matter to address from that day, so too are the other changes contained in the new Code. Licensees should be actively considering now, exactly what they need to do and by when in order to ensure they are ready for the new regime.

We are able to assist with a consideration of licensee’s current circumstances and steps they need to take.