Client Update: National consumer credit reform – the latest instalment
24 January 2013
In brief: As part of its ongoing reform of consumer credit protection, the Federal Government has released for consultation draft amendments to national consumer credit legislation. Partner John Gallimore (view CV) and Lawyer Andrew Shetliffe report on the changes that, if implemented, will have significant consequences for providers of credit to investors and small business as well as other participants in the credit industry.
The Federal Government proposes to further amend the National Consumer Credit Protection Act 2009 (the NCCP Act), the National Consumer Credit Protection Regulations 2010 (the Regulations) and the National Credit Code (the NCC). The key documents in the reform package are the draft National Consumer Protection Amendment (Credit Reform Phase 2) Bill 2012 (the Bill) and the National Consumer Protection Amendment Regulations 2012 (the draft Regulations). The key objective of the proposed reforms is to introduce regulatory requirements for providers of credit to investors (no longer only residential property investors) who are individuals1 and to small businesses (both individuals and corporations).
Under the Bill, credit activities in relation to credit contracts with individuals for any investment purpose will be brought within activities for which a person will be required to hold an Australian credit licence. (At present, a licence is only required for credit activities relating to the provision of credit to individuals for personal, domestic or household purposes or investment in residential property.)
The NCCP Act will also prohibit a person from engaging in credit activities in relation to a small business credit contract or a small business consumer lease unless they hold a permit. The permit regime is addressed in the draft Regulations, which provide that an applicant will be able to obtain a credit permit from ASIC if:
- they are a member of an ASIC-approved external dispute resolution scheme; and
- no disqualifying criteria apply to them (eg they are not insolvent or have previously held a currently suspended or cancelled Australian credit licence).
This permit system is different from, and simpler than, existing licensing requirements for credit providers to individuals for personal, domestic, household or residential investment purposes. As the Bill is currently drafted, a credit provider or credit assistance provider would be required to hold a permit for small business credit activities in addition to any Australian financial services licence or Australian credit licence they may already hold.
'Small business' is defined as a business with 20 or fewer employees or – if the business includes manufacturing – fewer than 100 employees. The draft Regulations propose to exclude small business credit contracts under which the amount of credit is more than $5 million. Accordingly, a person will not require a permit for small business credit activities if that person's credit activities relate only to small business credit contracts under which the amount of credit is more than $5 million. The Federal Treasury is considering an equivalent limit on the amount of a small business consumer lease.
The substantive provisions of the NCC will not apply to small business credit contracts or small business consumer leases. However, the responsible lending provisions in the NCCP Act outlined below will apply.
Responsible lending obligations under the NCCP Act will generally not be as extensive in relation to small business credit contracts or investment credit contracts as existing obligations are (and will continue to be) in relation to consumer credit to individuals. However, there will be more stringent (and entirely new) responsible lending obligations for specific classes of small business and investment credit contracts that are considered to pose particular consumer risks.
New responsible lending obligations applying to all small business credit contracts will include giving the consumer a disclosure document before entering into, or increasing the credit limit of, a small business credit contract. Additional obligations will apply if the relevant contract is a 'protected small business credit contract'. These include a requirement to make prescribed inquiries and a prohibition on entering into, or increasing the credit limit of, the contract if it is unsuitable for the consumer. A 'protected small business credit contract' is a small business contract where:
- the predominant use of the credit is to refinance the liability under an existing small business credit contract;
- the borrower has defaulted in respect of the repayments due under that contract (although it is not clear what obligations apply if the re-financing creditor is not aware of defaults); and
- the credit contract is secured by a mortgage over residential property.
The reforms also introduce the concept of a 'protected investment credit contract' – in relation to which different new responsible lending obligations under the NCCP Act will apply. Two sub-categories of 'protected investment credit contract' are defined. They are:
- a 'regulated product (home-secured) investment credit contract', being a contract where:
- the predominant use of the credit is to invest in a financial product offered by a person who is the holder of an Australian Financial Services Licence (or otherwise authorised by the Corporations Act 2001); and
- the debt is secured by a mortgage over the consumer's principal place of residence; and
- an 'unregulated product investment credit contract', being a contract where the predominant use of the credit is to acquire:
- a financial product being offered illegally; or
- a product that is not a financial product (excluding residential real property) (such as artwork or a commercial property).
Credit providers and credit assistance providers will be required to make different inquiries into the circumstances of a particular protected investment credit contract, according to these sub-categories.
All of this will result in a range of differing responsible lending obligations on credit providers and credit assistance providers, depending on the type of credit being provided and the circumstances in which it is provided. The table below summarises this (and highlights the complexities that will arise for credit providers):
|Type of credit/credit assistance
||Responsible lending obligations|
|Provider of consumer credit to individuals.
||Part 3-2. Part 3-2A (additional rules relating to standard home loans), Part 3-2B (additional rules relating to credit card contracts), Part 3-2C (additional rules relating to short-term and small amount credit contracts) also apply.|
|Provider of credit under protected investment credit contracts.
||Part 3-2E, Division 3 (different requirements apply in relation to two types of protected investment credit contracts).|
|Provider of credit under small business credit contracts.
||Part 3-2F, Division 3, Subdivision A.|
|Provider of credit under protected small business credit contracts.
||Part 3-2F, Division 3.|
|Lessor under a consumer lease to an individual.
|Lessor under a small business consumer lease.
||Part 3-4A, Division 3.|
|Provider of consumer credit assistance to individuals.
|Provider of credit assistance in relation to protected investment credit contracts.
||Part 3-2E, Division 2 (different requirements apply in relation to two types of protected investment credit contracts).|
|Provider of credit assistance in relation to small business credit contracts.
||Part 3-2F, Division 2, Subdivision A.|
|Provider of credit assistance in relation to protected small business credit contracts.
||Part 3-2F, Division 2.|
|Provider of credit assistance in relation to consumer leases.
|Provider of credit assistance to any person in relation to small business consumer leases.
||Part 3-4A, Division 2.|
The unjust contract provisions of the NCC will apply to investment credit contracts where the debtor is an individual. As is the case now, all provisions of the NCC will apply to credit to an individual for residential property investment.
The scope of regulated credit contracts will also be expanded to include contracts where the credit provider or lessor is a 'credit activity investor' – that is, an individual (or other small entity) who engages in credit activities as a credit provider or lessor in accordance with a servicing agreement with an intermediary (eg where lawyers arrange loans made by private clients, and other investment schemes where arrangers organise loans for private investors to make). At present, the legislation would not apply to such people, as they are not engaging in a business of providing credit.
Under the proposed amendments, a credit activity investor will be exempt from the requirement to hold an Australian credit licence, but only if:
- they are a member of an ASIC-approved external dispute resolution scheme;
- the intermediary is the holder of an Australian credit licence; and
- there is an agreement between the intermediary and the private credit providers and private lessors.
Short-term leases and indefinite-term leases (currently exempt under subsection 171(2) of the NCC) will be regulated where:
- at the time of entering into the lease, the lessor knew, or could have established through reasonable inquiries, that the consumer wanted the use of the goods for a longer or different period of time (the anticipated period of use); and
- the consumer would pay more than the cash price of the goods if they made rental payments for the anticipated period of use (rather than for the term of the lease).
The reforms will also introduce a prohibition on anti-avoidance conduct, prohibiting a person from beginning or carrying out a scheme for the purpose of avoiding the application of a provision of the NCCP Act, Regulations or the NCC. Whether the scheme is for purpose of avoiding the NCCP Act will be determined on objective factors, rather than the subjective intentions of the person engaged in the scheme, such as any representations made to consumers.
A six-month transitional period after the Bill takes effect is proposed.
Submissions on the draft amendments released by the Government are due by 15 February 2013.
If you have any queries about the Bill or the draft Regulations, or would like assistance with preparing a submission, please contact one of our experts below.
- The NCC generally also applies to the provision of credit to a strata corporation if it would apply to the provision of that credit to an individual. References to 'individual' throughout should generally be understood to include a strata corporation.
Ph: +61 7 3334 3135
Senior Finance Counsel, Sydney
Ph: +61 2 9230 4791
Stephen Spargo AM
Ph: +61 3 9613 8861
Ph: +61 8 9488 3877