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Client Update: Credit regulation and unfair contract terms

9 September 2009

In brief: The Senate Economics Legislation Committee has delivered its reports on new legislation that will introduce unfair contract terms provisions, and the National Consumer Credit Protection Package. Partner Catherine Parr and Senior Associate Cameron Ball summarise some key recommendations from these reports and comment on some key practical issues raised by the draft National Consumer Credit Protection Regulations.

Unfair contract terms

On 7 September 2009, the Senate Economics Legislation Committee delivered its report on the Trade Practices Amendment (Australian Consumer Law) Bill 2009, which will, amongst other things, introduce into the Australian Securities and Investments Commission Act 2001 (Cth) a new Subdivision BA dealing with unfair contract terms. The committee considered a number of key issues raised during their inquiry into the Bill including submissions on the timing of the commencement of the new regime, the potential uncertainty created by the new regime, the limitation of the regime to consumer contracts, the 'upfront price' exemption and the exclusion of insurance contracts. The majority of the committee recommended that:

  • the Bill be passed and that there be no deferral of the previously announced starting date of 1 January 2010;
  • Australian Securities and Investments Commission and the Australian Competition and Consumer Commission issue a set of guidelines on the operation of the unfair contract terms provisions to assist all parties to understand their rights and obligations under the new regime (which guidelines should make reference to the examples in the 'grey list' of terms which may be unfair in the Bill); and
  • equivalent protection should be provided to consumers in relation to unfair terms in insurance contacts and that the Federal Government should consider how this could best be achieved (for more details on this, see our Client Update: Proposed regulation of unfair terms in insurance contracts.)

Coalition Senators made a number of additional comments, including that they were divided on the question of whether unfair terms in insurance contracts and business-to-business contracts should be regulated.

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The National Consumer Credit Protection Package

In its report delivered on 7 September 2009, the Senate Economics Legislation Committee made the following recommendations on the National Consumer Credit Protection Bill 2009 and associated Bills:

  • while the first three bills forming the core of the package should be passed by 1 November 2009, the reforms due to begin on 1 January 2010 should be deferred until 1 July 2010 to allow sufficient time for the industry to prepare and to ensure state parliaments are able to facilitate the necessary referrals. It is clear that this recommendation suggests the commencement of the National Credit Code should be deferred by six months, but it is not entirely clear whether the committee is suggesting that the period for lodging licence applications should also be deferred by six months;
  • ASIC should consider a streamlined process for holders of an Australian Financial Services Licence when they apply for an Australian Credit Licence;
  • the responsible lending provisions should be amended to introduce some additional flexibility on the timing of assessment of suitability of credit contracts secured by a mortgage over residential property;
  • the Government should undertake further consultation to determine whether the definition of 'credit assistance' provides adequate protection in circumstances where a person benefits from referring a consumer to someone engaging in credit activity;
  • there should be provisions to allow consumers to seek remedies and compensation for loss suffered as result of a contravention of any responsible lending provision, regardless of whether a breach of a civil penalty provision is found to have occurred or a civil penalty is awarded;
  • the Government should investigate means to ensure that the legislation does not inadvertently reduce the current access of consumers to low-cost tribunals; and
  • lenders should be required to provide, in writing, the reasons for any rejection of a hardship application and the increased hardship threshold of $500,000 should apply to all applications for a variation of a regulated contract on the grounds of hardship regardless of whether the credit contract was entered into before or after the commencement of the national regime.

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Key practical issues with the National Consumer Credit Protection Regulations

We have identified some key practical issues in the draft National Consumer Credit Protection Regulations (the NCC Regulations).

First, there is no equivalent of current Regulation 79, which permits a credit provider to include a statement of loan term in their financial table. Customers expect to see a statement of loan term. System changes would be required for credit providers to remove the statement of loan term from the financial table and include it elsewhere in the credit contract.

Secondly, while some NCC Regulations are scheduled to commence on 1 July 2010 (when the key changes to the National Credit Code dealing with a regulation of credit for residential investment properties, amendments to purpose declarations and changes to default notices commence), other regulations are currently scheduled to take effect from 1 January 2010. These include the regulations mandating the form of information statements to be supplied to debtors, lessees and guarantors and various other notices relating to repossession of mortgaged goods. In each case, the key text change in the relevant form or notice from the equivalent under the Consumer Credit Code relates to external dispute resolution.

While the draft NCC Regulations allow a credit provider to continue to make references to the Consumer Credit Code for a transitional period of up to two years, they do not allow continued use of a form that does not contain the additional text mandated by the relevant NCC Regulation. This creates two key practical problems for credit providers:

  • unless the Senate Committee's recommendation of a deferred start date is adopted, they will need to change some forms and notices with effect from 1 January 2010 and others with effect from 1 July 2010; and
  • it is not possible for some credit providers to effect document changes overnight on a single day.

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Our submission

We have made a submission to Treasury covering these matters and explaining the practical difficulties that credit providers will encounter if these issues are not addressed. A copy of our submission is available here.

For more information or for assistance with reviewing your consumer credit contracts, please contract one of the people below.

For further information, please contact:

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