Focus: National Consumer Credit Protection Reform Package introduced
1 July 2009
In brief: The core legislation for the National Consumer Credit Reform Package was introduced into Federal Parliament last week. Partner Catherine Parr and Senior Associate Cameron Ball report.
How does it affect you?
The proposed reforms will have significant consequences for a wide range of participants in the credit industry, including credit providers, finance brokers, other intermediaries and mortgage managers. These entities will need to:
- register with the Australian Securities and Investments Commission (ASIC) and obtain a licence within a specified timeframe;
- comply with ongoing conduct obligations and licensing conditions;
- comply with new responsible lending requirements that prohibit providing or arranging loans unsuitable for a consumer's needs, or that a consumer does not have the capacity to repay;
- make certain disclosures to consumers, including in relation to commissions;
- be aware of ASIC's wide-ranging powers to enforce the licensing regime and take action against licensees; and
- note the significant criminal and civil penalties that may be imposed for licensee misconduct.
The new National Credit Code will also require lenders to make changes to their documentation and procedures for:
- loans for investment in residential property;
- business purpose declarations and enquiries into loan purpose;
- default notices and other standard form notices;
- applications for hardship variations; and
- applications to negotiate a postponement of enforcement proceedings.
The Federal Government released draft legislation for public comment in April. We summarised the draft package in our Client Update: National Consumer Credit Reform Package. Under the reforms the current state-based Uniform Consumer Credit Code (UCCC) will be replaced with a new National Credit Code (NCC). Our analysis of the differences between the UCCC and the NCC can be viewed in our Focus: Proposed changes to the Consumer Credit Code. The new regulation also involves the introduction of a licensing regime for credit providers, finance brokers and other intermediaries. We outlined the licensing regime, including the ongoing conduct and other obligations of licensees, in our Focus: National licensing regime for credit providers, finance brokers and intermediaries.
This publication highlights some key changes that were made to the draft National Consumer Credit Protection Bill 2009 before it was tabled in Federal Parliament.
In addition to the provision for exemption by regulation, ASIC will have power to exempt certain credit activities, or classes of credit activity, from the licensing and responsible lending obligations. The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has indicated that point-of-sale retailers such as car dealerships and retail outlets will be exempt from the requirements that relate to giving credit assistance to consumers. The Federal Government will examine the regulatory oversight of these entities within the next 12 months. He also indicated there will be an exemption, for the first 12 months only, for state or territory licensed debt collectors.
The original draft Bill provided that any assignee of rights under a regulated credit contract, mortgage, guarantee or lease would need a licence. The Bill as tabled only requires assignees at law to be licensed.
The breach reporting requirement in the consultation draft has been removed but it has been replaced with an obligation to lodge an annual compliance certificate.
Licensees will have an obligation to retain financial records for seven years.
- There are new responsible lending obligations in relation to consumer leases. These mirror the equivalent obligations for credit contracts.
- The commencement of the responsible lending conduct obligations will be deferred until 1 January 2011 to give industry time to put in place the systems, processes and training needed to comply with these obligations.
- In the original consultation draft, credit providers who also provided 'credit assistance' (that is, who suggested a consumer enter into a particular credit contract or assisted consumers to apply for a particular credit contract) had to comply with the responsible lending obligations for credit assistance providers as well as the responsible lending obligations for credit providers. That duplication has been removed so that credit providers will no longer be required to comply with the responsible lending obligations for credit assistance providers in relation to their own products.
- The responsible lending obligations on credit providers, lessors and credit assistance providers state that a credit contract or lease will be unsuitable for a consumer if it is likely that the consumer will be unable to comply with their financial obligations under the contract or lease, or will be unable to do so without substantial hardship. The Bill as tabled contains a new provision presuming substantial hardship if a consumer could only comply with the relevant obligations by selling their principal place of residence.
- The commission disclosure obligations for credit assistance providers and credit representatives have been modified to remove the previous requirement for a dollar value and to require disclosure of a 'reasonable estimate' of the amount of commission or a range of amounts. It is contemplated that the regulations may provide how commissions should be calculated and how commissions or amounts of commission must be described.
- There are new requirements for quotes for the provision of credit assistance.
- Some of the original content requirements for credit guides issued by credit providers and credit assistance providers has been removed, but it is possible that material may instead be required under the relevant regulations.
- There is a new prohibition on lodging a caveat, or threatening to lodge a caveat, to induce payment of fees payable for credit assistance.
The text of the NCC is largely unchanged from the consultation draft. However:
- it has been clarified so that credit to refinance a loan which was provided to purchase, renovate or improve residential property for investment purposes will be regulated by the NCC;
- there is a new offence of inducing a debtor to make a false purpose declaration;
- there has been a change to the new requirement for a notice on the first dishonour of a direct debit. The credit provider will have 10 business days after the default to give this notice rather than just 10 days; and
- provisions have been introduced to allow ASIC to exclude certain types of credit from the NCC. These provisions contemplate, in particular, that credit above a certain amount and credit of a certain class might be excluded.
Compliance, enforcement and ASIC's powers
There are a number of new administrative requirements relating to ASIC's role as regulator.
There is a new chapter on compliance and enforcement under which ASIC will have power, among other things, to:
- commence investigations;
- examine individuals in the context of investigations;
- inspect books and records;
- require auditors to provide information;
- conduct hearings; and
- if it can't get the information it needs because of a refusal or a failure to comply with any of its requirements in relation to these matters, give directions and make restraining orders relating to credit contracts, mortgages, guarantees and consumer leases.
The regulations may provide for ASIC to issue infringement notices and impose penalties which don't exceed one 40th of the maximum penalty a court could impose in respect of the relevant contravention.
Courts and jurisdiction
A framework has been established for the jurisdiction of the courts.
The small claims procedure which was in the original draft has been expanded. Under that regime the relevant courts will not be bound by the rules of evidence. Costs can only be awarded against the consumer in a small claims proceeding, or in an application relating to hardship or postponement, if the proceedings are vexatious or without reasonable cause.
It has been clarified that, once the Bill becomes law, a contravention of the Act will not affect the validity of credit contracts, mortgages and guarantees unless the NCC provides otherwise.
There is a prohibition on contracting out of the Act and a provision indicating that any indemnity from a debtor, mortgagor, guarantor or lessee for loss suffered by a credit provider or lessor arising under the Act (other than under the NCC) will be void. These provisions are similar to equivalent provisions in the NCC (which mirror current UCCC provisions).
There is a new provision in substantially the same terms as the existing section 169A of the UCCC providing that indemnities for liability under the Act (including for civil and criminal penalties), other than those referred to in the previous paragraph, are not void on the grounds of public policy. This means that it will be possible, for example, for an entity originating or servicing loans for a credit provider to indemnify that credit provider for any loss or damage it incurs under the Act through the conduct of the relevant originator or servicer.
The Senate has referred the Bill and three related bills to the Senate Standing Committee on Economics for report by 7 August 2009. The closing date for submissions to the committee is 17 July 2009.
For more information on the Bill or for assistance with reviewing your consumer credit contracts or understanding the licensing regime please contact one of the people below.
- John GallimoreConsultant,
Ph: +61 7 3334 3135
- Stephen SpargoPartner,
Ph: +61 3 9613 8861