Thinking | 11 August 2009
National Consumer Credit Protection Bill and ASIC releases Consultation Papers on ACL licensing requirements
Further to our update of 29 April 2009 on the proposed National Credit Reform draft legislation, the Government introduced the National Consumer Credit Protection Bill (Bill)and associated legislation to Parliament on 25 June 2009. The Bill has passed the first and second reading stages and has been referred to a Senate Economics Committee which is conducting an inquiry into the Bill. The Senate Economics Committee must report back to Parliament by 8 August. The Bill will then be debated by Parliament in the next Parliamentary Session (viz 11-20 August and 7-17 September).
The Bill essentially reflects the core provisions of the draft legislation albeit with some major concessions resulting from the consultation period preceding the introduction of the Bill, notably in relation to the application of the Bill to point of sale credit and a deferral in the commencement of responsible lending obligations.
Under the Bill:
- anyone who engages in defined credit activities will be required to register with ASIC between 1 November and 31 December 2009 (inclusive) in order to continue to undertake those activities;
- registered persons will then have six months to apply for an Australian Credit Licence (ACL), between 1 January 2010 and 30 June 2010 in order to continue to undertake those activities until a licence is granted; and
- new entrants to the credit market will have to apply for an ACL from 1 January 2010 in order to undertake credit activities.
The responsible lending conduct obligations will now commence on 1 January 2011 to provide industry time to put in place the systems, arrangements and training needed to comply with these obligations.
Point-of-sale retailers (including car dealerships and retail outlets) are to be exempted to enable further consultation for 12 months.
Other key changes to the legislation are set out below.
- ACL holders will not be required to report significant breaches of their ACL to ASIC.
- An express provision has been included to allow some flexibility to the application of the obligations of a licence holder depending on the nature, scale and complexity of the credit activities engaged in by the licensee. This will apply to arrangements for managing conflicts of interest, training of representative, having adequate arrangements and systems to ensure compliance with the general conduct obligations and having adequate resources and risk management systems.
- Licensing requirements only apply to legal assignees of debts and rights under credit contracts rather than all assignees.
Responsible lending conduct
- The Bill makes it clear that obligations in Part 3-1 applying to those who provide credit assistance (eg credit guides, quotes, preliminary assessments and the prohibition on suggesting unsuitable credit contracts) will not apply to credit providers in relation to their own proprietary credit products. We note that a number of these obligations (eg credit guides) will be required anyway under Part 3-2.
- Responsible lending conduct requirements have been extended to consumer leases.
- The inclusion of a provision in the legislation that creates a presumption that if a consumer will only be able to comply with the consumer’s financial obligations under the contract by selling his or her principal place of residence, the consumer is considered to be only able to comply with those obligations with substantial hardship, unless the contrary is established.
- Enhancements to the credit assistance quote, includes a requirement to advise whether an amount is payable by the consumer to the licensee if the consumer does not proceed with the credit contract.
- A prohibition on a credit assistant from securing their fees for providing credit assistance by taking a caveat has been included.
- The timeframe within which a written assessment of suitability requested by the consumer must be provided has been extended to seven businessdays,if the request is made within two years of the quote or contract date, or 21 business days if the request is made after two years. A consumer’s right to request a copy of the assessment is limited to seven years after the date of the quote or contract.
National Credit Code
Penalties, remedies and ASIC’s enforcement powers
- The maximum civil penalty infringement notice amount is reduced from 1/20th to 1/40th of the maximum civil penalties that can be imposed by the courts under the Bill.
- Criminal penalties are reduced to a maximum of two years jail term and 100 penalty units (currently $11,000). This reflects the different economic risks in credit matters compared to other financial products.
- The small claims cap has been increased from $20,000 to $40,000.
- The court jurisdiction and framework has been established and confers civil jurisdiction to Federal and State and Territory courts, including local and magistrates courts, and confers criminal jurisdiction to State courts.
To assist industry and consumers in transitioning to the new regime, ASIC has commenced publishing draft policy and guidance papers which are expected to continue in anticipation of the legislation taking effect. The ACL related papers are intended to be finalised by November 2009 to allow prospective licensees sufficient time to prepare their licence applications.
Until October 2009, ASIC intends to meet regularly with industry, consumer representatives and other interested stakeholders to discuss the proposed regulatory regime. A detailed timetable of ASIC’s planned public consultation is available from ASIC’s website.
In anticipation of ASIC’s powers under the Bill, ASIC has released a number of Consultation Papers from which some key issues are summarised below.
Consultation Paper 110: General conduct obligations of credit licensees (CP 110)
CP 110 outlines guidance for ACL holders about ASIC’s expectations for compliance with the general conduct obligations contained in clause 47(1) of the Bill by updating ASIC RG 104 Licensing: General conduct obligations of licensees which previously only applied to AFSL holders. Submissions close on 12 August 2009.
Key compliance concepts
ASIC proposes high level guidance on key compliance concepts, including the following:
- Compliance action will depend on the nature, scale and complexity of the relevant business eg number of people in the business, whether credit assistance is provided as part of the business and the value and size of transactions.
- Compliance measures must be documented (the legislation requires a written plan), implemented, monitored, reported on and reviewed (externally if necessary). Credit licensees must lodge a compliance certificate with ASIC annually and in order to comply with this obligation, ASIC expects that credit licensees will need to keep records of monitoring and reporting (on compliance and non compliance).
- ASIC recognises that activities may be outsourced to third parties eg IT, sales, debt collection, compliance and call centres. However, the credit licensee remains responsible for the conduct of third parties and must have measures in place for the appointment of suitable third parties, ongoing performance monitoring and dealing with breaches.
Broad compliance obligations
ASIC also proposes high level guidance about complying with credit legislation, licence conditions and the obligation to provide credit activities efficiently, honestly and fairly.
ASIC expects that compliance measures:
- be consistent with the nature, scale and complexity of the business eg for a simple business, a checklist focusing on compliance risks would be sufficient whereas manuals, programs and dedicated staff would be required for a large and complex credit business
- be integrated into risks management systems as a control to mitigate business risk
- and be communicated and overseen by senior management.
Risk management systems
ASIC expects a credit licensee to engage in a process which identifies business risks and put measures in place to control and minimise those risks. ASIC may require this risk assessment to be submitted as part of a credit licence application. Risk management system must also address conflicts of interest.
Monitoring and supervising representatives
ASIC expects licensees to monitor and supervise all their representatives, including their compliance with the responsible lending obligations. The extent of the monitoring and supervision will depend on the nature, scale and complexity of the business. Representatives include directors, employees, authorised representatives and others acting on behalf of the licensee.
Licensees are required to have adequate financial, technological and human resources to engage in credit activities. ASIC expects measures for human resources to include the recruitment process, induction, training, performance management, retrenchment and redundancy which must be reviewed regularly. The adequacy of IT system must also be reviewed regularly.
The updated RG104 also includes questions to consider when designing and testing the adequacy of compliance measures.
Consultation Paper 111: Compensation and financial resources arrangements for credit licensees (CP 111)
CP111 explains how ASIC proposes to apply compensation and financial resources requirements to ACL holders. Submissions close 12 August 2009.
Except where an ACL holder is a body regulated by APRA, the ACL holder must have adequate resources and have adequate risk management systems. Under the proposals, ACL holders will need to assess their business and form a view, on reasonable grounds, about the amount of financial resources they require to conduct their business in compliance with the Bill and their licence obligations. ASIC expects licensees to ensure that have sufficient funds to meet their financial obligations as they fall due in the near future (eg on a rolling three month basis).
With regard to compensation arrangements, all ACL holders will be required to hold professional indemnity insurance (PI insurance) that reflects the risks in their businesses. ASIC proposes that non-lender ACL holders will have to hold PI insurance cover based on annual revenue with a minimum cover of $2 and a maximum of $20 million. For lenders, ASIC does not propose to specify a minimum amount of cover. Instead, the lender must self-assess the amount of PI insurance cover needed for their business, taking into account any assistance they might provide to consumers and the risks that may arise from such activities.
Consultation Paper 112: Dispute resolution requirements for consumer credit and margin lending (CP 112)
CP 112 sets out how ASIC proposes to apply the dispute resolution requirements for credit providers, brokers and other credit licensees and their representatives, as well as for margin lenders and those who provide advice on margin loans, once the relevant legislation takes effect. Submissions close on Friday 11 September 2009.
For consumer credit, the Bill provides for a two-stage transition to full licensing. Initially those engaged in regulated ‘credit activities’ must apply to be registered with ASIC, or be a representative of an entity that is registered. Applications for registration must be made between 1 November 2009 and 31 December 2009. Registered persons must have membership of an ASIC-approved external dispute resolution (EDR) scheme.
Credit licensing commences on 1 January 2010 and applications must be made by 30 June 2010. Credit licensees will be required to have dispute resolution arrangements that include:
- an internal dispute resolution (IDR) process that meets ASIC’s approved standards and requirements; and
- membership with an ASIC-approved EDR scheme.
ASIC has provided the following table as a guide.
|An eligible tenant must make a written request to the landlord for rent relief||This must include a statement that the lease is an eligible lease and that the tenant qualifies for and is participating in the JobKeeper scheme.
The tenant is required to provide information that evidences their eligibility.
It is unclear what financial information a tenant is required to provide to satisfy this, but the Small Business Commission has indicated that it will publish a guideline to provide some assistance.
A tenant is only entitled to protection from termination for non-payment of rent if it makes a request in accordance with regulation 10 (discussed below), and complies with any subsequent agreement to vary the lease.
|The landlord then has 14 days (or longer by agreement) to make a rent relief offer.||The landlord must consider all the circumstances of the relevant lease and make an offer which complies with Regulation 10.
The offer must:
In relation to outgoings, regulation 14 states that the landlord is required to consider waiving recovery of outgoings. It is not clear how this should be determined by landlords but the obligation to act in good faith and in accordance with the Code will apply. The landlord must also pass on any reductions in outgoings to the tenant and must reimburse the tenant for any proportional share of a reduced outgoing that has already been paid.
When making an offer, the landlord’s financial ability to offer rent relief is also a relevant factor. The inclusion of this requirement is interesting and will provide some comfort to landlords who are also suffering the effects of COVID-19 or otherwise not well positioned to make concessions.
|The landlord and the tenant are then required to negotiate in good faith to agree the terms of the rent relief.||The Regulations provide that eligible leases are amended to impose an obligation to cooperate and act reasonably and in good faith.
This is to be implied into every lease for the duration of the application of the Regulations.
|Subsequent actions||Where a tenant has made a request for rent relief in accordance with the Regulations and is complying with the terms of any agreed rent relief, it will not be in breach of its lease for non-payment of rent or a reduction in trading hours, and a landlord cannot:
Regulation 12 includes a prohibition on rent increases during the period of the Regulations unless the landlord and the tenant otherwise agree in writing.
Deferred rent may be repaid over the greater of 24 months or the balance of the term. Regulation 13 also provides that if the parties agree a deferral of rent, the landlord must offer the tenant an extension to the term for the equivalent period of the rent deferral, unless otherwise agreed.
As expected, Regulation 17 prevents a landlord from requiring the tenant to pay interest ‘or any other fee or charge in relation to the payment of rent deferred by variation’ or any agreement relating to the variation.
Regulation 19 provides that the terms of any agreement reached by the parties must be kept confidential.
In contrast to the Commercial Tenancies (COVID-19 Response (Early Termination)) Bill 2020 in Western Australia, there are no express provisions in the Victorian Bill which allow financially distressed tenants to terminate a lease early.
|A regime for determination of disputes by mediation is created||If the landlord and tenant can’t reach agreement about the relief to be provided, the landlord or tenant can refer a dispute to the Small Business Commission for mediation. If the dispute cannot be resolved it may be referred to VCAT or the Supreme Court.
This dispute resolution regime mirrors the Retail Leases Act 2003 (Vic) mediation regime.
|Penalties apply||Civil penalties of up to 20 penalty units (which is approximately $3600) apply where a landlord terminates a lease, takes possession or has recourse to security in relation to non-payment of rent or reductions in trading hours, or attempts to do any of the above.
These penalties apply retrospectively.
These penalties are not high but apply in addition to the tenant’s rights under the Regulations.
There is also the risk of reputational risk for institutional landlords if they become subject to penalties.
Consultation Paper 113: Training and competence for credit licensees (CP 113)
CP 113 sets out how ASIC proposes to interpret the competence requirements of the Bill as they apply to ACL holders and their representatives. Submissions close on 20 August 2009.
The regime outlined in the Bill requires credit licensees to:
- maintain the competence to engage in the credit activities authorised by the licence (organisational competence) and
- ensure that their representatives are adequately trained, and are competent, to engage in the credit activities authorised by the licence (representative training).
In addition, the new credit regime requires ASIC to grant a person an ACL only if, among other requirements, ASIC has no reason to believe that the person is not a ‘fit and proper’ person to engage in credit activities. Where the applicant is not a natural person, the fit and proper test is applied to each director, secretary, senior manager, partner or trustee who would perform duties in relation to the authorised credit activities.
ASIC proposes to ask ACL applicants to identify in their applications the people in their organisation covered by the fit and proper test (their ‘key people’). For the purposes of assessing organisational competence, ASIC proposes to focus on the qualifications and experience of these key people. When an applicant has a large number of people who are required to be fit and proper, ASIC may restrict its focus to a subset of those people, being those who are most directly responsible for managing the credit activities of the business.
|Requirement||Mandatory/can be avoided?|
|Rent relief to include 50% waiver||Not mandatory. The landlord and the tenant can agree otherwise; however, the landlord must offer this to the tenant.|
|Rent relief to apply to the relevant period, being 29 March 2020 to 29 September 2020||Mandatory. The landlord’s offer must relate to the relevant period.|
|Waiving recovery of outgoings||Not mandatory. The landlord has a good faith obligation to consider this where tenants are unable to operate from the premises but it is not mandatory.|
|Prohibition on rental increases||Not mandatory. Regulation 12 requires that all eligible leases are taken to be amended to including this requirement, unless the parties agree in writing that this does not apply.|
|Offer to extend the term for the period of any deferral||Not mandatory. Regulation 13 states that all eligible leases are taken to be amended to include this requirement, unless the parties agree in writing that this does not apply.|
|Passing on reductions of outgoings||Mandatory. Regulation 15 requires that all eligible leases are taken to be amended to state that any reduction of an outgoing must be passed through the tenant.|
|Restriction on eviction of a tenant for non-payment of rent or failure to trade||Mandatory where the tenant has complied with the regulations and with any final agreement entered into between the parties.
We note that this does not apply to other breaches of the lease not related to COVID-19.
|Restriction on recovery of interest, fees or charges||Mandatory. Regulation 17 state that all eligible leases are taken to be amended to include this prohibition and does not allow the parties to agree otherwise.|
ASIC proposes to provide exemption from the requirements in the above proposals for representatives who:
- meet Tier 1 training requirements in Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) and
- provide advice about mortgages incidentally to providing financial product advice.
ACL holders are required to keep records of the CPD activities undertaken by their representatives and monitor compliance with this obligation.
- assist in making a submission to ASIC on the consultation papers
- provide specific advice as to how the new regime will apply to you
- assist in preparing ACL applications including all necessary proof documents in accordance with ASIC requirements and
- assist in drafting template documents which comply with all of the disclosure requirements contained in the Bill.
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