Thinking | 9 January 2013
National Consumer Credit Protection Phase 2 Reforms for Small Business Lending and Investment Lending
As a part of the Federal Government’s Phase 2 Consumer Credit Reforms, Treasury has released exposure draft legislation amending the National Consumer Credit Protection Act 2009 (NCCP Act) which covers:
- small business lending;
- credit provided for investment purposes;
- some forms of private lending;
- short term and indefinite term consumer leases; and
- anti-avoidance provisions.
The text of the proposed draft legislation together with explanatory material can be found here. Submissions on the draft legislation are due on 15 February 2013.
A transition period of 6 months has been proposed for the reforms to take effect. A start date has not been set for the legislation at this stage.
Small business lending and leasing
The key points of the small business lending reforms are as follows:
- The small business lending and leasing regime would generally apply to all business loans and leases provided to businesses which have fewer than 20 employees or fewer than 100 employees for manufacturing businesses. The small business lending regime will not apply to loans over $5 million.
- Providers of small business lending and leasing services will be required to obtain a permit from ASIC. The permit is different to an Australian Credit Licence (ACL) which authorises consumer credit activities. To obtain a permit, the small business lender/lessor will need to be a member of an external dispute resolution service such as the Financial Ombudsman Service or the Credit Ombudsman Service and not be someone who is disqualified from providing credit services (i.e. insolvent or otherwise banned).
- New responsible lending obligations have been introduced for small business lending and leasing providers as well as credit assistance providers in this area. Under the new responsible lending requirements, providers of small business loans and leases and credit assistance providers will now be required to provide disclosure documents setting out details such as the amount of credit, applicable interest, repayments and fees and charges. Further, in the case of certain types of small business refinancing contracts (i.e. protected small business contracts), lenders will be required to make inquiries and are prevented from making loans or leases where the small business is assessed as unsuitable for the loan.
Credit provided for investment purposes
It is also proposed that any credit which is provided predominantly for investment purposes would be subject to the consumer credit protection regime currently in place under the NCCP Act. This means that all providers of loans for investment purposes to individuals and strata corporations will need to obtain an ACL and the terms of any such investment lending would be regulated under the National Credit Code. Previously, the NCCP Act and National Credit Code only covered loans which are predominantly used for the purposes of investing in residential real estate.
It is expected that providers of financial services may now be captured under the investment lending regime. Treasury proposes to set up a streamlined process for financial services licensees applying for ACLs.
Other reforms which are part of the Phase 2 Consumer Credit Reform Package include:
- Regulation of “credit activity investors”, which are individual or small entity lenders or lessors who engage in credit activities through a service arrangement with an intermediary (e.g. persons who participate in lending schemes operated by lawyers or accountants). Under the proposed reforms, credit activity investors will need to be members of an ASIC approved external dispute resolution service and the intermediary will need to hold an ACL. Previously, exemptions applied to these types of activities.
- Short-term and indefinite term leases, presently exempt under subsection 171(2) of the National Credit Code will be regulated where the lessee is likely to pay more than the cash price of the good under the lease and the lender ought have known, after making reasonable inquires, that the lessor required the goods for a longer or different period of time.
- The reforms also introduce anti-avoidance provisions which would prevent parties from entering into schemes which are designed to avoid the operation of the NCCP Act and the National Credit Code.
What do you need to do?
In the first instance, credit providers should review their client lists to identify whether they are currently providing credit to small business or to individuals for investment purposes. If so, advice should be obtained in order to comply with the reforms once enacted as law.
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