29 April 2009
National Consumer Credit Reform Package released
Earlier this week, the Federal Government released its National Consumer Credit Reform Package (Package), including two Bills and four sets of draft regulations. The Package will have substantial ramifications for credit providers and other participants in the credit industry (including brokers, intermediaries, introducers, debt collectors and referrers).
The new national regime:
- includes a new national licensing regime, built around the Australian Credit Licence (ACL); introduces a ‘world-leading’ responsible lending obligation
- is intended to reduce red-tape for business
- includes a new low cost dispute resolution mechanism
- includes significant new consumer protection and redress mechanisms
- extends protections to investment loans (to individuals and strata corporations) for the first time
- adds numerous new improvements to the existing credit code and
- expands the access thresholds for mortgage hardship claims.
Under the draft legislation a person must not engage in a credit activity without holding a licence which authorises the person to engage in the credit activity. Generally, a ‘credit activity’ includes:
- lending money or collecting money due under a credit contract
- acting as a broker or intermediary (such as an aggregator or mortgage manager) or
- providing assistance to a consumer about a specific credit product.
‘Credit activity’ is specifically defined and all regulated activities generally fall into the following categories:
- credit contracts
- credit services
- consumer leases
- mortgages and
All of the above services are defined in the draft legislation and are tied to definitions in the Credit Code (discussed below). Accordingly, an ACL will only be required for activities that fall within the Credit Code and an ACL will not be required for activities such as loans to business.
The licensing process will commence on 1 January 2010 as follows:
- Existing Participants
Before 1 January 2010, all persons engaging in credit activities will need to be registered with ASIC and must apply for this registration (online with the Australian Securities and Investments Commission (ASIC)) between 1 November 2009 and 31 December 2009. They will then have six months to apply for an ACL, between 1 January 2010 and 30 June 2010.
- New Participants
All persons who engage in credit activities for the first time on or after 1 January 2010 must apply for and receive an ACL before commencing business.
Two categories of existing participants can be streamlined to an ACL:
- authorised Deposit-taking Institutions (such as banks and credit unions) and
- finance brokers who have met the requirements to hold either an ‘A’ or ‘B’ Class licence under the current Western Australian licensing regime.
In these cases the government believes these participants have been subject to sufficiently rigorous levels of supervision and therefore can be streamlined to a licence without having to again demonstrate their competencies and qualifications. Streamlining will mean that the application procedure will be simplified. Applicants will be able to apply for a licence without having to provide detailed (proof) material to ASIC.
However, all ACL holders will be required to meet new obligations immediately on becoming licensed. For example, they will be required to:
- have adequate financial and human resources to meet their obligations
- be properly trained and ensure representatives are adequately supervised
- deal with conflicts of interest so clients are not disadvantaged where such conflict exists
- act efficiently, honestly and fairly, to comply with the law, including responsible lending conduct obligations and
- become a member of an ASIC-approved External Dispute Resolution (EDR) Scheme.
Licensees must meet these obligations when engaging in credit activities, or risk losing their licence.
ASIC will have a broad range of enforcement powers in relation to licensees.
The ACL regime is substantially similar to the Australian financial services licensing regime.
Uniform Consumer Credit Laws
The National Consumer Credit Protection Bill largely incorporates the existing uniform State-based law (Credit Code), but in addition, the Bill enhances those laws by:
- extending the scope of the laws to cover residential investment properties increasing the monetary thresholds under which consumers can request a change to certain terms of their credit contract on the grounds of hardship and for postponements to enforcement proceedings to $500,000, and requiring credit providers to respond to such applications within 21 days
- prohibiting credit providers from using essential household goods as security
- requiring credit providers to give consumers information when a consumer defaults on their contract or a direct debit is dishonoured and
- reducing the potential for unscrupulous lenders to avoid the law’s application to consumers.
Responsible Lending Laws
It will be a condition of holding an ACL that lending must be done responsibly. All forms of consumer credit will be captured and it will become an offence to supply credit irresponsibly.
The laws, which are intended to operate from 1 November 2009, will entail two elements for assessing whether credit is being extended responsibly. These are:
- assessing the unsuitability of a credit product for an individual and
- assessing a persons’ capacity to repay the proposed credit debt.
ACL holders will be required to provide consumers with a Credit Guide, similar to the financial services guide under the AFSL regime. Failure to provide the Guide is a strict liability offence subject to a fine of approximately $5,000. Prior to providing any credit assistance to a consumer an ACL holder is required to provide the consumer with a quote which complies with the requirements set out in the Bill.
The responsible lending laws will make it illegal for a credit provider to extend credit for a consumer that is unsuitable based on their needs and their financial capacity. The laws will also make it illegal for credit service providers to suggest credit for a consumer that is unsuitable based on their needs and their financial capacity.
Compliance with the responsible lending laws will require an assessment and verification of a consumer’s credit needs and financial circumstances. This assessment must be conducted by the credit provider when an individual borrows directly from the provider, such as from a bank, or by the credit service provider where an individual uses a broker to access credit. In the latter case, it will be open for the ultimate lender to rely on the information gathered by a credit service provider if they choose to, although the obligation to lend responsibly will still apply to all ACL holders at all stages.
Breaches of responsible lending obligations may result in serious sanctions, including revocation or suspension of a licence and therefore the provider’s ability to extend credit.
In addition, lenders and credit advisers must inform consumers that they are required to assess them under these responsible lending obligations and consumers will be informed that they have the right to receive a copy of that assessment.
Lenders must also inform consumers about who they are, including their ACL number and their dispute resolution membership. They will also be required to inform the consumer about any fees and charges payable upfront before the loan is suggested or entered into and let the consumer know what commissions the lender will get for selling the consumer that loan.
Breaches of responsible lending obligations will attract sanctions ranging from fines through to civil and criminal penalties. Where consumers have a dispute and are found to suffer detriment as a result of a breach of responsible lending obligations, the consumer will have access to damages to compensate for this detriment.
A credit contract must be assessed as unsuitable for the consumer if at the time of making the assessment it is likely that:
- the consumer will be unable to comply with the financial obligations under the contract, or could only comply with substantial hardship
- the contract will not meet the consumer’s requirements and objectives or
- prescribed circumstances set out in the regulations.
The possible range of factors that may need to be established in relation to a consumer’s capacity to repay credit could include:
- the consumer’s current income and expenditure
- the maximum amount the consumer is likely to have to pay under the credit contract for the credit
- the extent to which any existing credit contracts are to be repaid, in full or in part, from the credit advanced
- the consumer’s credit history, including any existing or previous defaults by the consumer in making payments under a credit contract and
- the consumer’s future prospects, including any significant change in the consumer’s financial circumstances that are reasonably foreseeable (such as a change in the amount the consumer has to pay under the credit contract for the credit or under any other credit contract to which the consumer is party).
Greater care will need to be taken in regard to inquiries about the consumer’s financial situation in the circumstance where the consumer is refinancing, particularly due to an inability to meet the repayments of an existing credit contract. Under the refinancing the consumer may incur transaction costs and fees and charges, including fees for moving from one credit contract to another. All costs of moving credit contracts are expected to be taken into consideration when assessing the consumer’s ability to meet the obligations of the new credit contract over a reasonably foreseeable term.
Some Preliminary Industry Responses
The Financial Planning Association has raised a number of concerns about the extent of the regime including:
- the definition of “credit assistance”, which could potentially capture financial planners who suggest debt repayment strategies that involve specific credit products
- alignment with the Financial Services Regime (FSR regime) to avoid duplication and unnecessary regulatory requirements
- the extent of additional requirements current Australian Financial Services Licence (AFSL) holders and Authorised Representatives will need to meet with credit licensee requirements and
- the extent of the requirements for meeting responsible lending obligations that may fall on the financial adviser.
The Australian Bankers’ Association (ABA) has said that consumers will end up paying more for a loan and waiting longer for approval under the new “heavy handed” consumer credit laws noting that the new regime will mean more paperwork and further processes for the assessment of loan applications. The ABA noted that the new rules would “go a long way” towards eliminating predatory and unscrupulous lending practices but failed to recognise responsible lending practices by the banks and that the changes would make lenders more risk averse because of the substantial penalties they would face for breaking the rules.
The period for community consultation closes on 22 May 2009. The Bills are proposed to be introduced into Parliament before the middle of 2009.
- assist in making a submission to government on the proposed Package
- provide specific advice as to how the new regime will apply to your sector
- 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 Package.
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