The National Consumer Credit Protection reforms

In this final part of our series on the National Consumer Credit Protection reforms, we wrap up by briefly summarising our commentary in this series on key aspects and dates relating to the reforms under the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Transitional Act), the National Consumer Credit Protection Act 2009 (National Credit Act) and associated regulations.

Background

As part of the key elements of the first phase of the Government’s two-phase action plan for consumer credit reform, a single national regime for regulation of consumer credit in Australia is being established. This will replace the existing state and territory based regulatory regimes. The reforms introduce significant new obligations on participants in the consumer credit industry and widen the concept of consumer credit to include residential investment loans.

Some key elements, dates and requirements

Generally, the National Credit Act applies to all persons and businesses involved in the origination, provision, management and enforcement of consumer credit. This includes for example, banks, credit unions and finance companies, and those that are involved in assisting consumers obtain credit, such as brokers and financial planners.

Not all persons and businesses engaging in credit activities need to be registered or have an Australian Credit Licence (ACL). For example, if your credit activities are not regulated by the National Credit Act or if you are exempt, or if you only engage in credit activities on someone else’s behalf, and that person is registered or has an ACL, you do not need to be registered.

All other persons engaging in credit activities and who wish to continue to do so from 1 July 2010, will need to register with ASIC between 1 April 2010 and 30 June 2010. The registration period formally closes on 30 June 2010, and ASIC has indicated that due to the volume of anticipated applications, applications received after 18 June 2010 may not be processed quickly enough for credit activities to continue beyond 1 July 2010. If you are required to register with ASIC and you do not do so by 30 June 2010, you must stop engaging in credit activities until you have an ACL.

All registered persons will need to apply for an ACL between 1 July 2010 and 31 December 2010. Registration will enable you and your representatives to engage in credit activities until you complete the licensing process. If you are registered, you may only continue to engage in credit activities from 1 January 2011 if you have applied for an ACL by 31 December 2010. 

If you intend to engage in credit activities for the first time from 1 July 2010, you must first apply for and receive an ACL, or be covered by someone else’s.  

Registered persons and licensees have a number of general conduct obligations set out in the Transitional Act and the National Credit Act. Some of those obligations for licensees, and in some cases registered persons, include:

• the requirement to do all things necessary to ensure the credit activities authorised by the ACL (or registration) are engaged in efficiently, honestly and fairly;
• having in place adequate arrangements to ensure customers and clients of the licensee (or registered person) are not disadvantaged by any conflict of interest that may arise in relation to credit activities engaged in by the licensee (or registered person) or its representatives;
• being a member of an ASIC approved external dispute resolution scheme;
• having an internal dispute resolution procedure that complies with the required standards and requirements; and
• having adequate arrangements and systems to ensure compliance with these obligations and a written plan that documents those arrangements and systems. 

Licensees must comply with the responsible lending conduct obligations in Chapter 3 of the National Credit Act. The key obligation is that licensees must not suggest, assist with or provide a credit contract or a consumer lease to a consumer that is unsuitable for the consumer. The obligations also apply to increases, suggestions or assistance to increase credit limits, or for a consumer to remain in a particular credit contract. In making a determination, licensees will need to make reasonable enquiries about the consumer’s financial situation, requirements and objectives and take reasonable steps to verify the consumer’s financial situation. 

The requirement not to arrange or provide credit that is unsuitable will apply to non-ADIs and non-registered finance corporations (and their representatives) from 1 July 2010, and will apply to ADIs and registered finance corporations from 1 January 2011. Other responsible lending conduct obligations including disclosure requirements with respect to upfront fees and charges for example, will apply to all licensees and their representatives from 1 January 2011.

A regulatory framework has also been proposed for credit providers and lessors who have carried over instruments. That is, pre-existing credit contracts and leases regulated by existing state or territory based consumer credit legislation, and which are in force on 1 July 2010. 

Generally, it is proposed to categorise these credit providers and lessors as:

• those who only have a closed pool of carried over instruments on 1 July 2010 and who will not offer new credit contracts or consumer leases from that date (COI lenders); and
• those who will continue to offer new credit contracts and consumer leases from 1 July 2010 alongside their existing carried over instruments. These credit providers and lessors will need to register with ASIC by 30 June 2010, and apply for an ACL between 1 July 2010 and 31 December 2010. 

A COI lender can choose to apply for an ACL, in which case the provisions of the National Credit Act will apply to the COI lender unmodified and the COI lender will need to register with ASIC by 30 June 2010, and apply for an ACL between 1 July 2010 and 31 December 2010.

COI lenders who choose not to apply for an ACL (or who have their ACL cancelled by ASIC or voluntarily surrender it), will be automatically subject to the statutory scheme and will need to notify ASIC by 30 June 2010 of their intention not to offer new credit contracts or consumer leases after 1 July 2010, and not to become registered or licensed. Where this notification is given, the COI lender will be subject to regulation under the statutory scheme and will therefore need to be familiar with the requirements and obligations applying to that scheme. 

Licensees, and in particular credit providers and lessors, will need to ensure they are familiar with all of the changes being introduced under the National Credit Act, and review their documents and procedures to ensure they comply with them. Some of the changes cover:

• loans to individuals to purchase, renovate or improve residential investment property or refinance credit provided for such purpose;
• amendments to business purpose declarations and enquiries to be made in connection with the purpose of the proposed credit;
• amendments to default notices and other standard form notices including prescribed information of the EDR scheme of which the credit provider is a member; and
• new notices in response to applications for hardship variations and postponement of enforcement proceedings.

Next Steps

All persons and businesses who will engage in credit activities under the National Credit Act need to consider the extent to which they need to comply with the legislation and requirements, will need to be familiar with them and other applicable obligations and will need to be ready to make the necessary applications for registration and an ACL within the prescribed time.

Licensees will also need to have in place appropriate measures, systems and procedures to comply, and demonstrate compliance, with the applicable obligations and requirements.

In all instances, we recommend you seek appropriate legal advice to cater to your specific circumstances.

The second phase of the Government’s two-phase action plan for consumer credit reform will include further enhancements and reforms. These will include:

• specific conduct obligations to stem unfavourable lending practices with respect to certain credit products and other fringe lending issues;
• regulation of investment loans other than margin loans and mortgages for residential investment properties;
• reform of mandatory comparison rates and default notices;
• enhancements to the regulation and disclosure of reverse mortgages; and
• regulation of the provision of credit to small businesses. 

We will keep you informed of these reforms as they develop.

Further information
For further information please contact Kylie O’Keeffe, Partner, on (08) 9288 6852 or email her at kylie.okeeffe@lavanlegal.com.au.