Alert

The National Consumer Credit Protection Bill 2009 (Bill) has been introduced to Parliament. The Bill will mean sweeping changes for the Australian credit industry and a wide range of businesses that provide credit-related services. The Bill will establish a national licensing regime and impose new responsible lending obligations (the commencement of these will be delayed to 1 January 2011).

Obligations under the Bill are very similar to those under the April 2009 exposure draft, except that point-of-sale retailers are proposed to be exempted. There may be an opportunity to make submissions on the Bill if it is referred to a Senate Committee.

1 Previous exposure draft

An exposure draft of the Bill was released on 27 April 2009 and is discussed in our 27 April alert. Public submissions that were made in relation to the exposure draft during the four week comment period have been posted on the Commonwealth Treasury website.

A number of key changes have been made since the exposure draft.

• The Minister’s press release states that ‘responsible lending’ requirements will not be effective until 1 January 2011. This will allow the credit industry additional time to make necessary changes. This limitation is not contained in the Bill as introduced, and may be implemented through a regulation. (The National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill) contains a provision that affects how the responsible lending provisions will apply between January 2011 and July 2011, but does not formally state a delayed commencement date of 1 January 2011.)

• The Minister’s press release states that “Point-of-sale retailers - for example, car dealerships or retail outlets – will be exempt from the requirements that facilitate credit assistance to consumers”. This limitation is not contained in the Bill as introduced to Parliament, and the press release suggests that it will be implemented through a regulation.

• A lender will no longer be required to comply with the ‘credit assistance’ requirements in relation to its own credit products.

2 Key features of the Bill

2.1 National Australian credit licence regime

Under the Bill, credit industry participants will be required to hold an Australian credit licence from 1 July 2011, unless an exemption applies.

(By contrast, there will be requirements under the Transitional Bill from 1 January 2010 to have registered with ASIC as a credit provider and from 1 July 2010 to have either applied for or been granted a licence. There is no equivalent ASIC exemption regime.)

The credit licence must be held by any person that engages in any (very broadly defined) credit activity including:

• providers of Consumer Credit Code regulated credit or leases and any person who performs the obligations or exercises the rights of a credit provider or lessor (including debt collectors and assignees)

• mortgagees under Consumer Credit Code regulated mortgages and any person that performs the obligations or exercises the rights of a mortgagee

• beneficiaries under Consumer Credit Code regulated guarantees and any person that performs the obligations or exercises the rights of a beneficiary, and

• any person that provides credit assistance or acts as an intermediary between a credit provider or lessor and a consumer (including finance brokers), although it is expected that point-of-sale retailers will be exempted.

Holders of an Australian credit licence will be subject to a broad range of general obligations (similar to the obligations imposed on an Australian financial services licensee) including obligations to:

• do all things necessary to ensure that credit activities are engaged in efficiently, honesty and fairly

• have in place adequate arrangements to ensure clients of the licensee are not disadvantaged by any conflict of interest that might arise wholly or partly in relation to credit activities engaged in by the licensee

• ensure that representatives are adequately trained and are competent, and

• report significant breaches of the licensee’s obligations to ASIC.

Under the Transitional Bill, these conduct obligations, other than breach reporting, will apply to all registered credit providers from 1 January 2010.

2.2 Creating responsible lending obligations

Generally, the responsible lending obligations apply if an Australian credit licensee (or its representative):

• suggests that a consumer apply for, or assist a consumer to apply for, credit under a particular credit contract with a particular credit provider

• enters into a credit contract with a consumer, or

• increases the credit limit under a credit contract or suggests that a consumer apply for, or assisting a consumer to apply for, an increase to the credit limit under a particular credit contract with a particular credit provider.

The key features of the responsible lending obligation include obligations to:

• provide a credit guide containing information about the licensee and its obligations

• give a binding quote (if the licensee is providing credit assistance in relation to the credit products of another person), and

• assess whether the credit contract is unsuitable for the consumer. A credit contract is unsuitable if it is likely that the consumer will be unable to comply with their financial obligations under the contract (or could only comply with substantial hardship) or the contract does not meet the consumer’s requirements or objectives (or in other prescribed circumstances). The Bill now includes a rebuttable presumption that substantial hardship will exist where the consumer would need to sell their principal place of residence to comply with the credit contract.

For the purpose of assessing suitability, the credit licensee must make reasonable inquiries and take reasonable steps to verify the consumer’s financial situation.

2.3 The extension of the Consumer Credit Code to investment credit, increase in hardship thresholds, and other changes

The Bill incorporates the existing Consumer Credit Code into the new Act as a new National Credit Code with a number of amendments.

The most significant of these are:

• The National Credit Code extends to credit provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes.

• Increased thresholds under which consumers can request a change to certain terms of their credit contract on the grounds of hardship. The hardship provisions now apply if the maximum amount of credit provided under the credit contract is under $500,000.

A variety of other changes are made, and credit providers should not assume that the National Credit Code is identical to the Consumer Credit Code as in force immediately before the changes. Other changes include the following:

• Business purpose declarations will no longer have conclusive evidentiary value, and it will be an offence punishable by up to two years’ imprisonment to procure a false business purpose declaration.

• There are new restrictions on taking security over essential household property. Consumers are given new rights to require the return of mortgaged goods that have been improperly seized.

• Credit providers must respond to a request for hardship variation or a postponement of enforcement action within 21 days.

• The form and content of default notices are changed.

• Credit providers will no longer be required to publish comparison rate schedules.

• The ‘e-commerce’ amendments in section 172 of the Consumer Credit Code have been removed, apparently on the basis that the Electronic Transactions Act 1999 is sufficient. (Special classes of document that must not be provided electronically will be added to the Electronic Transactions Regulations.)

2.4 Role of ASIC

ASIC is appointed as the sole regulator, with enhanced enforcement powers.

3.1 Transitional provisions

The National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 proposes a two-stage transition process of registration followed by a licence:

What next?

The Government has announced its intention that the Bill and associated legislation will commence on 1 November 2009.

It is not yet clear whether the Bill will be referred to a parliamentary committee for additional consideration. If the Bill is referred to a committee, it is likely that there will be only limited time to make submissions in order to meet the proposed commencement date.

We can assist you in considering the impact of the Bill on your business and in preparing any submissions in response to the draft legislation. We have extensive experience in this area.

Useful links

Click here to view the National Consumer Credit Protection Bill 2009 as introduced to Parliament.

Click here to view the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 as introduced to Parliament.

Click here to view the National Consumer Credit Protection (Fees) Bill 2009 as introduced to Parliament.

Click here to view the Government’s Action Plan for single, standard, national regulation of consumer credit announced on 2 October 2008.

Click here to read our client alert from 3 October 2008 relating to the Action Plan.

Click here to read our client alert from 27 April 2009 relating to the exposure draft Bill.