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Consumer credit protection - a process in need of reform

​The first phase of the national consumer credit protection reform process is nearing completion, with the National Consumer Credit Protection Bill through the House of Representatives and introduced into the Senate on 7 September.

The process has been notable not only for the major change it represents to the regulation of credit in Australia but for the lack of broad-based consultation and the haste with which the Bill was drafted.

Treasury would be well advised to consult more widely in the next phase of reform, which will consider extending the changes to the small business sector. Otherwise, Canberra runs the risk of developing inappropriate regulations which will hamper the flow of credit into Australia’s business sector and weaken the process of economic recovery.

Getting ready for Phase 1

Although there are issues with the development of the Bill, all members of the credit industry need to be ready to comply with its obligations when it becomes law.

The Bill requires all persons engaging in a credit activity to be licensed or a credit representative of a licensee, unless an exemption applies. Credit activities include being a credit provider, providing various services involving credit contracts, acting as an intermediary or suggesting or helping a person enter into a credit contract, consumer leases, mortgages and guarantees.

A service provider who merely performs the obligations or exercises the rights of a credit provider or mortgagee will require a licence. A number of exemptions will be included in the final Regulations, and industry is awaiting these with much interest.

The Bill requires persons who engage in credit activities to apply to ASIC by 31 December 2009 to be registered (with applications accepted from 1 November 2009). The Senate Economics Committee Report appears to be suggesting a six-month deferral, however it is not yet clear what the Government’s final position on timing will be.

Key steps needed during this period include:

  • Identifying all parts of your business operations that require a licence or a relevant exemption - including your own entities, and any third party service providers;
  • Considering whether any of these operations require restructure, for example will third party service providers who need them be willing and able to obtain licences, or if not, would you be prepared to take responsibility for their compliance and appoint them as credit representatives.
  • Under the proposed regime, you will be directly responsible for ensuring that your counterparties are licensed if required. You will face both criminal and civil penalties for conduct business with a third person engaging in a credit activity if that other person is not licensed as required.
  • Starting to prepare for registration and licence applications;
  • Considering which parts of your business will be subject to “responsible lending” obligations from 1 January 2010 - the Government has announced these will commence on that day except for ADIs and registered finance companies) - and to start identifying any new processes to comply.

As part of this process, industry should continue to identify issues to make submissions to government on exemptions for certain activities.

Ensure your processes are “reasonable” and all processes are properly documented

The Bill introduces responsible lending obligations for both credit providers and persons who provide credit assistance by suggesting a consumer apply, or helping a consumer apply, for a credit contract or an increase to their credit limit (“credit assistance”).

Credit providers and persons providing credit assistance must undertake an assessment of “unsuitability” before a consumer enters into a credit contract or a credit limit is increased and before providing the consumer with assistance to do so. If requested, the customer must be given a copy of the assessment and this obligation continues for 7 years.

The level of enquiry required by the Bill is limited by making “reasonable enquiries” of the consumer including the consumer’s purpose and objectives as well as their financial situation. “Reasonable steps” then need to be taken to verify this information.

On 2 September ASIC released a consultation paper setting out its proposals for guidance on these obligations, and seeking comment by 30 September. It contemplates not only consideration of financial information going to capacity, but also unsuitability given how the consumer proposes to use the money, whether the consumer seeks and understands the implications of various product features, and flexibility.

Licensees will need to consider carefully how to comply with these new rules - and document compliance - for different types of products, customers and channels.

And then…

Further changes now proposed to be implemented on 1 July 2010 (previously to be introduced on 1 January 2010) include:

  • Application of the Code to credit for residential investment properties
  • Introduction of debit default notices
  • Amendments to business purpose declarations, default notices and procedures, and hardship procedures
  • Application of transitional provisions to existing contracts which will be transferred to the new regime.

These will involve changes to documentation, but also to systems and procedures, which will impact the timeframes for implementation.

Reaching a landing

Despite the streamlined timelines initially announced by the Federal Government, still no legislation has been enacted and the Bill remains in the Senate. Final regulations have not yet been released and ASIC is in the process of releasing consultation papers, with final guidance still to come.

Depending on where the Government lands on its final implementation timeline, there may be a very short turnaround time from when the legislation is passed to the commencement of credit provider obligations. Industry does not have the luxury of waiting for certainty before commencing preparation.

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