Australian Regulatory Compliance Review

Commonwealth legislation update

Commonwealth Parliament is in recess and will next sit on 19 October 2009.

Bills awaiting passage include:

• Corporations Amendment (Improving Accountability on Termination Payments) 2009
• Corporations Legislation Amendment (Financial Services Modernisation) 2009
• National Consumer Credit Protection 2009
• Personal Property Securities 2009
• Trade Practices Amendment (Australian Consumer Law) 2009

See Bills list

Brokers targeted for earlier responsible lending start

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has announced the responsible lending conduct requirements for brokers and all other lenders which are not Authorised Deposit-taking Institutions or Registered Finance Companies, will now apply from 1 January 2010 instead of 1 January 2011, as previously proposed.

More here

National Credit Code overview: are you affected?

This article by me was first published in Retail Banking Review.

The new Minister for Financial Services , Superannuation and Corporate Law, Chris Bowen MP, introduced the 3 Bills in the consumer credit reform package into Parliament on 25th June 2009. Subject to the agreement of the States and Commonwealth Parliament the new laws will start on 1 November 2009 with licensing to commence by 1 January 2010.

The core Bill is the National Consumer Credit Protection Bill 2009 which contains the new national consumer credit code,responsible lending conduct provisions (which require lenders to make an assessment of the suitability of the loan for the borrower as well as the borrower’s capacity to repay the credit being offered), licensing of credit provider rules and greater enforcement powers for ASIC to police the new regime.

The Bill also requires mandatory membership of an external dispute resolution (EDR) body by all providers of consumer credit and credit-related brokering services and advice.

The scope of credit products covered by the Credit Code will be extended to regulate the provision of consumer mortgages over residential investment properties.

ASIC will become the national regulator for consumer credit and finance broking, taking over from the states and territories. This means that home loans, personal loans, credit cards, overdrafts and line of credit accounts, among other products and services, will be regulated under Commonwealth legislation and administered by ASIC.

Credit Licensing

The key elements of the new licensing regime are that:

• it requires persons who engage in credit activities to, initially, be registered with ASIC, and to subsequently hold an Australian Credit License;
• it imposes entry standards for registration and licensing, and enables ASIC to refuse an application where the person does not meet those standards;
• it requires registered persons and licensees to meet ongoing standards of conduct while they engage in credit activities; and
• it provides ASIC the power to suspend or cancel a licence or registration, or to ban an individual from engaging in credit activities.
• Existing lenders and credit-service providers (such as brokers) will be required to register with ASIC between 1 November 2009 and 31 December 2009, and will have to apply for a licence by 30 June 2010 in order to continue to engage in credit activities.
• ASIC expects that thousands of currently unregulated credit service providers will be caught by the new licensing provisions.
• The definition of “credit activity” is very wide. It could apply to car dealers, retailers providing credit and even internet peer to peer loan facilitators if they are conducting a business.
• Intermediaries providing a credit service would need to be licensed.

Responsible lending conduct

As a condition of being granted an Australian Credit Licence a credit provider or credit service provider must comply with conduct obligations, including responsible lending conduct requirements.

If a loan is considered to be unsuitable for a loan applicant and if the borrower does not have the capacity to repay the loan, they will not be provided with the loan.

The key obligation on licensees is to ensure they do not provide a credit contract or lease to a consumer or suggest or assist a consumer to enter into a credit contract or lease that is unsuitable for them. This obligation requires licensees to assess that the credit contract or lease is not unsuitable for the consumer‘s requirements and that the consumer has the capacity to meet the financial obligations under the credit contract or lease.

The responsible lending conduct obligations will commence on 1 January 2011 to provide industry time to put in place the systems, arrangements and training needed to comply with these obligations.

Credit Code changes

The application of the Code has been extended to residential investment property loans.

The Bill also introduces a number of new concepts and procedures into the consumer credit regime including the following:

• the “capacity to pay” test for credit assessment will be expanded by a test of whether the credit contract will be unsuitable for the borrower before entering the contract or increasing a loan;
• “unsuitability” means if it will be likely, at the time the loan is made, the borrower could not comply (and repay) without hardship or the credit doesn’t meet the borrower’s objectives;
• the Bill specifies what is reasonable for a credit provider to do in making the unsuitability assessment ;
• the credit provider must give the borrower a copy of the assessment if requested within two business days if requested any time up to 12 months after the contract expires. There is no obligation to provide a copy of the assessment if the credit contract is not entered into or the credit limit is not increased;
• credit providers must give a person a credit guide , as soon as practicable after it becomes apparent that the credit provider is likely to enter a credit contract with a person who will be the borrower under the contract;
• the credit provider must give written notice of the outcome of an application for a hardship change within 21 days after receiving the application. If the application is refused, the notice must state the credit provider’s EDR and the applicant’s rights under that scheme;
• The first time a default occurs in payment pursuant to a direct debit authority, the credit provider must give a notice in the prescribed form to the borrower and any guarantor within 10 business days of the default occurring;
• there are new default notice requirements before a credit provider can enforce a credit contract or a mortgage against a defaulting debtor or mortgagor.

The second phase of reform will consider a review of unsolicited credit card limit extension offers and the possible regulation of reverse mortgages.

More details at our National Consumer Credit Reform website

Register for our Credit Code Reform seminar.

Subscribe to National Consumer Credit Reform by Email

ASIC credit code regulatory guides

ASIC has released details of the policy and guidance documents relating to the National Credit Code it proposes to issue in the coming months, together with an indicative timetable.

In addition to the two papers already issued on conduct obligations of credit licensees and financial resources and compensation obligations of credit licensees, topics that ASIC intends to release further guidance on throughout 2009 are:

• competency and training for credit licensees;
• responsible lending;
• registration and transition;
• the scope of the licensing regime;
• relief applications; and
• dispute resolution.

ASIC will also release the Credit Licensing Kit and Form later in the year.

More details at our National Consumer Credit Reform website

Reminder: National Credit Code seminars

We will be holding a series of half day seminars on the new credit licensing and consumer credit regime as follows:

Brisbane: Tuesday 11 August (Cliftons)

Sydney: Wednesday 12 August (Grace Hotel)

Melbourne: Thursday 13 August (venue to be advised)

Adelaide: Friday 14 August (venue to be advised).

The Senate Committee is due to deliver its report on the draft Bills on 7 August.

The seminars will discuss:

• licensing
• training requirements
• changes to the Credit Code
• unfair contracts
• disclosure requirements
• the effect on existing contracts
• the effect on business lending
• external dispute resolution
• compensation requirements

Contact Levina Chim 02 8234 4777 for details.

For more National Credit Code and licensing information, visit our National Consumer Credit Reform site.

National Consumer Credit Protection Reform Package introduced

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has introduced the Government's national consumer credit laws into Parliament.

The regime will establish a single, standard, national law for the regulation of consumer credit.

The new national regime includes:

• a national licensing regime regulating credit providers and providers of credit related services enforced by the Australian Securities Commission (ASIC) as the sole regulator (from 1 January 2010);
• responsible lending requirements (from 1 January 2011);
• compulsory dispute resolution mechanisms for credit providers;
• extension of consumer credit laws to residential investment property loans;
• an increase to the threshold for hardship claims to $500,000.

The Reform Package comprises three Bills:

• the National Consumer Credit Protection Bill 2009 (Credit Bill) which contains the licensing provisions and new National Credit Code (replacing the existing Consumer Credit Code);
• the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill); and
• the National Consumer Credit Protection (Fees) Bill 2009 (Fees Bill).

Subject to the passage of the Reform Package and reference legislation in each state, the Reform package will commence on 1 November 2009:

• Lenders and credit-service providers (such as brokers) will be required to register with ASIC between 1 November 2009 and 31 December 2009, and will have to apply for a licence by 30 June 2010 in order to continue to engage in credit activities.
• The responsible lending conduct obligations will commence on 1 January 2011 to provide industry time to put in place the systems, arrangements and training needed to comply with these obligations.

Langes is currently reviewing the draft bills in detail.

We will be discussing the legislation at our seminars in Brisbane, Sydney, Melbourne and Adelaide in August.(More information here).

Links:Treasury's Consumer Credit Website

Langes National Consumer Credit Reform website

ASIC;s National Consumer Credit Regulation page

National Credit Code seminars

We will be holding a series of half day seminars on the new credit licensing and consumer credit regime as follows (venues to be advised):

Brisbane: Tuesday 11 August
Sydney: Wednesday 12 August (Grace Hotel)
Melbourne: Thursday 13 August
Adelaide: Friday 14 August.

The seminars will discuss:

• licensing
• training requirements
• changes to the Credit Code
• unfair contracts
• disclosure requirements
• the effect on existing contracts
• the effect on business lending
• external dispute resolution
• compensation requirements

Contact Levina Chim 02 8234 4777 for details.

For more National Credit Code and licensing information, visit our National Consumer Credit Reform site.

Draft National Consumer Credit Reform package released

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has released the draft National Consumer Credit Reform package for comment by Friday 22 May 2009.

The package consists of drafts of the following: 

• National Consumer Credit Protection Bill 2009 (the National Credit Code is a Schedule to this Bill)
• National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009
• National Consumer Credit (National Credit Code) Regulations 2009
• National Consumer Credit Protection (Transitional and Consequential Provisions) Regulations 2009
• National Consumer Credit (Infringement Notices) Regulations 2009 and
• draft explanatory material. 

The Bill creates a new national regime for consumer credit including:

• a new national licensing regime, requiring an Australian Credit Licence
• a responsible lending obligation
• a new dispute resolution mechanism for lenders
• extending protections to investment loans for the first time;
• amendments to the existing credit code, and
• an increase of the threshold for mortgage hardship claims to $500,000

Australian Credit License
The Bill creates the Australian Credit License (ACL). After a registration phase commencing on 1 November 2009, coverage of the ACL regime will commence on 1 January, 2010, will be Australia-wide and will include all parts of the credit industry.

The ACL regime will be supervised by the Australian Securities and Investment Commission (ASIC) and will replace existing state regulation.

ASIC will be given the power to cancel or suspend a licence or ban people from engaging in credit activities

ACL holders will all be required to meet minimum entry standards before they can offer products and services to consumers.

All banks, credit unions, finance companies and other lenders, known in the Bill as credit providers, and all credit advisers and mortgage and credit brokers, known as credit service providers will be required to hold an ACL.

A person or entity will need an ACL where they engage in any of the following credit activities:

• lending money or collecting money due under a credit contract,
• acting as a broker or intermediary (such as an aggregator or mortgage manager),
• providing assistance to a consumer about a specific credit product.

All holders of an ACL will be required to meet new obligations immediately on becoming licensed. For example, they will be required to be properly trained and ensure representatives are adequately supervised. They must also deal with conflicts of interest so clients are not disadvantaged where such conflict exists.

Licensing will be implemented in two phases. Anyone who currently engages in credit activities will need to register online with ASIC between 1 November 2009 and 31 December 2009. "Fast-tracking" will not be offered to existing lenders.

On becoming registered, a person must meet a range of obligations – they will be required to act efficiently, honestly and fairly, to comply with the law, including responsible lending conduct obligations and to become a member of an ASIC-approved External Dispute Resolution (or EDR) Scheme.

In phase 2, lenders will have six months to apply for an Australian Credit Licence, between 1 January 2010 and 30 June 2010. To qualify for an Australian Credit Licence, applicants must demonstrate to ASIC that they have the necessary organisational capacity, competencies and skills.

All persons who engage in credit activities for the first time on or after 1 January 2010 must apply for and receive an Australian Credit Licence before commencing business.

Responsible Lending
Responsible lending has two core elements:
1. if a loan is considered to be ––unsuitable for a consumer; and
2. if they do not have the ––capacity to repay the loan, they will not be provided with the loan.

ASIC Enforcement powers
The national credit laws will also include enhanced ASIC enforcement powers including:

• criminal penalties for licensee misconduct with possible imprisonment for up to 5 years for those who lend contrary to the responsible lending requirements,
• civil penalties for licensee misconduct to enable ASIC to impose heavy fines of up to $220,000 for an individual and $1.1 million for a corporation,
• infringement notices (or fines) to enable ASIC to quickly act to penalise certain breaches of the law; and
• consumer remedies, which will enable consumers to seek redress for their loss and damage as a result of misconduct by a licensee, or when their credit is provided unlawfully.