25 June 2009

National Consumer Credit Protection Reform Package

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

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

"The new regime will provide better protection for all Australians and assist with market confidence for the ongoing stability of the consumer credit sector," Mr Bowen said.

"In introducing these reforms into the Parliament, I would like to acknowledge the outstanding work of Minister Sherry in carrying this reform through."

The National Consumer Credit Protection Reform Package (the Reform Package) sees the Rudd Government deliver on Phase One of the historic agreement made by the Council of Australian Governments (COAG) in October 2008 for the Commonwealth to assume responsibility for consumer credit regulation.

"There are substantial benefits to be realised from the credit reform package and its implementation is long overdue. The package of reforms will see consumers and industry benefit through robust licensing regime– that will exclude the unscrupulous and incompetent from the industry," Mr Bowen said.

The reform will see the integrity of the credit market in Australia significantly enhanced. Providers of credit and credit related services will be world leading as a result of the rigorous entry conditions required for an Australian credit licence and the requirement to meet responsible lending standards when providing credit or credit assistance.

The credit market will benefit from enhanced assurance that consumers are well protected and the international confidence that Australia has a well regulated credit market contributing to the promotion of a stable domestic and international financial sector.

Significantly, phase one of 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;
  • world-leading responsible lending requirements;
  • significant reduction in red-tape for Australian businesses in the credit industry;
  • low cost, easy access dispute resolution mechanisms for consumers;
  • new consumer redress options;
  • protections for investment property loans;
  • numerous enhancements to the State-based Uniform Consumer Credit Code Code (UCCC); and
  • an increase to the threshold for hardship claims.

The Government is keen to strike the right balance in these reforms, so following extensive consultation, has made the following changes to the legislation:

  • Point-of-sale retailers - for example, car dealerships or retail outlets – will be exempt from the requirements that facilitate credit assistance to consumers. The Government will examine the issue of regulatory oversight within the next 12 months.
  • 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.
  • The requirement for credit providers to perform the credit assistance obligations when providing credit assistance in relation to their own proprietary credit products has been removed.

The Reform Package comprises three Bills:

  • the National Consumer Credit Protection Bill 2009 (Credit Bill) which replicates the current UCCC as the National Credit Code (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).

To ensure the smooth operation of the legislation, the Reform Package will be augmented by regulations on a range of matters to give guidance to industry and allow greater flexibility so that the laws may be applied in a sensible and practical way.

The Government intends to build on the reforms to enhance the regulatory framework established by this package. Work on the next phase will include the areas of credit card limit extensions, fringe lending issues and reverse mortgages as well as extending the regulation of credit to include small business and other investment loans.

The package of consumer credit reforms will be available at www.treasury.gov.au/consumercredit.

25 June 2009

Further Details of the Credit Reform Package

Credit Reform Package

The Reform Law Package establishes the key components of the regulatory framework.

  • The Credit Bill develops a framework to license credit providers, brokers and intermediaries and applies responsible lending conduct requirements to licensed parties. It also provides a robust dispute resolution mechanisms supported by appropriate enforcement powers for the sole national regulator (ASIC), court arrangements, remedies for consumers and penalties for licensee misconduct.
  • The Transitional Bill contains the treatment of rights and liabilities of certain existing credit contracts; and arrangements for court proceedings that existed or arose prior to the commencement of the Credit Bill. It also establishes a registration process for industry participants as a precursor to licensing.
  • The Fees Bill provides the mechanism to support the imposition of fees for various matters such as the lodgement of documents and the inspection or search of a register kept by ASIC.

Proposed Regulation

To facilitate the smooth operation of the national credit regime in a sensible and practical manner, broad regulation making powers are included in the Credit law package to enable the making of regulations in relation to matters, such as:

  • the treatment of interest paid in advance for residential investment property;
  • the setting of fees and charges for lodgement of a licence application and licence renewal;
  • exemptions from licensing – for example, exemptions for state-licensed debt collectors (12 months only) and for point of sale credit assistants;
  • clarifying the application of responsible lending requirements relating to certain disclosure documents, such as the provision of the credit guide when the transaction is commenced by phone of online and the format for commission disclosures;
  • clarifying, where needed, the application of the responsible lending provisions to particular situations in relation to certain products;
  • establishing the infringement notice regime;
  • clarifying the jurisdiction where legal proceedings must be commenced; and
  • streamlining to a licence brokers who hold either an 'A' or 'B' class licence under the Finance Brokers Control Act 1975 (WA).

Commencement of the Reform Package

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.

Key features of the Reform Package include:

  • a comprehensive licensing regime for all providers of consumer credit and credit-related services in the industry;
  • industry-wide responsible lending conduct requirements on licensees – these requirements will prohibit the suggestion or provision of credit products and services that are unsuitable for the consumers' needs and that the consumer does not have the capacity to repay;
  • improved sanctions and enhanced enforcement powers for the regulator, the Australian Securities and Investments Commission (ASIC);
  • expanded protection for consumers through court arrangements, remedies for consumers and penalties for licensee misconduct; and
  • an expanded scope for the Code to include regulation of credit provided to purchase, renovate, improve or refinance a residential investment property.

Comprehensive licensing regime

Recognising that industry will need time to move over to the new credit regime, a two-stage approach – a period of registration followed by licensing – is designed to ease the transition burden for industry and ensure that consumers are not left exposed in the transfer.

A person will not be able to obtain a credit licence if they cannot demonstrate:

  • they are a fit and proper person, and
  • they meet the legal obligations of a licence holder (such as acting honestly, efficiently and fairly or properly training and supervising their agents).

Questionable operators on the margins who cannot meet these new national standards will not get a licence and will be forced to exit the industry.

The requirement to hold a credit licence will apply to:

  • all banks, credit unions, finance companies and other lenders; and
  • mortgage and finance brokers, and other intermediaries who assist consumers to obtain credit.

Authorised deposit-taking institutions will be streamlined into holding an Australian credit licence in recognition of the adequacy of existing rigorous levels of government oversight.

Regulations may also provide for the streamlining of other participants and licence exemptions.

Point-of-sale retailers – retail outlets and intermediaries (for example, car dealerships or other point of sale retailers) that facilitate credit assistance to consumers will be exempt from these requirements, with a review of the issue of the appropriate regulatory oversight to occur within 12 months. Lenders of credit and lease arrangements in the retail sector will not be exempt.

Debt collectors that hold a state or territory licence and are authorised by a lender to collect a debt are exempt for a 12-month period pending further consultation with state and territory governments and industry.

Consumers across Australia will be protected, as a person who loses their licence will be excluded Australia-wide. At present, there is nothing to prevent a person banned in one State continuing to operate simply by moving to a different State or Territory, a situation that undermines the integrity of the industry.

Responsible Lending

  • To address community concerns of consumer over-indebtedness and fringe lending problems, the Credit Bill introduces a set of responsible lending conduct requirements, which set a standard of expected behaviour of licensees when they enter into a credit contract, or when they suggest a credit contract to a consumer or provide assistance to a consumer to apply for a credit contract.
  • The obligations ensure that licensees do not provide or suggest unsuitable credit to a consumer. To meet these obligations, licensees will have to make an assessment to ensure that any credit contract meets the consumer's requirements; and that they have the capacity to repay the financial obligations.
  • There are clearly delineated responsible lending conduct obligations on credit assistants (such as finance brokers) and credit providers (e.g. banks) to facilitate industry compliance.
  • The Credit Bill introduces important disclosures for consumers in relation to: credit related costs and commissions, key rights of consumer redress, and transparent assessment outcomes. These disclosures assist with consumer decision making when making often significant, financial decisions.
  • Importantly for Australian home owners who are refinancing in the face of financial difficulty, the law includes a presumption that the refinancing will be unsuitable for the consumer if the consumer would have to sell their primary residence to meet the financial obligations of the new finance arrangements.
  • In the event that a consumer's existing credit contract is unsuitable and no other credit contract would be suitable, credit assistants will now be obliged to inform consumers of their ability to seek respite from their credit provider, such as a variation to their contract on the basis of financial hardship.

National Credit Code

To facilitate transition to the new regulatory framework and minimise disruption to industry and consumers, the UCCC has been largely replicated as a Schedule in the National Consumer Credit Protection Bill and has been extended and improved in a number of key ways:

  • It extends protection of the Credit laws to cover residential investment property loans, providing important protections to "mum-and-dad" property investors.
  • The monetary thresholds under which consumers can apply to their credit providers for hardship variations or stays of enforcements have been increased to $500,000. This will enable more consumers to apply for changes to the terms of their credit contract when in financial hardship, for example because of illness or unemployment. In addition, credit providers will have to respond to such requests within 21 days.
  • Lenders will be prohibited from using essential household goods as security.
  • Lenders will be required to give consumers information when a consumer defaults on their contract or a direct debit is dishonoured.
  • Reduces the potential for unscrupulous lenders to avoid the application of the Code's protection to consumers.

Penalties, remedies and ASIC's enforcement powers

The Credit Bill enhances consumer protection in a number of key ways through:

  • criminal penalties for licensee misconduct, which can include possible imprisonment for up to 2 years for serious breaches of the responsible lending conduct requirements;
  • civil penalties for licensee misconduct, which enable ASIC to seek heavy fines of up to $220,000 for an individual and $1.1 million for a corporation;
  • infringement notices (fines) issued by ASIC so that they can act quickly to penalise certain breaches of the law; and
  • consumer remedies, such as compensation, which allow consumers to seek redress for their loss or damage from a licensee.

The Credit Bill includes a no-cost, three-tier dispute resolution system designed to make it easier for consumers to have their disputes resolved. This system consists of access to:

  • the licensee's internal dispute resolution process;
  • the licensee's ASIC approved external dispute resolution scheme; and
  • the Federal Court, Federal Magistrates Court and the courts of the States and Territories.

Consumers and licensees will be able to access a streamlined court procedure for 'small claim' actions for loss or damages of up to $40,000; or to obtain orders under the Code that they have started in a magistrates' court, local court or Federal Magistrates Court.

  • The streamlined process creates presumptions that the parties do not need legal representation and against issuing adverse cost orders. In addition, it allows the Courts to adopt informal legal procedures and to depart from the formal rules of evidence.

Transition to the National Consumer Credit Regime

ASIC will play a key role during the transition period to provide assistance to industry.

To ease the transition burden for industry and facilitate the implementation of the national credit regime in a sensible and practical fashion, the Government has given ASIC greater flexibility to exempt or modify the application of licensing requirements, where this is desirable.

ASIC has been resourced to provide guidance to industry and to assist them to comply with the new obligations under the law. ASIC will also be able to exercise discretion in imposing penalties where persons have attempted in good faith to comply.

Enhancements to the Reform Package following consultation

The table below outlines the key changes made to the draft bills following their release for public consultation on 27 April 2009 and the industry and consumer consultation process undertaken in the development of the credit package.

KEY CHANGES

Licensing

Breach reporting by holders of an Australian Credit Licence has been removed.

An express provision has been included to allow some flexibility to the application of the obligations of a licence holder according to the nature, scale and complexity of the credit activities engaged in by the licensee.

Licence requirements only apply to legal assignees of debts and rights under credit contracts

Responsible Lending Conduct

The requirement for credit providers to perform the credit assistance obligations when providing credit assistance in relation to their own proprietary credit products has been removed.

Responsible lending conduct requirements have been applied to consumer leases.

Inclusion of a provision in the law that presumes that if a consumer will only be able to comply with the consumer's financial obligations under the contract by selling the consumer's principal place of residence, the consumer could only comply with those obligations with substantial hardship, unless the contrary is established.

Enhancements to the credit assistance quote.

A prohibition on a credit assistant from securing their fees for providing credit assistance by taking a caveat has been included.

The timeframe within which a written assessment requested by the consumer must be provided has been extended to seven business days, if the request is made within two years of the quote or contract date or 21 business days if the request is made thereafter. A consumer's right to request a copy of the assessment is limited to seven years after the date of the quote or contract.

National Credit Code

A lender will be required to give the debtor (and any guarantor) a notice within 10 business days of the first direct debit payment failing in relation to a direct debit instruction.

Penalties, Remedies and ASIC's Enforcement Powers

The civil penalty infringement notice amount is reduced from 1/20th to 1/40th.

The criminal penalty is reduced to two years jail term and 100 penalty units. This reflects the different economic risks in credit matters compared to other financial products.

The small claims procedure has been significantly expanded to include actions for loss or damages of up to $40,000 or to obtain certain orders under the Code where the contract is valued at less than $40 000.

The court jurisdiction and framework has been established and confers civil jurisdiction to Federal and State and Territory courts, including local and magistrates courts, and confers criminal jurisdiction to State courts.

A provision is included to permit the jurisdiction of where legal proceedings can commence to be determined by regulations.