National Consumer Credit Registration & Licensing Requirements - Lenders with Pre-Existing Credit Contracts

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP has today announced details of the proposed regulatory framework for lenders with pre-existing contracts in force when the National Consumer Credit Protection Legislation commences on 1 July 2010.

These new arrangements will strengthen and clarify the regulatory framework governing pre-existing contracts and leases and in doing so, safeguard consumers by mandating appropriate regulatory standards in respect of those contracts.

"Lenders who intend to continue lending after 1 July 2010 will have to apply for an Australian credit licence. That licence and the obligations attaching to it will cover both their old and new loans," Mr Bowen said.

"Lenders who will not offer new loans or leases after 1 July 2010 but are still continuing to collect payments due under pre-existing contracts will have the option to apply for a licence. However, if they do not have a licence they will need to meet similar statutory requirements instead so that the Australian Securities and Investments Commission can monitor their conduct and compliance with the law."

"It is important that those lenders understand the implications of the proposal so that they can decide which option suits them best."

"The Government has always intended to require lenders who are collecting payments on credit contracts after 1 July 2010 to meet enhanced standards of conduct. This proposal ensures, as far as possible, consistency in the way these persons operate and gives consumers confidence in their dealings with them."

"It is therefore equally important to the integrity of the national credit reform package that the regulatory framework applying to pre-existing credit contracts and leases after 1 July 2010 is robust."

Details of the proposal are included in the attachment.

The Government welcomes comments from any interested persons on the proposal and asks that these comments be emailed to coilenders@treasury.gov.au by Friday, 9 April 2010.

Regulations to give effect to the arrangements for pre-existing contracts are expected to be made in early May 2010.

Lenders and affected persons can subscribe to receive email updates through the ASIC website at www.asic.gov.au/credit.

Further information on the new consumer credit regime can be obtained from the ASIC website or from www.treasury.gov.au/consumercredit.

30 March 2010

Attachment

Summary of proposed approach to regulating
credit providers and lessors with carried over instruments

Categories of carried over instruments (COI) lenders

Carried over instruments (COIs) are credit contracts and consumer leases that were previously regulated by the State and Territory based Uniform Consumer Credit Code (UCCC) which are still in effect as at 1 July 2010. From 1 July 2010 COIs will become subject to the National Credit Code.

Credit providers and lessors who will have carried over instruments can be broadly categorised into two groups:

• credit providers and lessors who only have a closed pool of carried over instruments as at 1 July 2010 and will not offer new credit contracts or consumer leases (COI lenders); and
• credit providers and lessors who will continue to offer new credit contracts after 1 July 2010 alongside their existing carried over instruments.

Regulatory options for COI lenders

Credit providers and lessors who intend to continue offering new contracts after 1 July 2010 must register with ASIC prior to that date, and must apply for an Australian credit licence (ACL) to cover both their old and new loans.

COI lenders must make a decision about how they intend the credit legislation to apply to them from 1 July 2010.

That is, they will need to either:

• Register with ASIC between 1 April and 30 June where they intend to apply for an ACL after 1 July 2010 (for Option A); or
• Notify ASIC by 30 June 2010 of their intention not to offer new contracts after 1 July 2010 and not to become registered or licensed, and therefore be regulated under the statutory scheme (for Option B).

The notification process will require COI lenders to provide basic information to ASIC such as name, ABN, business address, number of loans and estimate of when their last contract will be finalised (based on when payments under the contract when due, without making assumptions about early repayments or extensions), and external dispute resolution scheme membership (if any).

Details of requirements imposed under the statutory scheme (Option B)

The statutory scheme will apply to all COI lenders who have elected not to register or apply for a licence from 1 July 2010. These requirements are designed to enable ASIC to more effectively monitor the conduct of this category of lenders. These requirements do not affect the contractual relationship between the lender and the consumer but impose requirements to ensure that lenders are complying with their existing legal obligations.

Many of the obligations and requirements applying to licensees in Chapter 2 of the Credit Act will be applied to COI lenders. These include:

• the obligation to provide statement or audit report, give ASIC information or provide ASIC with reasonable assistance (sections 49 to 51);
• the obligation to lodge annual compliance certificate (section 53);
• the financial record keeping requirements (sections 88 to 96);
• acting efficiently, honestly and fairly (paragraph 47(1)(a));
• no disadvantage from conflict of interest (paragraph 47(1)(b));
• maintain competencies to engage in credit activities in respect of COIs (rather than as authorised by the licence) (paragraph 47(1)(f));
• ensure its representatives are adequately trained to engage in credit activities in respect of COIs (rather than as authorised by the licence) (paragraph 47(1)(g));
• have an internal dispute resolution system in place (paragraph 47(1)(h));
• have adequate arrangements in place to comply with legal obligations, and that these be documented (paragraph 47(1)(k)); and
• have adequate resources and risk management systems (paragraph 47(1)(l)).

The way in which lenders can comply with these obligations is flexible (for example, some could be legitimately achieved through outsourcing functions to third parties), and the adequacy of such arrangements is determined with reference to the nature, scale and complexity of the COI lender's business. ASIC has released Regulatory Guide 205 Credit licensing: General conduct obligations which discusses this issue (see paragraphs 205.19 to 205.22) and will be able to assist COI lenders in understanding how to met these requirements.

Some obligations applying to licensees will not be applied to COI lenders (for example, the provisions in respect of appointing credit representatives, as these will not be relevant).

In addition, there will be specific requirements that only apply to COI lenders who elect to be regulated under the statutory scheme (Option B). As these lenders will not be licensed they will be subject to alternative requirements to ensure the regulatory framework is equally robust. Specifically:

1. Some COI lenders may be required to undertake their activities such as collecting payments or responding to requests for hardship variations through a licensee rather than having direct contact with the consumer. This could include COI lenders who, for example, are subject to a State or Territory 'control order' and therefore would not qualify for an ACL.
2. Requirement that they report significant breaches of the credit legislation to ASIC and maintain a register of complaints.
3. Requirement that they report applications for hardship variations and the outcomes to ASIC on a quarterly basis.
4. A requirement to lodge an independent report by 1 January 2011 as to whether their contracts comply with the disclosure requirements in sections 15 and 152 of the UCCC.