Treasury has released a package of exposure draft legislation which, if passed, will implement from 1 March 2021 changes to Australia’s consumer credit regulation. It will distinguish between credit licensees on the basis of whether or not they are Authorised Deposit-taking Institutions (ADIs) and whether or not they provide ‘low limit credit contracts’ or consumer leases.
The package consists of:
- NCCP (Supporting Economic Recovery) Bill 2020;
- NCCP (A new regulatory framework for the provision of consumer credit) Regulations 2020; and
- Non-ADI Credit Standards.
The amendments by the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 to the National Consumer Credit Protection Act 2009 include:
- Responsible lending obligations (RLOs) will apply only to small amount credit contracts (SACCs) (to be renamed ‘low limit credit contracts’), SACC-equivalent loans by ADIs, and consumer leases beginning on 1 March 2021;
- amending the Credit Act to give the Minister a power to determine standards, by legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes in relation to certain non-ADI credit conduct;
- unsuitability assessments no longer apply to credit card contracts;
- exempting small business lending from the application of consumer lending standards;
- A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour will apply to all credit assistance providers, not just mortgage brokers;
- changing the equity projection obligations for reverse mortgages.
There will be no change to the current national licensing regime for persons who engage in credit activities.
National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020
The Bill amends Chapter 3 of the Credit Act so that, from 1 March 2021, RLOs apply only to SACCs, SACC-equivalent loans provided by ADIs and consumer leases.
Section 5 of the National Credit Act defines a small amount credit contract as an unsecured loan of under $2000 that is not a continuing credit contract and with a term of between 16 days and one year.
The RLOs will apply to both credit providers and credit assistance providers.
For all other credit, the Bill will:
- remove RLOs for loans by ADIs which are not SACC-equivalent;
- continue to impose RLOs for ADI SACC-equivalent loans;
- remove RLOs for credit contracts by non-ADIs other than SACCs and consumer leases;
- impose lending standards for non-ADIs, based on similar obligations to those imposed on ADIs;
- extend the best interests obligations for mortgage brokers to all credit assistance providers.
The Bill inserts the new term “low limit credit contract” which is defined as a credit contract when:
(a) the contract is a small amount credit contract; or
(b) the contract would be a small amount credit contract if the lender was not an ADI.
Application to ADIs
If an ADI provides an unsecured loan of under $2000 that is not a continuing credit contract, and with a term of between 16 days and one year, the ADI continues to be subject to the RLOs that have previously applied to credit contracts generally. However, the obligations that have previously applied specifically to SACCs (such as the requirement to give consumer warnings) do not apply to ADIs in this scenario.
Application to non-ADIs: new non-ADI credit standard
Non-ADI credit conduct is not subject to Chapter 3 RLOs from 1 March 2021.
But non-ADI credit conduct will be subject to non-ADI credit standards made by legislative instrument. It is proposed that these standards will be based on APRA ADI standards.
“Non-ADI credit conduct” is defined as conduct which relates to credit contracts where the contract is not a SACC and the credit provider is not an ADI. In relation to these contracts, non-ADI credit conduct is:
• a licensee entering a credit contract with a consumer where the consumer will be the debtor under the contract;
• a licensee unconditionally representing to a consumer that they believe the consumer is eligible to enter into a credit contract with the licensee;
• where a consumer is a debtor under the credit contract, a licensee increases the credit limit of that contract; or
• a licensee unconditionally representing to a consumer under a credit contract that the credit limit can be increased.
The eligibility assessment will be based primarily on whether the consumer could comply with the consumer’s financial obligations without substantial hardship.
The standards will not apply to small business credit.
Additionally, these standards may require a licensee to give to a consumer a copy of documents at a particular time and in a particular manner. This will enable a standard to require a licensee to give a copy of an assessment prescribed by the standard to a consumer.
A licensee is prohibited from engaging in non-ADI credit conduct unless the systems, policies, and processes applicable to the conduct, as required by a non-ADI credit standard, are both:
• established and maintained to comply with the requirements in the standard; and
• documented in a written plan.
A licensee failing to have met either of these requirements before engaging in an instance of non-ADI credit conduct will contravene a civil penalty provision with a maximum penalty of 5,000 penalty units. (currently $222 each, a total of $1.11 million)
Where the licensee fails to implement established and maintained systems, policies, and processes on a repeated basis, the licensee will contravene a civil penalty provision with a maximum penalty of 5,000 penalty units.
In cases where a failure to implement the systems, policies, and processes does not contravene the civil penalty provision, consumers will retain access to redress through other mechanisms, such as through the AFCA scheme.
Further, a licensee is required to retain a record of a written plan for seven years after the time that the written plan ceases to set out the current systems, policies, and processes the licensee utilises.
A licensee will contravene a civil penalty provision with a maximum penalty of 5,000 penalty units when the licensee does not keep the records for the written plan for seven years after the end of the period the plan applies to.
Best interests duty: application to credit assistance providers
A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour apply to all credit assistance providers, not just mortgage brokers.
Credit assistance licensees and their credit representatives must:
• act in the best interests of consumers when providing credit assistance in relation to credit contracts; and
• where there is a conflict of interests, give priority to consumers in providing credit assistance in relation to credit contracts.
These obligations do not apply to credit assistance provided in relation to credit for predominantly business purposes.
A maximum civil penalty of 5,000 penalty units applies to a contravention.
Additionally, licensees that authorise credit representatives must take reasonable steps to ensure that those persons comply with the best interest duty and obligations.
The requirement for a licensee providing reverse mortgages to give equity projections remains in place, but from 1 March 2021, the obligation is to do so before the licensee provides credit assistance or enters the credit contract.
In addition to giving equity projections, the licensee must also:
• ask the consumer about their expected future aged care accommodation costs; and
• present the consumer’s expected future aged care accommodation costs alongside the equity projection, in a manner allowing the consumer to appreciate how the equity expected to be left in the home may impact their ability to afford aged care.
The licensee need only ask the consumer for their estimate of the future costs. The licensee does not need to form its own view.
A maximum civil penalty of 5,000 penalty units applies to a failure to comply.
The provisions about the periods for determining unsuitability in respect of credit cards will be repealed because unsuitability assessments no longer apply to credit card contracts.
Small Business Definition
“Small business” has the same meaning as in section 5 of the Australian Small Business and Family Enterprise Ombudsman Act 2015 namely:
A business is a small business at a particular time in a financial year (the current year) if:
(a) it has fewer than 100 employees at that time; or
(i) its revenue for the previous financial year is $5,000,000 or less; or
(ii) if there was no time in the previous financial year when the business was carried on–its revenue for the current year is $5,000,000 or less.
In counting employees for the purposes of the definition of small business part-time employees are taken into account as an appropriate fraction of a full-time equivalent.
Revenue is to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time.
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Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.