National Consumer Credit – what should you be doing now?

The new National Consumer Credit Protection laws have been enacted.

Key points:
• The National Credit Code (NCC) will replace the Uniform Consumer Credit Code (UCCC) from 1 July 2010.
• From 1 April 2010, you will be able to register with ASIC, and from 1 July 2010, you will be able to apply to ASIC for your Australian Credit Licence (ACL).
• Responsible lending obligations will commence from 1 January 2011 for authorised deposit taking institutions (ADIs) and registered financial corporations (RFCs).
• Other credit businesses such as brokers will be subject to some of the responsible lending requirements from 1 July 2010, and then the rest of the requirements from 1 July 2011.

Margin lenders will have extra obligations.

If you are a credit business, it’s time to start planning what you need to do.

Registration and licensing
ASIC has released some helpful regulatory guides on registration and licensing. RG 202 deals with registration and RG 204 deals with licensing. You can find these on the ASIC credit webpage. As a first step, you should read these guides.

What you need to do in preparation for your ACL will depend a lot on the nature of your credit business.

• If you are an ADI such as a bank, building society or credit union, you will probably already have an Australian Financial Services Licence (AFSL). Much of the compliance requirements for an ACL are similar to those for an AFSL (although for a different part of your business), and your compliance infrastructure for your AFSL can be modified and extended to also cover your ACL. In RG 204, ASIC says that it expects AFSL holders will comply with their general conduct obligations under their ACL by maintaining the same types of arrangements as they have in place for their AFSL.

• If you are a lender only, you may not have an AFSL unless you provide other financial services. If you don’t have an AFSL, you’re going to have a considerable amount of work to do: you’ll have to put in place a program to cover your ACL obligations. This includes a documented compliance plan, risk management system, and other documented measures covering organisational competence, conflicts of interest, dispute resolution and so on. You may have existing measures in place that address some of these requirements, in which case they can be revised and upgraded as needed to meet the ACL requirements.

• If you are a broker or other intermediary, you will first need to decide whether you will obtain your own ACL, or act as a credit representative of a licensee. In most cases we expect that you will end up needing to obtain your own ACL, because lenders and others to whom you refer applicants will probably require this. Assuming you have to apply for an ACL, you will also need to put an ACL compliance infrastructure in place.

Smaller lenders and intermediaries should note ASIC’s view that what you need to do to comply will depend on the nature, scale and complexity of your business. What a large bank must do to comply might not be (and probably won’t be) the same as what you need to do. ASIC has also produced an information guide for small credit businesses (see INFO97). It offers some suggestions for practical steps you can take.

Before you can even be registered, let alone licensed, you have to be a member of an ASIC approved external dispute resolution scheme (FOS or COSL) – if you aren’t already a member, one thing you can do right now is to join one of these schemes.

Your registration and licence applications will both require you to make some statements about the background of responsible managers involved in your business, and you will need to do background checks so that you can make those statements truthfully. In fact your licence application will require you to do those checks. Background checks take time, and ASIC recommends starting the background check process about 6 weeks before you plan to lodge your applications.

National Credit Code
Most of the NCC is the same as the UCCC, but there are some differences, such as the coverage of residential investment property lending and new content for default notices. Lenders will need to revise their documents to reflect these changes. If you use documents provided by a third party you should check that these are being revised by the provider to incorporate any changes required by the NCC.

Responsible Lending
Responsible lending is about 2 things, enhanced disclosure and product suitability.

ASIC released a consultation paper on responsible lending (CP115) in September 2009 and should be issuing a definitive regulatory guide on this topic early in 2010.

On the disclosure side, you will need to develop the following new documents (and supporting processes):
a credit guide;
• a suitability assessment document that can be given to the applicant; and
• if you are a broker, a credit quote and credit proposal disclosure document.

The product suitability requirements of responsible lending could have a major impact on your credit application and assessment processes. Hopefully you already arrange credit or lend responsibly, but you will need to do this in the manner required by the new law and importantly, be able to show that you comply in your loan files and processes.

Product suitability has 3 main elements:
• making reasonable enquiries of the applicant’s financial situation and requirements and objectives;
• taking reasonable steps to verify the applicant’s financial situation; and
assessing if the credit contract will be unsuitable for the applicant if the contract is entered into.

Other requirements
The National Consumer Credit Protection legislation contains general conduct obligations for licensees but also has some specific obligations in addition to the responsible lending requirements, such as record keeping. Smaller credit businesses in particular should assess whether they currently meet these requirements and if not, determine what they must put in place to comply under their ACL.

Australian Consumer Law
Separate from the National Consumer Credit laws is the proposed new Australian Consumer Law, the first part of which is a national law on unfair contract terms. A Bill to introduce this law is currently in the Federal Parliament and if passed, the new law is likely to commence on 1 July 2010.

When reviewing your documents for the NCC you should also consider whether any terms in your standard form consumer agreements might be at risk of being considered unfair; and if they are terms you don’t need, perhaps you can delete them.

Putting together a compliance implementation project plan
To plan for National Consumer Credit, you may want to have a compliance implementation project plan. We can assist you in the design and development of your compliance implementation plan.

Here is a suggested set of steps to follow to develop and implement your plan.
1. Identify legal requirements – the first step is to list all of the things that you need to do under the new laws. These could be new obligations or changes to existing obligations. You will probably need legal advice to confirm that you have identified all the requirements. It may be helpful to group these under major headings – e.g. Australian Credit Licence, National Credit Code Changes, and Responsible Lending.

2. Identify current situation and gaps – the second step is to describe the position of your business in relation to each of these new requirements. For example, in relation to the requirement that you have a documented compliance plan, the current situation may be that you have a plan, but it does not address all of the matters that need to be in your compliance plan for your ACL.

3. Specify business requirements – once you have identified the gaps, you can then prepare a list of business requirements that need to be met to meet your compliance obligations.

4. Project plan – the next step is to prepare a project plan for execution of the business requirements, in which you allocate timelines and responsibilities for the work to be done.

5. Implement plan – your preparation is now done and the next step is to implement the plan and do the work. You should ensure that someone is responsible for managing this work and that there is reporting and follow up.

6. Post-implementation review – once the plan is fully implemented, it may be worthwhile to have a post-implementation review where you go over what has been done and confirm that everything is in place. Your review might also reveal ways that things can be done better in future.

You should always seek legal advice about your own circumstances, but we hope this article (which is not legal advice) will help your preparation for National Consumer Credit.

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