Bills Digest no. 30 2009–10
National Consumer Credit Protection Bill
2009
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Date
introduced: 25 June
2009
House: House of Representatives
Portfolio: Treasury
Commencement:
Sections 3 to 337 and
Schedule 1 commence on a day to be fixed by Proclamation, or 6
months after Royal Assent, whichever occurs first. The rest of the
Act commences on the day on which it receives Royal
Assent.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
To implement the new national
consumer credit regulation framework, which will replace the
current State based regulatory framework known as the Uniform
Consumer Credit Code.
Consumer credit is money loaned to individuals under a contract,
for domestic or personal purposes. These include mortgages on a
person s house, their personal credit card, personal loans for
cars, etc. Under this Bill, it will also include mortgages over
residential investment properties. It does not include credit
provided from one individual to another under a personal contract,
but instead covers credit provided by lenders that are in the
business of providing credit.
Currently, regulation of consumer credit is the responsibility
of the States and Territories. This was achieved through the
establishment of a code system a single regulatory code enacted by
one jurisdiction (Queensland), with all other jurisdictions
enacting enabling legislation, to enforce the Queensland code
within their State or Territory. This is known as the Uniform Consumer Credit Code
(UCCC).[1] Policy
development of the UCCC is negotiated between the States and
Territories through the Ministerial Council for Consumer Affairs
(MCCA).
Administration of the UCCC is described on the UCCC website as
follows:
The legislative structure of the Code is based
upon a template scheme. This means that template legislation has
been passed (in Queensland: Consumer Credit (Queensland) Act 1994
and the Consumer Credit Regulation
(Queensland) 1995).
All States and Territories have passed enabling
legislation which adopts the template legislation and applies it in
the State or Territory as "in force from time to time". By doing
this, any amendments (changes) to the Code or Regulations only need
to be made to the template legislation; they will then
automatically apply in other states without amendment to those
States' Enabling Acts.
Under the Uniform Consumer Credit Laws
Agreement 1993 (AUCLA) the Ministerial Council for Uniform Credit
Laws (an offshoot of the Ministerial Council on Consumer Affairs)
has to agree to amendments to the Code by a two-thirds
majority.
All states and territories are required by the
AUCLA not to introduce legislation into their parliaments which
conflicts with or negates the Code.
Over the years, problems emerged with the operation of the UCCC.
Despite the purpose of the UCCC being to ensure consistent
regulation across borders, there was, in reality, no guaranteed
consistency between jurisdictions. Western Australia s failure to
enact the UCCC (and instead enact equivalent legislation in that
State) created a dual regulatory system. Also, all States and
Territories are at liberty to enact complementary legislation on
ancillary consumer credit issues (for example, some, but not all,
jurisdictions have enacted legislation to cap interest
rates[2]).
Consequently, while the bulk of credit providers statutory
obligations are consistent, there are slight variations in
regulation between jurisdictions.
The debate about whether consumer credit regulation should be a
Commonwealth matter has been ongoing for many years, and crossed
both sides of politics. In her 2nd reading debate speech
to the House of Representatives, Belinda Neal (Member for
Robertson) stated:
... this has been an aspiration of the
Australian Labor Party since I was the consumer affairs shadow
minister back in 1996.[3]
The Hon Judi Moylan (Member for Pearce) stated:
... it is important also to note that this was
not the first attempt to reach such an agreement at COAG level. The
coalition government s efforts to establish national uniform laws
in this regard were hampered by disagreement among many of the
Labor controlled state governments while we were in office
federally...[4]
While the move towards federal regulation of the industry has
been long debated, other factors became apparent in recent years to
encourage a review of the regulatory framework. The emerging
industry of finance broking established a major presence in the
finance sector, and was for many years largely unregulated. While
an attempt to form a unified regulatory response was made by the
States and Territories in MCCA, the process was slow and resulted
in only some jurisdictions regulating that industry, in a variety
of forms.[5] The
risks associated with the continued lack of comprehensive
government supervision of finance broking practices drew a high
level of media attention.[6]
Additionally, governments experienced increased pressure to
protect consumers from onerous mortgages. With housing prices
increasing and interest rates peaking at the highest rate since the
mid 90s, mortgage regulation was also an issue that drew increasing
attention. Overseas in late 2007 and early 2008, the sub-prime
market problems in the United States unfolded and caused major
disruptions to the country s economy (and eventually the world s
economy). While it was well established that Australia did not have
a significant sub-prime problem,[7] the combination of issues had drawn sufficient
attention to the consumer credit regulatory framework to warrant a
significant review of the policy. With the recently elected
Australian Labor Party (Labor) government experiencing a supportive
all-Labor Council of Australian Governments (COAG), the conditions
for reaching an agreement on reforms were highly improved.
The Productivity Commission (the Commission) was engaged in 2006
to report on Australia s consumer policy framework.[8] This included examination of both
the regulation of consumer credit, and potential regulation of the
emerging credit-related industry of finance broking. The Commission
released their report,
Review of Australia s Consumer Policy Framework in May
2008.[9] The
Commission recommended that:
Responsibility for the regulation of credit
providers and intermediaries providing advice on credit products (
finance brokers ) should be transferred to the Australian
Government, with enforcement to be undertaken by the Australian
Securities and Investments Commission (ASIC).
Amongst other things, the new national credit
regime should:
- cover all consumer credit products and all intermediaries
providing advice on such products (including through electronic or
other arms-length means);
- retain the Uniform Consumer Credit Code (UCCC) as a self
standing set of requirements within the broader financial services
regulatory regime;
- incorporate changes to the Code that have been agreed to by the
Ministerial Council on Consumer Affairs (MCCA), but not yet
implemented;
- incorporate requirements from state and territory credit
legislation outside of the code, where these pass a benefit-cost
test;
- include a national licensing system for finance brokers, and a
licensing or registration system for credit providers that would
give consumers guaranteed access to an approved dispute resolution
service; and
- allow, over time, for the streamlining of the current UCCC in
the light of requirements within the broader financial services
regime, where net benefits are likely.
- Also, CoAG should give consideration to implementing the new
national regime in a phased way, including as initial steps:
- importing into the Australian Government s jurisdiction the
current UCCC modified to reflect changes agreed to by MCCA, but not
yet implemented and making ASIC responsible for its enforcement;
and
- introducing an interim, ASIC enforced, national licensing
arrangement for finance brokers, based on the draft proposal
developed by MCCA.[10]
At the COAG meeting on 2 October 2008, the Governments of the
Commonwealth and States and Territories reached an agreement that
the Commonwealth should take over regulation of consumer credit.
The new regulatory framework would replicate the UCCC, create a new
licensing system, impose responsible lending requirements, and
extend regulation to apply to the finance broking industry. The new
framework would be administered by the Australian Securities and
Investments Commission (ASIC).
The Bill was referred to the Senate Economics Legislation
Committee (the Senate Committee) for inquiry. Details of the
inquiry, and the final report, are at the
Senate Economics Committee webpage.[11] The report was tabled on 7 September
2009.
The Senate Committee recommended that the Bill (and accompanying
bills) be passed, subject to some recommendations made in the
report.
Fifty-eight submissions were made to the Senate Committee. A
selection of the submissions is discussed below.
Overwhelmingly, industry is supportive of the proposed new
regulatory framework. However, as evidenced in the submissions made
to the Senate Committee, many stakeholders have commented on
certain aspects of the Bill that they find problematic, in
particular:
- the use of displacement provisions under clauses 23
26 of this Bill
- subclause 130(3), which waives the requirement
for credit providers to verify a consumer s financial situation
where a credit assistance provider has recently done so, and
- the extension of the monetary limit for application of hardship
provisions, up to $500 000, being non-applicable to existing credit
contracts.
These issues are discussed under Key Issues (below). The
following outlines other general positions of stakeholders.
General support for regulatory reform was expressed by most
industry groups. Abacus Australian Mutuals Limited stated:
Abacus and its members support placing conduct
obligations on licensees as part of the consumer protection
framework. Regulating what lenders and brokers actually do (conduct
obligations) is a more effective consumer protection tool than
merely regulating what they say (disclosure obligations),
especially when consumers are given the right to seek redress
against lenders and brokers through low-cost EDR.[12]
The Australian Bankers Association stated:
The ABA strongly supports the Commonwealth
Government assuming sole responsibility for the national regulation
of consumer credit. A single, nationally consistent regime for the
regulation of consumer credit will be an important contribution to
the Australian economy. It recognises that consumer credit is a
national market for greater efficiency and consumer certainty
requires national regulation. The critical factor in achieving
sound economic outcomes and consumer benefit is to ensure that the
regulation achieves the right balance.[13]
Typically there was no objection to the structure of the reforms
proposed; however, the issue of whether a separate regime is needed
was raised during consultation. For example, Minter Ellison stated
in their submission to the Committee:
We are not convinced that there is sufficient
justification to establish a separate licensing regime under a
separate statute. Given the nature of the proposed credit licensing
regime, there does not seem any reason not to regulate credit
through the Australian financial services licence (AFSL) regime in
Chapter 7 of the Corporations Act 2001 (FSR).... we are
concerned that the proposal for a separate regime has made it
harder to identify the differences between the regimes and also
meant that the Government has not explained why many of those
differences are appropriate. [14]
In response to this concern, Treasury stated in its submission
to the Economics Committee:
Whether or not credit should simply be included as a financial
product within the Corporations Act, and the existing system for
holders of an Australian financial services licence (AFSL) was
considered. It was acknowledged that having credit come under the
AFSL would mean that existing legal concepts and standards of
conduct would apply. However, the different characteristics of
credit products would mean that there would be a consequent need to
modify elements of the Corporations Act, diluting this effect and
potentially increasing confusion for industry and consumers, where
products under the same licence were treated differently.[15]
Treasury pointed out in the submission that the Credit Bills
take a different approach from the Corporations Act 2001
(the Corporations Act) to reflect particular differences between
credit and other financial products, for example, the less onerous
requirements for financial records relating to providing money to,
rather than accepting money from, the consumer.
Some stakeholders expressed concern with the proposed
commencement date for the Responsible Lending Conduct provisions of
January 2011, in relation to its application to certain licensees,
particularly brokers. For instance, the National Legal Aid
Secretariat said:
Some States (such as NSW ACT VIC and Western
Australia) have varying degrees of broker regulation at present.
However if these States relinquish this responsibility at the
commencement of the Bill in January 2010, there will be no
regulation of the conduct of brokers anywhere (including in the
some (sic) of the most populous States) for 12 months.
This will result in a very significant gap in the protection of
consumers, at a time when consumers are more vulnerable to unjust
lending practices due to the tightening availability of credit
through more mainstream credit providers.[16]
The Mortgage and Finance Association of Australia (MFAA)
commented on the delay of the responsible lending provisions:
These provisions of the Bill are the heart and
soul of the legislation, so a decision to delay their operation is
tantamount to a decision to delay consumer credit protection for 12
months.... in those states and territories where there is already
operative broker legislation, viz WA, NSW, Victoria and ACT,
consumers will be in a worse position than they currently are...
[17]
However, the deferral of the commencement date for credit
providers was considered valuable by that part of the industry.
Westpac commented:
One of the principal reasons for the deferral of the responsible
lending obligations was the linking of the bill to comprehensive
credit reporting laws. We welcome the deferral on this basis.
Westpac s previous submission to the Government highlighted the
importance of linking consumer credit law reforms with a system of
comprehensive credit reporting, making the point that the policy
aims behind the responsible lending obligations of the bill will
not be fully realised without this alignment.[18]
Subsequently, the Minister
announced intended changes to the commencement date of the
responsible lending conduct requirements, bringing it forward for
brokers and some lenders to 1 January 2010.[19] For Authorised Deposit-taking
Institutions and Registered Finance Companies, the requirements
will still commence on 1 January 2011.
The Explanatory Memorandum states:
The Government has provided $70.2 million over
four years to implement the decision of COAG as part of the 2008-09
Mid-Year Economic and Fiscal Outlook. This Bill includes measures
to give effect to the transfer. The funding will support the
establishment of a national licensing regime for providers of
credit and credit services, with ASIC as the sole national
regulator. It will also support the national regulation of
mortgages, margin lending, personal loans, credit cards and pay day
lending. The funding will be partially offset by revenue raised
from fees required to be paid by persons regulated by the national
framework, payment of which commences during the 2009-10 financial
year. The amount of revenue generated from these fees will depend,
in part, on the number and type of persons seeking to be
licensed.[20]
In relation to the financial impact on businesses:
The main compliance cost impact arises in
relation to the licensing regime. This will primarily involve the
initial costs associated with applying for an ACL (Australian
Credit Licence) which include the payment of fees to lodge
application documentation with ASIC, annual compliance costs and
costs of EDR (External Dispute Resolution Scheme)
membership.[21]
The fees associated with licensing under the new system are set
out in the National Consumer Credit Protection (Fees) Bill
2009.
Under the Commonwealth Constitution, the Commonwealth does not
have the power to legislate to establish a comprehensive national
consumer credit regulatory scheme. Rather, the regulation of
consumer credit is currently the responsibility of the States and
Territories. In order for the Commonwealth to acquire the necessary
power, the States and Territories agreed at COAG to refer the
appropriate matters to the Commonwealth so that it could then
utilise section 51 (xxxvii) of the Constitution.[22]
The use of this method to achieve a national regulatory scheme
is not an unusual exercise similar referrals of power have been
exercised before, most notably for the regulation of corporations
under the Corporations Act. In recent years, suggestions for
similar referrals of power have been made regarding other areas
wholly or partly outside of direct Commonwealth jurisdiction, such
as the proposed nationalisation of health and education
systems.
As is typical for referrals of this nature, the legislation
includes displacement provisions that is, provisions which allow
for the States and Territories to enact inconsistent credit laws
which override the operation of the Commonwealth laws, or
concurrent credit laws which may operate alongside the Commonwealth
laws (see clauses 23 26 of this Bill). For many
stakeholders, the presence of displacement provisions in the Bill
is a key issue. Displacement provisions are typically used where
powers have been referred under section 51 (xxxvii) of the
Constitution. The Bill s referral and displacement provisions have
been modelled closely on those in the Corporations Act.
This matter was identified by a large number of stakeholders
during the consultation process. Westpac stated:
We remain concerned at the capacity of states
and territories to introduce jurisdiction-specific changes on top
of the legislative model agreed by COAG. This will continue to
undermine the rationale for a uniform law (which was a critical
failing of the UCCC model in its operation) and risks eroding the
national character of the law over time.[23]
Minter Ellison stated:
We submit that there should be a clear
exclusion of State or Territory legislative power in relation to
credit activities, subject only to the power of a State to
terminate its referral of power to the Commonwealth.[24]
However, the Treasury submission to the Senate Committee
discussed referrals of power, and the use of displacement
provisions with such referrals, in response to the stakeholder
comments. In order to understand how the referral and displacement
provisions might operate, an examination of current practices is
beneficial.
This relationship between the Commonwealth and
the States and Territories is usually outlined in a model set of
provisions, which is contained in the substantive Act, called the
inconsistency or displacement provisions. The leading model is the
Corporations Act, enacted following the referral of State
constitutional power in respect of the incorporation and regulation
of corporations. This model has been refined in minor respects in
subsequent referral in other areas.[25]
The identified leading model , the Corporations
Act, was developed in a highly consultative way between the
jurisdictions. Operating under an Intergovernmental Agreement
(between the Commonwealth, States and Territories), all
jurisdictions are members of the Ministerial Council for
Corporations (MINCO). MINCO meets regularly to develop policy and
legislative changes to the Corporations Act. The Intergovernmental
Agreement outlines how policy and legislative changes are agreed to
(usually based on number of votes), how disputes are dealt with,
and importantly, includes an agreement that the referring States
and Territories not legislate on the matter while the referral is
current. The referrals are re-examined and renewed regularly.
Consequently, in this case, the displacement provisions in the
Corporations Act have never been used, despite their presence.
While the explanatory materials do not indicate
so, the Treasury submission to the Committee states that an
Intergovernmental Agreement will be used for the Commonwealth
credit laws as well.
(the legislation will be) supported by
agreement on the arrangements involved in switching-off state
responsibilities for credit regulation and switching-on national
credit laws with the commencement of the national credit regime.
States and Territories have indicated commitment to the COAG credit
reform agenda and to focus their policy efforts to supporting the
reform s agenda. To that end, they have agreed to refrain
from legislating in the area of consumer credit after the transfer
of state powers to the Government.[26] (emphasis added)
and
Supporting the enactment of the Credit Package
is an intergovernmental agreement (IGA). This IGA provides a
political compact amongst the Commonwealth, State and Territory
governments dealing with various arrangements underpinning the
operation of the Credit Package. The IGA will contain safeguards
and consultative arrangements to be followed by signatories
including:
- Mandatory consultation mechanism about any legislative changes
to the scheme; and
- Resolution procedures in relation to potential inconsistency
between relevant State and Commonwealth laws. [27]
While it is not yet revealed what the specifics
of the IGA will entail for instance, if the number of votes
required for policy and legislative changes are equal to those in
the Corporations Act it can be expected that the general operation
of the credit laws IGA will be similar to that of the Corporations
Act. This would suggest that while the concerns expressed about the
displacement provisions are legitimate and logical, in reality, the
threat of any real risk of State-based inconsistent legislation
being developed is minimal.
Many stakeholders expressed concern with
subclause 130(3) of the Bill. This provision deals
with responsible lending conduct. Part of the new responsible
lending conduct requirements include making an assessment of the
suitability of a credit contract for the consumer, whether a party
is providing credit, or credit assistance. However,
subclause 130(3) exempts credit providers from
verifying a consumer s financial situation, where a similar
assessment has already been made under the Part in the past 90 days
(for instance, by a finance broker).
While the measure reduces red tape for credit
providers, a number of stakeholders expressed the opinion that it
creates complications regarding liability in the event that a
consumer enters an unsuitable credit contract which causes them to
default.
For example, the submission to the Senate
Committee from the National Legal Aid Secretariat stated:
The unusual provisions in s130 directly
challenge the legislative intent of the Bill by, for the first
time, endorsing a new culture in lending where credit providers
will be permitted to outsource their assessment of risk where
credit is provided through credit assistance providers such as
broker services.
This provision might also result in consumers
being forced to bear the risk because:
- Credit providers will seek to avoid risk of liability for an
unsuitable loan by pointing to the activities of credit assistance
providers;
- Credit assistance providers often do not have the financial
resources to pay successful claims for damages by consumers;
and
- Consumers cannot stop enforcement action by the credit provider
whilst they take legal action against the credit assistance
provider (this means they could lose the house that they live in
despite ultimately having a decision made in their favour against
the credit assistance provider).[28]
And from the Mortgage and Finance Association of Australia
(MFAA):
(section 130(3)) seems to allow a lender to
abrogate its responsibility to make the ultimate assessment. No
licencee (sic) should be able to escape their obligations.
Lenders should be responsible for lending, servicing and
collections. Brokers should be responsible for broking. No doubt
prudent lenders will have their own practices to ensure all
information is appropriately verified, but it leaves the door open
to poor practices under which predatory lending and broking, which
this Bill is clearly focussed on protecting consumers from, can
thrive.... section 130(3) should be deleted, because there should
be no case when the lender can escape liability.[29]
It should be noted that civil penalties are used in the Bill to
deter contravention of the responsible lending conduct provisions
up to 2 000 penalty units can be used to punish non-compliance with
the unsuitability assessment requirements.[30]
Although the requirement for a credit provider to conduct an
assessment of unsuitability is waived under clause
130(3), credit providers are still prohibited from
entering unsuitable contracts under clause 133.
Additionally, clause 133 does not excuse or defer
liability for those who have relied upon clause 130(3). Therefore,
there is still scope for consumers to rely on the actions of credit
providers under these provisions.
However, the Senate Committee came to the conclusion that
clause 130(3) should be omitted from the Bill,
citing the potential for this clause to be exploited by predatory
lenders as a defence for not undertaking assessments as the
reason.[31]
The Bill seeks to increase access for consumers to the hardship
provisions of the Credit Code under item 72 of the
National Credit Code (the Code)
set out in Schedule 1 of the Bill. The new Code
would allow debtors to seek changes to their credit contracts on
the grounds of hardship (due to illness, unemployment or other
reasonable causes). Known as the hardship threshold , the upper
threshold for credit contracts which are eligible for such
applications is currently set at $345 290.[32] The new Code increases the
threshold to $500 000 (or a prescribed higher amount).
However, the Bill only applies the new hardship threshold to new
contracts existing credit contracts will continue to follow the
lower UCCC threshold. Many stakeholders objected to this restricted
application of the new threshold.
National Legal Aid Secretariat stated:
Without making any comment on the legal basis
for making this change in the Bill, the operation of a two-tiered
cap will be at best confusing for borrowers.[33]
The Senate Committee also recommended that the increased
hardship threshold apply to all contracts, not only new ones.
It appears that the application of the new hardship threshold
has been framed so as to not remove existing rights to credit
providers based on credit contracts formed under the current UCCC.
Therefore, it has been framed so as to avoid any possible
contravention of section 51 (xxxi) of the Constitution.
Treasury explained in response to the concerns:
Certain provisions in the Credit Bill and
National Credit Code (Code) may not apply to existing credit
contracts. The Commonwealth s ability to apply certain provisions,
such as increased thresholds for hardship variations and stays of
enforcement (subsection 72(5) and 94(4) of the Code) to existing
credit contracts is restricted due to the acquisition of property
issue under the impact of section 51 (xxxi) of the Constitution....
there is a significant risk that the application of new
requirements to existing contracts, could infringe (that
section).[34]
Whether or not there is a real risk of breaching section 51
(xxxi) of the Constitution depends on whether there would be a real
risk of acquiring property (otherwise than on just terms) as a
result of the hardship provision applying to existing credit
contracts.[35]. If
the provision were to apply to existing contracts, it would operate
as follows:
- A debtor who is experiencing hardship due to illness,
unemployment or another reasonable cause, and cannot reasonably
meet their obligations under a contract, may apply to the credit
provider for changes to be made to the contract.
- The credit provider is not obligated under legislation to
accede to the application; it is required to provide the debtor
with a written notice advising them of whether they agree to the
change.
- If an application is refused, the debtor may apply to the Court
to change the terms of the contract under item 74 of the Code.
If item 72 was framed so that the credit
provider was automatically stripped of property (assuming the
contractual rights of the credit provider was considered to be
property within the meaning of 51 (xxxi)) such as the right to
refuse to change the credit contract to the debtor s benefit, or
the right to the amount due to them under the contract then there
would be a real risk of breaching section 51 (xxxi) of the
Constitution. However, in the Code s proposed form, a credit
provider does not automatically lose any property if the provision
were exercised by an existing debtor. It would still be at liberty
to deny the application from the debtor. Also, where there is a
refusal and subsequent application to the Court, it is the Court
which will consider the circumstances and make an order that it
thinks fit not the Commonwealth.
On this basis, it appears possible for the increased hardship
threshold of $500 000 to apply to all credit contracts not just new
ones without the risk of breaching the Constitution.
On the whole, the regulatory scheme presented in the Bill for
ASIC is in line with ASIC s current powers for Australian Financial
Services Licence (AFSL) regulation. In particular, search and
investigatory powers are identical to those already held by ASIC in
relation to its regulation of financial services.
Perhaps the only significant difference that the credit industry
will experience from these reforms is increased consistency.
Current regulation of the industry is the responsibility of Fair
Trading and Consumer Affairs agencies of State and Territory
Governments. While the legislative capabilities of these agencies
are generally similar, variations including factors such as
funding, resources, the size of the jurisdiction and internal
working policies of the various governments, are all influencing
factors. The Senate Committee quoted Mr John Brady of the National
Financial Services Federation, by way of example:
It is harder to get a licence in WA than it is
to do almost anything else. There is a six-week period between
making an application and getting a licence. They have regular
audits. They turn up and look at files. It is very good, and
hopefully this system will be at least as good as that. To get a
licence in Victoria you write a letter and the licence comes back
in the mail the following day. The ACT has a similar documentary
requirement to WA, but from what I can gather and I apologise in
advance to the ACT regulators if I am wrong about this they do not
look at the documents that are given to them; they just issue the
licence in any event. In the ACT there is no-one, really, who is a
lender just in the ACT. They are always outside the ACT as well. WA
is very good; the rest are at least equivocal.[36]
Elimination of these varying practices of each jurisdiction s
office will ensure that a single consistent regulatory system is in
place. The increased consistency should amount to better protection
for consumers across all jurisdictions, and more predictable
interactions with the regulators for licensees.
The regulatory style of ASIC, who will be the new single
regulator of the credit industry, has been described as
follows:
ASIC s Chairman... has described the Commission
s regulatory task in terms of a pyramid divided into three layers.
At the bottom of the pyramid are those who comply with the law. For
this group, ASIC s role is to provide guidance to help them
continue to comply . The middle band contains opportunists who are
prepared to bend the rules if they can get away with it . ASIC s
strategy is to influence their views and conduct. At the top of the
pyramid is the smallest layer those who engage in improper and
illegal behaviour. ASIC uses its full enforcement strength to
regulate this group .[37]
ASIC s prosecution strategy is determined in consultation with
the Director of Public Prosecutions, whose policy is to prefer the
laying of criminal charges where recommended (presumably as opposed
to civil penalties).[38] It has been said that:
ASIC has acknowledged that enforcement actions
will only ever catch a relatively small number of offenders, often
after the horse has bolted . Its long-term strategy is to inform
the financial services sector of recent legislative changes and to
promote public awareness about scams and frauds as part of (their)
consumer education strategy.[39]
The scope of the Bill s application is outlined in a number of
areas of the Bill. Key provisions are clauses 6-9
of the Bill and items 4 6 of Schedule
1of the Bill.
Clauses 5 9 and 11 15 of the Bill provide
definitions of terms for the Bill. Some key definitions include
credit activity (clause 6), credit
service (clause 7), credit
assistance (clause 8) and acts as an
intermediary (clause 9). These
definitions are of particular importance as they define the
application of the Act.
Engaging in credit activity is defined
to mean the following:
- providing credit under a credit contract (such as a credit
card)[40]
- being the lessor under a consumer lease, or carrying on a
business that provides consumer leases
- being the mortgagee under a mortgage
- being the beneficiary of a guarantee, and
- most significantly for this Bill, being a person who provides a
credit service . This is defined under
clause 7 as either providing credit
assistance to a consumer, or acting as an
intermediary .
Under clause 8 the term credit
assistance extends from providing actual assistance
to a consumer in apply for a particular credit contract to
suggesting to a consumer that they apply for a particular credit
contract or an increase to the credit limit of a particular credit
contract.
The provisions in the Bill impose a wide range of penalties for
non-compliance, with many obligations for licensees framed with
both civil penalty provisions and criminal penalty provisions
(imposing penalty units and/or imprisonment). The range of penalty
options presented gives the regulatory body, ASIC, flexibility in
their choice of method for enforcement of the provisions. For more
information, Chapter 4 of the Bill outlines the
rules relating to the civil penalty provisions, civil proceedings
and criminal proceedings.
Clause 18 of the Bill sets out the
constitutional basis for the Act. It states that the application of
the Act(s) in a referring State is based on the combination of the
legislative powers contained in section 51 of the Constitution
(other than paragraph 51(xxxvii)), and those it has as a result of
the relevant referral paragraph 51(xxxvii) of the Constitution.
Subclause 18(2) provides that the application in a
Territory is based on the legislative powers in sections 51 and 122
of the Constitution.
Clause 19 sets out the meaning of
referring state . It specifies that a
State is a referring State if it has referred its own Parliaments
power to legislate on specific matters to the Commonwealth in this
case, the power to make laws about referred credit matters
(clause 20) such as:
- the regulation of credit or personal property leases
- the regulation of securities (including mortgages), guarantees
or insurance that relates to credit or personal property
leases
- the regulation of credit activities, and
- consumer leases (the sale or supply of goods or services which
has been financed by the provision of credit)
A state ceases to be a referring state if its reference
terminates (including the termination of any amendment reference
made to cover future amendments to the Act).
Clause 20 outlines the meaning of
referred credit matters , bringing the
following credit matters into the scope of the Commonwealth
legislation:
- regulation of credit or personal property leases
- regulation of securities (including mortgages) guarantees or
insurance insofar as they relate to credit or personal property
leases
- regulation of credit activities, and
- sale of goods or supplies of services which are financed by
provision of credit, under some circumstances.
Division 3 of Chapter 1 of the Bill sets out
the interaction between the Commonwealth credit legislation and
State and Territory laws.
Clause 23 states that concurrent operation
between the Commonwealth credit legislation and any State and
Territory laws is the intention of the legislation. Therefore, the
legislation is not intended to override any State or Territory
laws, to the extent that they are not directly inconsistent with
the credit legislation: subclause 23(3). Subclause
23(2) provides that where an act or omission is both an offence
under relevant Commonwealth or State or territory law, and a person
is convicted in one of those jurisdictions, that person is not
liable to be convicted for the same offence in the other
jurisdiction.
Clause 24 allows for the non-application of the
credit legislation, in whole or in part, if a referring State or
Territory has declared a matter to be an excluded matter from the
credit legislation. This replicates provision in section 5F of the
Corporations Act. Regulations under the Act can affect the
operation of this clause: subclause 24(3).
Clause 25 deals with direct inconsistencies
between the credit legislation and State or Territory laws. It
applies to displacement provisions which have been created and
declared as such by a State or Territory, and which is not capable
of concurrent operation with a credit legislation provision. The
effect of a displacement provision is that the credit legislation
provision will not operate inconsistently with the displacement
provision. Therefore it is the State provision in that case that
will prevail. The provision states that it has effect above
anything else in the credit legislation.[41]
Clause 26 allows for regulations to be made to
modify the operation of the Commonwealth credit legislation in
relation to State or Territory laws, in order to prevent
inconsistencies or doubling up of laws. However, this regulation
could not be used to override clause 25 (by virtue
of subclause 25(1)) and therefore could not be
used to make a provision of the credit law prevail over an
inconsistent displacement provision.
The licensing scheme for the new credit laws are contained
within Chapter 2 of the Bill. Clause
35 sets out the definition of an Australian
credit licence (ACL) and clarifies that they only
authorise licensees to engage in the particular credit activities
specified in the licence.
Clause 29 sets out penalties for a person who
engages in credit activity if they have not been licensed to do so.
The activity attracts a civil penalty of 2 000 penalty units, or a
criminal penalty of 200 penalty units or 2 years imprisonment (or
both). This offence applies on and after 1 July 2011 (or a later
day if prescribed by regulation) (clause 28).
Subclause 29(3) clarifies that employees or credit
representatives of a license holder do not also need a licence when
acting on behalf of that license holder.
Other prohibited conduct for people not holding a licence
includes:
- falsely holding out or advertising that they are licensed to
engage in credit activity (clause 30)
- conducting business in a way that causes an unlicensed person
to engage in credit activity (clause 31)
- charging a fee for engaging in future credit activity
(clause 32)
It is also an offence to give misleading information in the
course of conducting credit activity (clause 33).
The prohibited conduct outlined in clauses 30-33
carries civil and/or criminal penalties.
Clauses 36 44 set out how to get an ACL. Of
note are clauses 37 and 38 which set out when ASIC
must grant a licence, and what ASIC must have regard to, in
processing license applications for non-ADIs and ADIs respectively.
For non-ADI applicants, ASIC must not have a reason to believe that
the applicant will contravene their general obligations or that
they are not a fit and proper person to engage in credit
activities; additionally, ASIC must have regard to past
suspensions, contraventions, banning orders, disqualifications,
etc., and must consider any criminal convictions and other
matters,. Clause 37 empowers ASIC to request
additional information from a non-ADI applicant for the purposes of
assessing their application.
In contrast, clause 38 provides that an ADI
must simply provide a statement with their ACL application to the
effect that it will comply with its license obligations. ASIC is
required to licence any ADI that does so. Presumably the rigorous
examination of the applicant is not needed for ADIs, as they have
already been scrutinised for the purposes of registering as an
ADI.
Clause 40 contains an exception to the rule in
clause 38 in that it prevents licences from being granted to
applicants with current banning or disqualification orders, or a
prescribed State or Territory order, in force. However, applicants
must be given a hearing before a licence can be refused
(clause 41).
Clauses 45 46 deal with the conditions on an
ACL. Clause 45 enables ASIC to impose, vary or
revoke conditions on licences, and requires ASIC to give notice to
the licensee if it has done so. Licensees must also be granted a
hearing before new, varied or revoked conditions take effect on an
existing licence: subclause 45(3). Clause
46 sets out special procedures for imposing, varying or
revoking licence conditions, where those changes might affect the
licensee s APRA-regulated or other banking business. Steps must be
taken by ASIC to consult with APRA under subclause
46(1), or by the Minister to consult with ASIC under
subclause 46(2) respectively in relation to those
licence conditions.
The general conduct obligations of licensees are set out in
clause 47 and include the following:
- ensuring clients are not disadvantaged due to any conflicts of
interest that the licensee or their representative may have
- complying with licence conditions and credit legislation
- maintain the competence to engage in its licensed credit
activities, and ensure their representatives are adequately trained
and competent
- have an internal dispute resolution procedure as well as
membership to an approved external dispute resolution scheme
- have adequate resources and risk management systems (for non
APRA-regulated bodies) to engage in the credit activities
authorised by the licence
- have compensation arrangements (as set out in clause
48).
Clauses 49 53 set out obligations for licensees
in relation to their ACL. These deal with providing ASIC with
information and assistance. Clause 49 deals with
providing a statement or obtaining an audit report in response to a
written notice from ASIC. Non-compliance with that notice attracts
a civil penalty of 2 000 units. The requirement has also been
framed as an offence punishable by 25 units or 6 months
imprisonment (or both), or a strict liability offence punishable by
10 penalty units. Clause 50 deals with licensees
obligations to give ASIC any information required by regulations
under the Act. It is framed similarly to clause
49, with comparable penalties. Clause 51
deals with licensees obligations to provide ASIC with assistance if
ASIC reasonably requests assistance .[42] It is also framed similarly to
clause 49, with comparable penalties (but without
the strict liability offence). Clause 53 requires
licensees to lodge an annual compliance certificate, with a civil
penalty of 2 000 units, and a strict liability offence punishable
by 60 penalty units.
Clauses 54 62 deal with suspension,
cancellation and variation of licences. The clauses set out ASIC
procedures for making such changes to licences, and deal with
issues such as the offering of hearings to licensees, and special
procedures for APRA-regulated bodies (which includes consultation
with APRA or the Minister, if required). In particular
subclause 55(1) empowers ASIC to suspend or cancel
an ACL where, amongst other things:
- ASIC has reason to believe that the licensee has contravened,
or is likely to contravene one of the obligations set out in clause
47, or
- ASIC has reason to believe that the licensee is not a fit and
proper person to engage in credit activities.
Where a belief must be based on reasonable grounds , it has been
held that, while the notion imports an objective test, reasonable
involves a value judgment.[43] The decision of ASIC that a person is likely to
contravene an obligation under clause 47, will only be open to
challenge if the decision was one that ASIC could not have lawfully
made on the basis of the materials before it.[44]
Clause 64 72 deal with the authorisation of
credit representatives. Credit
representatives are those people who have been authorised by a
licensee to engage in specified credit activities on their behalf
(such as employees). Of note are clauses 69 and
70, which restrict licensees from making ineffective
authorisations,[45]
or to fail or vary or revoke an authorisation that ceases to have
effect. Both clauses carry civil penalties of 2 000 units or
criminal penalties of 100 units, or 2 years imprisonment (or both).
Also of note is clause 71 that obligates
licensees to notify ASIC about authorisations, sub-authorisations,
and changes in details, carrying civil penalties of 2 000 units.
Clause 71 has also been framed as a strict
liability offence with criminal penalties of 25 units, or 6 months
imprisonment (or both).
Clause 73 enables ASIC to give a licensee
personal information about a known, suspected or potential
representative of the licensee, if ASIC believes on reasonable
grounds that the information is true. The clause dictates how
licensees and courts may use that information licensees may only
use it to make a decision about taking action against the
representative, or to give it to another person or a court for that
same reason. The clause also states that a person has qualified
privilege in relation to the sharing, recording or use of the
information as allowed by the section.[46]
Clauses 74 78 deal with the liability of
licensees for representatives. The clauses apply to any conduct of
a representative of a licensee that relates to a credit activity,
on which a client could reasonably be expected to (and ultimately
did) rely in good faith.[47] The clauses clarify the liability where there is a
single or multiple licensees to a representative (that is, where
the representative might represent more than one licensee) and
where the conduct is covered by only one authority, or multiple (in
which case, the authorising licensees might be jointly and
severally liable see subclauses 76(3) and
(4)). Clause 77 expressly states
that the responsibility of a licensee under this Division of the
Act extends so as to make the licensee liable to the client for
loss or damage suffered by the client resulting from the
representative s conduct.
Clauses 80 85 set out provisions about banning
orders. Banning orders prevent a person from engaging in (some or
all) credit activities, whether permanently or temporarily
(clause 81). Clause 80 enables
ASIC to make a banning order against a person if:
- ASIC has suspended or cancelled that person s licence
- the person becomes insolvent (other than trustees of a
trust)
- the person is a natural person and is convicted of fraud
- the person has contravened the credit legislation, or was
involved in another person s contravention of the credit
legislation (or if ASIC has reason to believe they are likely to do
so)
- ASIC has reason to believe they are not a fit and proper person
to be engaging in credit activities
- if a prescribed State or Territory order is in force against
the person, or
- if another circumstance prescribed by the regulations permits
it.
For all persons, the opportunity to appear at a private hearing
and make submissions to ASIC must be afforded before a banning
order can be made: subclause 80(4). However, this
does not apply to those convicted of serious fraud, or those whose
licence was suspended or cancelled without a hearing:
subclauses 80 (5) and (6).
Contravention of a banning order is a civil penalty punishable by 2
000 units and a criminal penalty punishable by 100 units, or 2
years imprisonment (or both): clause 82. Any
decision to make a banning order must be accompanied by a written
statement of reasons: clause 85.
Clause 86 enables ASIC to apply to the court
for an order, if ASIC has cancelled a licence or made a permanent
banning order against a person. The court can make an order
disqualifying the person (permanently or temporarily) from engaging
in some or all credit activities, or any other order the court
considers appropriate. Although not required to give effect to a
banning order under clause 80, a disqualification order by the
court would provide authority where an administrative decision may
not suffice or be appropriate.
Clauses 88 106 deal with financial reports,
trust accounts and audit reports. The Guide to the Part
(clause 87) summarises the clauses as dealing
with:
- the requirements for licensees to keep certain financial
records, as well as how those records must be kept
- the requirements in relation to trust accounts kept by
licensees that provide credit services and receive money on behalf
of others (and are therefore required to maintain a trust account).
The requirements include how to deal with trust account money,
statements and audit reports, and
- the requirements relating to audit reports that are required
under the Act.
Clause 110 contains a regulation-making power
for the Minister to exempt or modify the operation of the
provisions relating to licensing under Chapter 2. The Minister, in
commenting to the Scrutiny of Bills Committee about the very wide
power under this clause, noted:
This arrangement will facilitate a flexible
approach to the application of licensing requirements and reflects
the Government s decision to adopt the broad definition of engaging
in credit activities and exclude activities that should not be
subject to licensing requirements. This broad approach may capture
activities that should not be regulated and will need to be
addressed through appropriate exemptions.[48]
Subsequently, the Scrutiny of Bills Committee requested that the
Explanatory Memorandum be amended to include this information about
clause 110.[49]
The responsible lending conduct provisions in Chapter
3 of the Bill set out the required conduct for licensees
in relation to their dealings with consumers. The parts of the
chapter are divided by reference to particular groups of licensees,
as follows:
- Part 3.1 licensees providing credit assistance
on a credit contract for which they are not the provider
(for example, finance brokers)
- Part 3.2 licensees that are credit providers
(i.e. the actual lender)
- Part 3.3 licensees that provide credit
assistance on a consumer lease for which they are not
lessor under that lease
- Part 3.4 licensees that are lessors under a
consumer lease
- Part 3.5 credit representatives
- Part 3.6 debt collectors
Some elements of responsible lending conduct are consistent
through most, or all, of the groups of licensees. For instance,
every group is required to give a credit guide[50] to consumers as soon as
practicable after it becomes apparent that their services are to be
rendered (see clauses 113, 126, 136, 149, 158 and
160). To contravene this may be both a strict liability
criminal offence (punishable by a fine of up to 50 penalty units)
or a civil penalty offence (punishable by a fine of up to 2 000
civil penalty units).
Those groups providing credit assistance (as opposed to actual
credit) are required to provide a quote to the consumer for the
provision of that assistance. Clauses 114 and 137
set out the particulars of those obligations and civil penalties
for their contravention.
All groups (except credit representatives and debt collectors)
are obliged, before providing the credit/credit assistance, to make
an assessment of whether the credit contract is unsuitable for the
consumer (see clauses 115 119, 128 131, 138 142,
and 151 154). The Bill s provisions relating to
credit assessments state:
- the assessments must be conducted whether a consumer is
entering a new credit contract, or increasing the credit limit of
an existing contract. (For providers of credit assistance, an
assessment must also be conducted before making a recommendation to
remain in an existing contract.)
- The licensee must make reasonable inquiries into the consumer s
requirements, objectives, financial situation, etc. before making
the assessment
- Assessments must be made no more than 90 days before providing
the credit or credit assistance
- Assessments are conducted to determine unsuitability of the
credit contract or credit increase. Unsuitability is measured by
two key indicators the likelihood of creation of substantial
hardship (which is presumed if the consumer would have to sell
their principal place of residence in order to meet the contract s
obligations),[51]
and whether the credit contract/increase meets the requirements or
objectives of the consumer. The regulations may prescribe
additional circumstances for determining unsuitability.
- Subclauses 130(3) and 153(3)
provide exceptions to the requirement for conducting an assessment.
These paragraphs allow a credit provider to forgo verification of a
consumer s financial situation (required by subclauses
130(1) and 153(1) respectively) if a
preliminary assessment has already been made in relation to that
credit contract / increase in credit. Therefore, credit providers
that have their consumers referred by finance brokers need not
perform verifications of financial situation if the broker has
already done so (provided that assessment did not show that the
contract/credit increase would be unsuitable, and was made no more
than 90 days before entering the contract or increasing the
limit).
- If an assessment concludes that a credit contract/increase is
unsuitable, licensees are prohibited from entering, or assisting
the consumer to enter, the credit contract/credit increase. Where
the assessment concludes that a consumer remain in an existing
credit contract that is unsuitable, the Act prohibits a person
providing credit assistance (such as a broker) from suggesting that
the consumer remain in the contract.
Chapter 4 deals with remedies. Clauses
166 175 outline the treatment of civil penalty provisions.
Only ASIC may apply to a court for a declaration that a person has
contravened a civil penalty provision. The time limit within which
ASIC must instigate proceedings is six years: clause
166. Once a declaration is made the court may order
payment of pecuniary penalties for those contraventions:
clause 167. Clause 172 provides
that proceedings for either a declaration that a person has
contravened a civil penalty provision or an order to pay a civil
penalty are stayed if criminal proceedings are brought in respect
of the same conduct. Clause 174 prevents evidence
given in proceedings for pecuniary penalty orders from being used
in criminal proceedings.
The power of the court to grant remedies is set out in
clauses 177 184. The court can grant injunctions
under clause 177 on the application of ASIC or any
other person; compensation orders under clause
178; and orders in relation to engaging in credit
activities while not holding an ACL under clause
180 as the court considers appropriate (including orders
to prevent profiting, or preventing loss or damage likely to be
suffered). The court may also make an adverse publicity order upon
application by ASIC (clause 182).
Clause 183 enables the court to relieve a
person from liability for contravention of a civil penalty
provision, if in a court proceeding against that person it appears
that the person acted honestly, and ought to be fairly excused from
the contravention. The relief may be whole or partial, and can be
sought by application to the court for such relief
(subclause 183(2)).
Clause 184 provides that a court may grant
multiple remedies.
The jurisdiction and procedure of the courts is set out under
clauses 186 202. Clause 187
outlines the limits to each court s jurisdiction in relation to
civil matters. There are no limits to the jurisdiction of the
Federal Court; the Federal Magistrates Court does not have
jurisdiction exceeding $750 000; and lower courts, including State
and Territory courts, have the limits that they usually carry,
based on locality and subject matter. The provisions also deal with
cross-jurisdictional appeals (clause 189) and
transfers between the courts (clause 191 198).
Criminal proceedings, including the criminal jurisdiction of
courts and how laws are to be applied are dealt with in
clauses 203 208.
Chapter 5 of the Bill deals with Administration
of the Act. The Chapter outlines ASICs role in administering the
legislation, including:
- providing that ASIC must maintain a credit register that is
publicly accessible. The register will show licensees and their
credit representatives, as well as persons against whom a banning
order or disqualification order has been made: clauses
213 and 214
- providing that ASIC may maintain a non-public register of
documents: clause 219, for which licensees can be
required to provide documents (with civil and criminal penalties):
clauses 218 and 220, and that
information gathered from any such register can be used as evidence
in a court proceeding: clause 221
- providing ASIC with wide powers to determine what documents and
information will be eventually required for the purposes of the
document register: clause 219
- creating civil and criminal offences against falsification of
information by licensees: clause 225.
Chapter 6 deals with compliance and
enforcement. On the whole, the chapter replicates existing
provisions contained in the Australian Securities and
Investments Commission Act 2001 for enforcement of the
corporations law, including existing offences and penalty amounts.
Therefore, the matters set out in Chapter 6 are
standard powers which are already exercised by ASIC in relation to
corporations.[52]
Credit providers that are already registered as corporations under
the Corporations Act 2001 will be familiar with the style
and scope of ASIC s compliance and enforcement regime.
Chapter 7 include miscellaneous provisions,
including a regulation-making power, provisions enabling
applications to the Administrative Appeals Tribunal for review of
decisions, and the Minister s authority to delegate certain
functions and powers.
The new National Credit Code, which sets out requirements for
credit contracts, is set out in Schedule 1 of the
Bill. On the whole, the new Code generally replicates the existing
code which operates in all States and Territories. However, some
minor amendments have been made to the Code, to reflect new
Commonwealth policy and to make amendments that had already been
previously agreed to by the States and Territories. These
include:
- Including mortgages for residential investment properties as a
type of credit to which the Code applies see items 5 and
13
- New powers to ASIC to exclude certain types of credit and
consumer leases from provisions of the Code (items
6 and 171), make applications to the
court for hardship cases (item 79),
- new offences for false or misleading declarations
(items 13 and 172)
- an increase to the cap of credit for hardship cases, from $125
000 or the amount prescribed by regulation,[53] to $500 000 or an amount prescribed
by regulation(item 72)
- expanded default notice requirements (item
88)
Copyright Commonwealth of Australia
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2699.
[38]. Australian Securities and Investments Commission, ASIC
Annual Report 2002 03 , Commonwealth of Australia, 2003,
p. 6.
[46].
Qualified privilege is defined by the Butterworths Concise
Australian Legal Dictionary as a privilege offering protection in
an action in defamation where the person who made the communication
had an interest or a duty legal, social or moral to make it to the
person to whom it was made, and the person to whom it was made had
a corresponding interest or duty to receive it.
PaoYi Tan
15 September 2009
Bills Digest Service
Parliamentary Library
© Commonwealth of Australia
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