National credit reform is just around the corner - announcing the National Consumer Credit Protection Bill

The Bills to enact the National Consumer Credit Reform Package were introduced into Parliament on 25 June 2009 and changes to its timetable for implementation have been announced on 14 August 2009. Draft Regulations have also been released for public comment on 14 August 2009.

Overview

The key aim of the proposed legislation is to replace the current State-based Uniform Consumer Credit Code (UCCC) with single Federal consumer credit regulation. This will also impose significant new compliance and regulatory obligations on lenders, brokers, financial planners and debt collectors.

The centrepiece is the National Consumer Credit Protection Bill 2009, introducing key components which include:

• a comprehensive licensing regime for those engaging in 'credit activities', via an Australian Credit Licence (ACL) to be administered by the Australian Securities and Investments Commission (ASIC) as the sole regulator;
• industry wide responsible lending conduct requirements for licensees;
• improved sanctions and enhanced enforcement powers for the regulator; and
• enhanced consumer protection through dispute resolution mechanisms, court arrangements and remedies.

Other bills deal with transitional issues and fees.

'Credit activities'

The Bill will extend the categories of persons classified as engaging in 'credit activities' beyond lending, leasing and activities in respect of mortgages and guarantees. The Bill will capture persons providing credit services which include brokers and other intermediaries who engage in securing credit for consumers or who assist consumers in relation to particular credit contracts.

Key features of the Reform Package

Licence requirements

Currently, there is no consistent approach applied by the States to regulate providers of credit and related services. In order to remove different State requirements, all persons engaging in credit activities will be required to hold an ACL in order to continue to engage in credit activities.

The requirement to hold the ACL will apply to banks, credit unions, finance companies and other lenders, as well as mortgage and finance brokers and other intermediaries who assist consumers to obtain credit. ASIC will have significant powers in controlling the process of applications for the ACL. Once registered, credit providers will be required to become members of an External Dispute Resolution Scheme, to provide consumers with effective no-cost complaints resolution. The ACL scheme is similar in nature to the financial services licensing regime and will be compliance-intensive.

Responsible lending conduct

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. 

For 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 under 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' who suggest and assist consumers to apply for provision or increase of credit, 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 ("The Code")

The Code will largely mirror the UCCC. However, some of rules in the UCCC will be amended.  These changes include:

• Extension of the Code to cover residential investment property loans.
• Limitations on relying on business purpose declarations by credit providers.
• Increased threshold under which a debtor can request a change to certain terms of their credit contract on the ground of hardship.
• Requirement for credit providers 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.
• Prohibition from using essential household goods as security.

Revised key dates

Subject to the passage of the Reform Package, the following timetable will be applicable:

• 1 November: 31 December 2009: Lenders and credit-service providers (such as brokers) will be required to register with ASIC.
• 1 January 2010: 30 June 2010: Application for a licence will have to be made by persons registered as at 1 January 2010.
• 1 January 2010: Responsible lending conduct obligations will commence for brokers and some lenders who are not Authorised Deposit-taking Institutions or Registered Finance Corporations.
• 1 July 2010: The Code requirements will commence.
• 1 January 2011: Responsible lending conduct obligations will commence for the remaining lenders.
• 1 July 2011: Lenders and credit-service providers must be licensed in order to continue to engage in credit activities.

Implications

Although the Reform Package is not yet law, lenders and intermediaries should be ready to address the reforms now by preparing for licensing, reviewing their documentation and implementing compliance programs particularly for the responsible lending requirements.