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Focus: National licensing regime for credit providers, finance brokers and intermediaries

21 May 2009

In brief: The proposed national regulation of consumer credit involves the introduction of a licensing regime for all credit providers, finance brokers and other intermediaries. The licensing regime will impose responsible lending requirements, extensive conduct and disclosure obligations, and substantial penalties for non-compliance. Partner Catherine Parr and Lawyer Katya Rozenblit outline the proposed regime and its potential consequences.

How does it affect you?

  • The proposed reforms will have significant consequences for a wide range of participants in the credit industry, including credit providers, finance brokers, mortgage managers and assignees of the rights of credit providers. These persons will need to:
    • register with the Australian Securities and Investments Commission (ASIC) and obtain a licence within a specified time frame;
    • comply with ongoing conduct obligations and licensing conditions;
    • comply with new responsible lending requirements that prohibit providing or arranging loans unsuitable for a consumer's needs, or that a consumer does not have capacity to repay;
    • make certain disclosures to consumers, including in relation to commissions;
    • be aware of ASIC's wide-ranging powers in relation to enforcing the licensing regime and taking action against licensees; and
    • note the significant criminal and civil penalties that may be imposed for licensee misconduct.

Background

As described in our 28 April 2009 Client Update and in our 13 May 2009 Focus, the Federal Government recently released its National Consumer Credit Reform package. If the proposed reforms, set out in the exposure draft of the National Consumer Credit Protection Bill (the proposed Bill), become law, credit providers and credit assistance providers will need to be registered with ASIC by 31 December 2009 and will be required to apply for a licence by 30 June 2010. Licensees will have extensive conduct and disclosure obligations.

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Who will require a licence?

A person engaging in 'credit activities' will need an Australian Credit Licence (ACL). 'Credit' is defined as provided for personal, domestic or household use, or for the purchase, renovation or improvement of the value of a residential investment property.  Credit otherwise provided for investment purposes is expressly excluded.

Persons engaging in 'credit activities' will include:

  • credit providers under credit contracts and lessors under consumer leases (including in their capacity as mortgagees or beneficiaries of guarantees where the contract or lease is secured or guaranteed); and
  • others who provide 'credit services', such as finance brokers, mortgage managers or aggregators and other intermediaries who have a direct or indirect role in securing credit for a customer, or suggest, or provide assistance in respect of, a specific product with a particular credit provider.

An ACL will be required if these persons engage in, among other activities, any of the following:

  • providing credit or consumer leases, including engaging in pre-contractual conduct;
  • activities in relation to a mortgage or guarantee where the mortgage or guarantee is taken to secure or guarantee obligations under a credit contract or consumer lease;
  • collecting money due under a credit contract (including where the lender is no longer providing credit, or where debt collectors or mortgage managers manage the contract on the credit provider's behalf); or
  • receiving by assignment and subsequently exercising the rights of a credit provider or lessor.

The Regulations provide for certain activities, such as those undertaken by lawyers and tax agents as well as certain administrative functions such as passing on factual information or prepared documentation, to be exempt from being 'credit activities'. The Regulations also exempt certain persons such as receivers and managers, liquidators and registered debt agreement administrators from requiring a licence. Financial counselling agencies are also exempted in certain circumstances.

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When will the licensing regime commence?

To expedite the introduction of the new regime, it is planned that it will take effect in two phases.

Between 1 November 2009 and 31 December 2009, persons currently engaging in 'credit activities' will need to register with ASIC and once registered, to apply for an ACL by 30 June 2010.

Persons engaging in credit activities for the first time will be required to apply for an ACL from 1 January 2010.

From 1 July 2011, all persons engaging in credit activities will need to be licensed.

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What is the registration and licensing process?

A person must apply to ASIC to be registered, by lodging an electronic application in the approved form. The applicant must confirm that it is a member of an approved external dispute resolution (EDR) scheme and confirm that none of the criteria resulting in automatic exclusion apply. A person will be automatically excluded from registration if, among other things, he or she is insolvent, has committed serious fraud or has been banned or disqualified from engaging in credit activities, but generally ASIC must register an applicant. 

Once registered, a person will be required to conduct their business in accordance with a number of specific conduct standards similar to those applying to licensees, outlined below. A key issue is whether these obligations will include responsible lending obligations. The Government commentary on the proposed Bill (the commentary) states that it will. However, this is not clear from the drafting of the proposed legislation.

The application process for an ACL is similar to that for registration. ASIC must grant an ACL if:

  • an application is made properly;
  • ASIC has no reason to believe that the applicant is likely to breach the obligations imposed on a licensee or is not a fit and proper person to engage in credit activities; and
  •  the applicant has provided ASIC with any additional information and meets any other prescribed requirements. 

An ACL will specify the types of credit activities that a licensee is authorised to engage in and any other conditions that ASIC imposes (these may be revoked or varied by ASIC at any time). Special procedures will apply in relation to conditions imposed on Australian Prudential Regulation Authority (APRA) regulated bodies.

ASIC may refuse to grant an ACL after giving a person a hearing and the opportunity to make submissions.

Credit representatives

A registered person or a licensee will be able to appoint 'credit representatives' to engage in all or some of the credit activities for which it is licensed without the representative being required to hold its own licence. The appointment of a representative must be advised to ASIC within 15 business days. A credit representative that is a body corporate may sub-authorise natural persons to engage in credit activities on behalf of the registered person or ACL holder with their consent. Sub-authorisations must also be advised to ASIC.

A credit representative may be authorised to act for more than one principal. Where it acts for only one principal, the principal will be wholly responsible for its conduct. Where the representative acts for more than one principal, liability will be determined in accordance with certain principles set out in the proposed Bill.

A person cannot be appointed as a credit representative in relation to a credit activity if the person is registered or licensed to engage in that credit activity.

Streamlined applicants

Authorised deposit-taking institutions (ADIs) will be able to obtain an ACL without needing to demonstrate their competencies and by providing a statement to the effect that if granted an ACL, they will comply with their obligations. Regulations may enable other classes of applicants to be streamlined. According to the commentary, it is expected that holders of 'A' or 'B' class licences under the Finance Brokers Control Act 1975 (WA) will be streamlined. We expect that there will be a number of submissions that other types of organisations should also be streamlined. For example, there seems to be no reason why a lenders' mortgage insurer that is supervised by APRA should not be streamlined in the same way as ADIs will be. Similarly, credit providers licensed in Western Australia may argue that they should be streamlined in the same way as it is expected that brokers currently licensed in Western Australia will be.

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What conduct requirements will licensees have?

Unless an exemption applies, a licensee will have ongoing obligations to:

  • ensure that credit activities are engaged in efficiently, honestly and fairly;
  • put in place adequate arrangements to ensure that clients are not disadvantaged by any conflict of interest in relation to credit activities engaged in by it or its representatives;
  • comply with any licensing conditions;
  • comply with credit legislation and take reasonable steps to ensure its representatives do also;
  • maintain competence to engage in credit activities it is authorised to provide, and ensure that its representatives are adequately trained and competent to engage in those activities;
  • have internal dispute resolution procedures that are compliant with standards and requirements made or approved by ASIC;
  • be a member of an approved EDR scheme;
  • have compensation arrangements (supported, subject to some exceptions, by professional indemnity insurance) for loss or damage resulting from breaches of its obligations;
  • have adequate and documented arrangements and systems to ensure compliance with its obligations;
  • except where the licensee is APRA regulated, have adequate resources to engage in credit activities and have adequate risk management systems;
  • comply with any additional obligations imposed by regulations;
  • cite its ACL number on certain prescribed documents;
  • assist ASIC by, among other things, providing it with information about whether it is complying with the the credit legislation;
  • report to ASIC any significant actual or likely contraventions of the credit legislation within 10 business days, at the latest, after becoming aware of the contravention or likely contravention; and
  • keep financial records in relation to engaging in credit activities and maintain trust accounts where money is received for or on behalf of others.

The above obligations are similar to, but more rigorous, than those imposed at the registration stage. 

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What are the responsible lending requirements?

A licensee will need to meet responsible lending obligations where it is either:

  • a credit provider, that is, it enters into credit contracts with consumers or increases the credit limit of a credit contract; or
  • a credit assistance provider in that it:
    • suggests a consumer enter into a particular credit contract with a particular credit provider, or increase the limit of a particular credit contract with a particular credit provider; or
    • assists a consumer to apply for a particular credit contract with a particular credit provider or an increase in a credit limit of a particular credit contract with a particular credit provider.

The responsible lending obligations will also apply to a credit assistance provider who suggests to a consumer that they remain in an existing credit contract.

Although the responsible lending obligations of credit assistance providers are addressed separately from the obligations of credit providers in the proposed Bill, both credit providers and credit assistance providers are required to assess whether a contract will be unsuitable for the consumer if the contract is entered into or a credit limit in a contract is increased.

A credit assistance provider must make the assessment (referred to as a 'preliminary assessment') before providing credit assistance to a consumer or suggesting that a consumer remain in a particular contract with a particular credit provider. A credit provider must make the assessment before providing credit or increasing a credit limit. 

Before making the relevant assessment, both a credit assistance provider and a credit provider must make:

  • reasonable inquiries about the consumer's requirements and objectives in relation to the credit contract; and
  • reasonable inquiries about the consumer's financial situation and take reasonable steps to verify it.

If a consumer requests a copy of an assessment and a credit assistance provider ends up providing credit assistance to the consumer, or a credit provider enters into a contract with, or increases the credit limit of a contract, the relevant licensee must provide the copy within two business days of receiving the request.

What is an unsuitable credit contract?

Where a proposed credit contract or credit limit increase is unsuitable, a credit assistance provider will be prohibited from providing credit assistance in relation to the proposal and a credit provider will be prohibited from entering into the contract or increasing the credit limit.

In relation to credit assistance providers, a credit contract will be unsuitable if it will be likely that, at the time the contract is proposed to be entered into or a credit limit is proposed to be increased:

  • the consumer will be unable to comply with its financial obligations under the contract or could comply only with substantial hardship; or
  • the contract will not meet the consumer's requirements and objectives.

Similar criteria will apply to credit providers in assessing whether a contract is unsuitable.

It is not clear in the current draft of the proposed Bill whether a credit provider or a credit assistance provider will breach the legislation if it provides or assists with the provision of credit that turns out to have been unsuitable, even though the relevant reasonable inquiries were made and the relevant reasonable steps were taken to verify information. 

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What disclosure obligations will licensees have?

Disclosure obligations are an aspect of the responsible lending obligations described above. 

Credit guide

Where a credit provider or credit assistance provider must comply with the responsible lending requirements, before providing any services it must also disclose, in a credit guide, key details about itself to the consumer. 

A credit guide will need to include the following information:

  • name, contact details and licence number of the relevant licensee;
  • details of membership in an EDR scheme and the consumer's rights under the scheme;
  • information about compensation arrangements;
  • information about the licensee's obligation to make an assessment as to whether a credit contract will be unsuitable and that it will provide a copy of an assessment on request; and
  • for a credit assistance provider only:
    • fees and charges payable by consumers and the method of calculation;
    • information about any commissions it, or its employees, directors or credit representatives are likely to receive from credit providers; and
    • the panel of credit providers (up to six) that it deals with. 

Credit representatives, debt collectors and assignees of credit providers will also be required to give debtors a credit guide containing some, but not all, of the information above.

Quote by credit assistance providers

The consumer must also be given a written quote to provide credit assistance prior to its provision. The quote must set out the maximum amount payable to the credit assistance provider and a breakdown of the costs involved.

Commission disclosures

At the time of providing credit assistance, a credit assistance provider must give a consumer a credit proposal disclosure document disclosing, among other things, commissions, fees and charges (including third-party fees paid by the consumer or received by the credit assistance provider) and the amount of credit available to the consumer after the deduction of any commissions, fees or charges. 

A credit provider, must before entering into a contract with a consumer or increasing the credit limit of a credit contract, give the consumer a document setting out any commission it, or any of its employees, directors or credit representatives are likely to receive in relation to the contract or increase.

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Penalties and remedies

ASIC will regulate and enforce the licensing regime. Among other things, it will have the power to suspend or cancel a licence with or without a hearing (depending on the circumstances), to make orders banning any person from engaging in credit activities and to make adverse publicity orders. 

Criminal penalties of up to five years imprisonment and civil penalties of up to $220,000 for an individual and $1.1 million for a corporation will also apply to certain breaches of the regime. 

Consumers will have a range of remedies available to them, including compensation where they suffer loss or damage from the misconduct of a credit provider or credit service provider. Remedies will also be available where the credit provider or credit service provider acts without an appropriate licence.

We will deal with penalties and remedies in more detail in a separate Focus publication shortly.

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Conclusion

Credit providers will carefully need to review the proposed changes and consider their impact. Lenders and the intermediaries with which they deal will need to obtain an ACL and, as an interim step before licensing, to register with ASIC. Registration and licensing will attract a number of significant obligations, including responsible lending requirements and disclosure obligations.

Published 21 May 2009

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