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Focus: Bill for Commonwealth regulation of unfair contract terms introduced

29 June 2009

In brief: Another step in the establishment of a uniform national consumer law was taken on Wednesday with the introduction into Parliament of the Trade Practices Amendment (Australian Consumer Law) Bill 2009. The Bill will introduce a single national consumer law (to be known as the Australian Consumer Law), which includes provisions regulating unfair contract terms. Partner Catherine Parr reports on the implications of the Bill for financial service providers and provides an update on new guidance on unfair terms in consumer credit contracts in Victoria.

• Background
• The Australian Consumer Law
• Key changes from the consultation draft
• More guidance from Victoria

Background

Our Focus: Draft legislation to regulate unfair contract terms provides some background to this regulatory change as it affects financial services and outlines some key provisions of a consultation draft of the Bill which was circulated for comment in May.

The Australian Consumer Law

The Bill amends the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) to introduce an unfair contract terms regime for financial services. The ASIC Act provisions mirror changes to the Trade Practices Act 1974 (Cth) (the TPA) to introduce the Australian Consumer Law as a schedule to the TPA to regulate contracts for the supply of goods or services other than financial services and contracts for the sale or grant of an interest in land. See our Focus: Australian Consumer Law Bill for an outline of the key provisions of the Bill. This publication highlights what has changed since the consultation draft of the provisions relating to financial services.

Key changes from the consultation draft

Consumer contracts only

Following a negative response to the Government's initial proposal to apply the new law to business-to-business contracts, the Government has removed non-consumer contracts from the scope of the Bill pending a further review of the unconscionable conduct provisions of the TPA (and, presumably, the ASIC Act). Accordingly the regime will, on its commencement, only regulate a contract for the supply of services to an individual wholly or predominantly for personal, domestic or household use.

Exemption for constitutions

The provisions do not apply to the constitution of a company, managed investment scheme or other kind of body.

Timing and transitional provisions

The Federal Government has previously said that the unfair contract term provisions will commence on 1 January 2010. The provisions will apply to standard form consumer contracts entered into on or after the commencement date. A contract entered into prior to that date will not be subject to the new provisions unless:

• it is varied after that date, in which case the provisions will apply to the contract as varied on and from the day the variation takes effect, in relation to conduct that occurs on or after the variation date; or
• it is renewed after that date, in which case the provisions will apply to the contract as renewed from the time of renewal in relation to conduct that occurs on or after the renewal day.

The consequences of a variation are not the same as those provided for in the consultation draft, which provided that only the changed term would become subject to the regime. This change may have significant practical implications.

In the Second Reading speech on 24 June the Minister said he is 'mindful of the need for businesses to comply with the law and that they may need more time'. Accordingly there is provision in the Bill for a commencement later than 1 January 2010.

Consequences of a term being unfair

An unfair contract term will be void, but the contract will continue if it is capable of operating without the unfair term. A prohibited term will also be void and the inclusion of a prohibited term in a standard form contract, or reliance on such a term, will contravene the legislation. ASIC will be able to seek a declaration that a term is unfair.

A business that is found to have included an unfair term in a consumer contract may also be subject to the enhanced remedies included in the Bill which are as follows.

• Civil pecuniary penalties will be available for conduct that does not warrant a criminal penalty and will now include the unconscionable conduct provisions and the unfair contract terms provisions of the ASIC Act. These penalties vary. The maximum penalties are consistent with the those presently available for breaches of certain consumer protection provisions of the TPA ($1.1 million for corporations and $220,000 for individuals).
• Disqualification orders are also made available for breaches of certain provisions of the ASIC Act (including those relating to unconscionable conduct and the use of prescribed unfair contract terms). These prohibit individuals from managing corporations or engaging in particular activities in connection with the management of corporations.
• ASIC will have the power to issue substantiation notices requiring a supplier to provide information or documents capable of substantiating a representation made by the supplier in relation to the supply or possible supply of financial services.
• ASIC may issue infringement notices for breaches of certain parts of the ASIC Act, including the unfair contract terms provisions, with penalties of up to $6,600. These are designed to supplement more serious penalties by facilitating relatively small financial penalties for minor contraventions without requiring court proceedings.
• Public warning notices may be issued by ASIC to inform the public of potentially harmful conduct without the need for a court order.
• ASIC will also be able to seek court orders requiring a supplier to provide redress to consumers who are not parties to a particular enforcement proceeding. This power is designed to be used where a large number of consumers suffer similar identifiable damage. The redress can take a number of forms, including refunds, the variation of a contract or orders to honour representations.

More guidance from Victoria

Since 11 June 2009 the unfair contract terms provisions in the Fair Trading Act 1999 have been law. For details please see our Focus and our Client Update. Consumer Affairs Victoria (CAV) has now released guidelines on Preventing unfair terms in consumer credit contracts.

CAV indicates in the guidelines that it has identified four priority areas. These are:

• small amount cash loans;
• credit cards;
• non-bank housing financing targeted at first home buyers (the focus in relation to this appears to be vendor terms and rent-to-buy land contracts); and
• reverse mortgages.

However CAV makes some comments about unilateral variation terms, contingent (default) fees and early termination fees in credit contracts generally. A number of the comments made in the guidelines in relation to the four product groups listed above indicate CAV's likely future approach to consumer credit arrangements generally.

CAV also indicates that neither the Commonwealth regime reflected in the Bill, nor the fact that Victoria will refer responsibility for the Consumer Credit Code and regulation of finance brokers to the Commonwealth, will affect Part 2B of the Fair Trading Act or the jurisdiction of CAV or the Victorian Civil and Administrative Tribunal. So it seems the Victorian regime is here to stay alongside the new Commonwealth regime.

Published 29 June 2009

For further information, please contact:

• John GallimorePartner, Brisbane
  Ph: +61 7 3334 3135
  John.Gallimore@aar.com.au
• Stephen SpargoPartner, Melbourne
  Ph: +61 3 9613 8861
  Stephen.Spargo@aar.com.au

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