2012 has continued the trend of significant reforms to the regulation of consumer credit under the National Consumer Credit Protection Act 2009 (Cth) (“NCCP Act”) and further reform proposals continue to be raised which are likely to result in more change in 2013.
The Consumer Credit Legislation (Enhancements) Act 2012 (“Enhancements Act”) received royal assent on 17 September 2012 with significant, and some not so significant changes, being introduced to the NCCP Act. Most of these changes will commence on 1 March 2013 however some have already started and some won’t commence until 1 July 2013. These changes will require consideration of what systems and processes need to be updated when offering and providing regulated credit.
Changes affecting the offering and conduct in relation to credit contracts
The Enhancements Act introduces a number of changes which will affect the general offering of credit contracts. This includes new restrictions in how credit contracts are advertised, how payments can be collected and provisions relating to fees and charges.
For example, while ASIC has already publicised its views and taken action in relation to unconditional offers of credit (see here), the Enhancements Act now prohibits such unconditional offers being made before the required suitability assessment is complete.
Changes are also made to make the civil penalty provisions under the National Credit Code broader and to extend ASIC’s powers.
New hardship process
Since Treasury has flagged the introduction of changes, the hardship process has been the subject of significant consultation and industry discussion. The Enhancements Act now introduces changes to the hardship process for both credit contracts and consumer leases.
These changes will require credit providers and lessors to update their processes and procedures for identifying and responding to hardship requests to ensure compliance with the new regime. However, under current drafting, changes will only apply to contracts entered into from 1 March 2013 – this creates a significant compliance burden as there is no provision to deem compliance for existing contracts if the new regime is applied across all contracts. This is a real issue that should be addressed and future lobbying of Treasury may be required to rectify this.
New regime for reverse mortgage
The Enhancements Act has amended the National Credit Code so that certain express requirements and limitations apply to reverse mortgages - this is a new area of specific regulatory intervention. The changes will affect both the initial assessments made in relation to the reverse mortgages as well as ongoing disclosure obligations.
In particular, in fulfilling responsible lending obligations, credit assistance providers and lenders must undertake prescribed steps in making projections in relation to the value of the customer’s property and their debt.
Short term and small amount credit contracts
The Enhancements Act introduces a regulatory regime that distinguishes “short term” and “small amount” credit contracts.
Holders of an Australia credit licence must not suggest a customer apply for or assist a customer apply for a short term credit contract. Licensees must also not enter into or increase the amount of credit under short term credit contracts. This effectively prohibits this type of lending going forward.
In relation to small amount credit contracts, if small amount credit contracts are offered more extensive and prescribed steps for the purpose of meeting responsible lending obligations must be fulfilled. If a representation is made that this type of credit is available, disclosure in accordance with Regulations must be made. The Enhancements Act also restricts certain monetary obligations under small amount credit contracts
National cap on costs
While many of the States previously had regimes under which caps applied to the amount of interest that could be payable under a credit contract, a national regime has now been introduced. The regime largely replicates that which applied in NSW and, in calculating the cap, takes into account a number of factors including fees and charges payable under the contract and to certain third parties. Different formulas will apply depending on whether the credit contract is a ‘medium amount credit contract’ or not.
New consumer lease regime
Consumer leases have previously been subject to a discreet regime under the National Credit Code (while the NCCP Act more generally applied to these types of contracts). In a move to align the requirements applying to credit contracts and consumer leases, significant changes have been made to the obligations which apply to lessors under the Code.
This include changes under which:
- lessors must provide consumers with statements of account;
- lessors much provide consumers with end of term statements;
- the manner in which changes can be made to the lease contract are prescribed;
- consumers rights to terminate before the goods are provided are prescribed;
- rules applying to acceleration clauses and default notices will apply to leases.
New restrictions on certain words
The Enhancements Act prohibits licensees from using certain words in providing credit services including “independent” “impartial” and “unbiased” or similar words. “Financial counsellor” is also the subject of restrictions in its use.
New liability for intermediaries – whether licensed or not
The scope of the NCCP Act is generally to attach obligations to those persons that hold Australian credit licences. Changes under the Enhancements Act introduce liability for intermediaries whether or not they hold a licence or not. This is particularly relevant for entities operating under a licensing exemption, such as retailers, who would otherwise, with a licensing exemption, fall within the scope of the Act.
Under the changes, whether or not a person holds a licence, if the person provides a credit services the court may make certain orders if their conduct has been “unfair or dishonest”. The Act sets out certain circumstances to which regards is to be had in determining whether the person’s conduct is unfair or dishonest. While the court may make orders to redress the unfairness or dishonesty these orders cannot affect the credit contract, consumer lease, mortgage or guarantee relating to the conduct.