Total repayments on small amount credit contracts (SACCs) and consumer leases for household goods will be capped at 10% of a consumer’s net income, if a new Bill and foreshadowed regulations become law.
The Financial Sector Reform Bill 2022 was introduced into the Australian parliament on 8 September 2022. Schedule 4 of this Bill proposes many reforms to consumer credit law, enhancing protections for consumers of small amount credit contracts and consumer leases.
Key change: The most important changes are foreshadowed by the Explanatory Memorandum (EM) to be included in the accompanying regulations.
• 10% cap for SACCs: It is expected that the regulations will set a protected earnings amount of 10% of a borrower’s net income (after tax and other deductions) for all consumers. This means that lenders cannot enter into a SACC with a borrower if the total repayments under the SACC, and any other SACCs that the borrower has, would exceed 10% of the borrower’s net income. The Bill itself introduces a new regulation-making power that can be used to ensure that all consumers are covered by a protected earnings amount (although different amounts may apply to different consumers). The new regulations will not need to prescribe a protected earnings amount for prescribed classes of consumers.
• 10% cap for consumer leases for household goods: The Bill paves the way for regulations to introduce a protected earnings amount for consumer leases for household goods. It is expected that the regulations will provide a protected earnings amount of 10% of a consumer’s net income, for all consumers. This means that lessors cannot enter into a consumer lease for household goods with a consumer if the total repayments under the consumer lease, and any other consumer leases that the consumer has, would exceed 10% of the consumer’s net income.
Other changes to consumer leases: The Bill also proposes these changes to consumer leases, which commence 6 months after assent:
• Cap on fees: The Bill introduces a cap on the amount that can be charged for a consumer lease. Lessors must not enter into or vary a consumer lease so that the total amount payable by the consumer (including any taxes and add-on fees) is more than the permitted cap.
○ Indefinite leases: 2.92 x base price: The permitted cap for a consumer lease for an indefinite period is 2.92 times the base price of the hired goods + permitted delivery/installation/add-on fees + other specified amounts eg reasonable enforcement expenses
○ Fixed term leases: The permitted cap for a consumer lease with a fixed term is the sum of the base price of the hired goods + 0.04 x the number of whole months of the consumer lease (up to a maximum of 48 months) x the base price + permitted delivery/installation/add-on fees + other specified amounts eg reasonable enforcement expenses
• New obligations for consumer leases for household goods:
– Past 90 days account information: The Bill requires lessors and brokers to collect and consider a consumer’s account information for the 90 days before entering into a consumer lease for household goods with the consumer
– Disclose base price: The Bill requires lessors to disclose to consumers the base price of the goods hired under the lease and the difference between the total amount payable under the lease and the base price
– Prohibit unsolicited communications: The Bill prohibits lessors from making (or arranging the making of) face-to-face unsolicited communications to induce consumers to obtain consumer leases for household goods in public places, door-to-door sales, stalls, aircraft, vehicles or vessels, or any place other than the lessor’s business premises.
– Written assessment of suitability: The Bill requires lessors and brokers to document in writing their assessment or preliminary assessment that a consumer lease for household goods is not unsuitable for a consumer.
– Warning statements: The Bill requires lessors and brokers to display and give information to consumers as required by ASIC’s legislative instrument. ASIC will be able to require different information to be given to different types of consumers and at different times. ASIC may also require different delivery methods. The aim is to effectively highlight the risks of consumer leases for household goods and help consumers to make better use of alternatives.
Other changes to SACCs: The Bill also proposes these changes to SACCs, which commence either 6 months after assent or 7 days after assent:
• Repeal rebuttable presumption: repealing the rebuttable presumption that a SACC is unsuitable if the borrower has entered into 2 or more SACCs in the past 90 days or is in default under a SACC
• Equal repayments: requiring SACCs to have equal repayments and equal repayment intervals over the life of the loan
• No monthly fees after early repayment: expressly prohibiting lenders from charging monthly fees for the remainder of a loan if a borrower fully repays the loan early
• Prohibit unsolicited SACC invitations: prohibiting lenders and brokers from making (or arranging the making of) unsolicited communications (whether oral, written or electronic) to consumers to apply for or enter into a SACC if the consumer has ever applied for a SACC (and the lender or broker ought to know of this) or if the consumer has ever borrowed money under a SACC. This would stop SACC lenders inviting borrowers to take out more credit after they enter a SACC loan. General advertising of the availability of SACCs is still allowed.
• Written assessment of suitability: requiring lenders and brokers to document in writing their assessment or preliminary assessment that a SACC is not unsuitable for a consumer
• Enhancing warning statements: requiring lenders and brokers to display and give information to consumers about SACCs as required by ASIC’s legislative instrument. ASIC will be able to require different information to be given to different types of consumers or at different times. ASIC may also require different delivery methods. The aim is to give consumers information that effectively highlights the risks and financial implications and help them make better use of alternatives. The Bill repeals the existing requirement for lenders and brokers to display information as required by the regulations.
• No referrals that lead to the unregulated provision of credit: prohibiting SACC lenders from referring a consumer to another person if it is reasonable to believe that the consumer would or might, directly or indirectly due to the referral, enter into a contract or arrangement for providing credit where the National Credit Code (NCC) does not apply. Breaches can attract penalties up to 5,000 penalty units ($1.11 million).
Anti-avoidance: The Bill prohibits avoidance schemes relating to SACCs, consumer leases and product intervention orders made under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act). This change will commence on the day after assent. The Bill prohibits schemes that are designed to prevent a contract from being a SACC or a consumer lease. The proposed anti-avoidance law targets lending models using complex contractual arrangements designed to escape consumer credit laws.
Indefinite consumer leases covered: The Bill extends the NCCP Act to cover consumer leases entered into for an indefinite period. This means that all the consumer credit laws that currently apply to consumer leases will also apply to consumer leases for an indefinite period, so far as they can apply. This change will commence 6 months after assent.
What is a SACC? A small amount credit contract is broadly an unsecured credit contract (other than a continuing credit contract or any credit contract where the credit provider is an ADI) with a credit limit that is $2,000 or less and with a term that is at least 16 days but no longer than 1 year: NCCP Act, s 5. They are sometimes called “payday loans”.
• Financial Sector Reform Bill 2022 and Explanatory Memorandum, especially para 4.19–4.28 (summary of key new law), 4.35 and 4.188 (protected earnings amount), 4.145 (cap on consumer leases), 8 September 2022.
• Consumer Action Law Centre, Finally, time to Stop the Debt Trap!, 8 September 2022.