House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Human Services Minister for Financial Services, Superannuation and Corporate Law the Hon Chris Bowen MP)

Chapter 1 - Introduction

Outline of chapter

1.1 Chapter 1 of this explanatory memorandum outlines the preliminary provisions, dictionary and application provisions established in Chapter 1 of the National Consumer Credit Protection Bill 2009 (Credit Bill).

Context of new law

1.2 At its meeting on 2 October 2008, the Council of Australian Governments (COAG) agreed that the Commonwealth would assume responsibility for the regulation of consumer credit.

Summary of new law

1.3 Chapter 1 of the Credit Bill covers the following:

•

the preliminary matters such as the short title and commencement of the Credit Bill;

•

defined terms and other definitions for the Credit Bill;

•

the constitutional basis and application of this Credit Bill; and

•

the interaction between Commonwealth credit legislation and State and Territory laws.

1.4 The Credit Bill and the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill) are based, in part, on a referral of constitutional power by the States.

1.5 The relationship between the new Commonwealth Act and State and Territory legislation is dealt with in a set of provisions, contained in the Credit Bill, called the 'inconsistency' provisions. These provisions deal with how any inconsistencies between Commonwealth, and State and Territory law are treated. The purpose of these legislative provisions is to provide a mechanism to allow certain potentially inconsistent State and Territory laws to operate, notwithstanding the application of section 109 of the Constitution. Section 109 provides that where a State law is inconsistent with a Commonwealth law, the Commonwealth law prevails and the State law, to the extent of the inconsistency, is invalid.

1.6 The definitions provisions contain terms that apply to the interpretation of the Credit Bill which assists in clarifying the operation and effect of these provisions.

Detailed explanation of new law

Part 1-1 - Preliminary

Division 1 - Preliminary

Commencement

1.7 Sections 1 and 2 of the Credit Bill commence on the day on which it receives Royal Assent. The remaining provisions commence on a day to be fixed by Proclamation. Provisions that do not commence within six months after the commencement day of the Credit Bill commence the day after that period. [Part 1-1, Division 1, section 2]

1.8 In relation to the new licensing regime, a two-phase approach is being adopted on commencement of the Credit Bill. Credit providers and credit service providers will be required to be registered with the Australian Securities and Investments Commission (ASIC) by 30 June 2010, and to have applied for a licence by 31 December 2010 in order to engage in credit activities.

1.9 Some responsible lending conduct obligations in Chapter 3, such as the requirement not to arrange or provide credit that is unsuitable, will commence for non-ADIs and non-RFCs from 1 July 2010. Those responsible lending conduct obligations will commence for ADIs and RFCs on 1 January 2011.

1.10 Additional responsible lending obligations such as disclosure requirements, including the provision of quotes, credit guides and assessments will commence on 1 January 2011 to give industry time to put in place the systems and training needed to comply with their new obligations.

1.11 Schedule 1 to the Credit Bill which contains the National Credit Code (Code) has effect as law of the Commonwealth. [Part 1-1, Division 1, section 3]

Part 1-2 - Definitions

Division 2 - The Dictionary

Explanation of the use of defined terms in the Bill

1.12 The Credit Bill and Transitional Bill specify the regulatory requirements applying to persons engaged in credit activities. A person will need a licence if they engage in credit activities.

When does a person engage in a credit activity

1.13 The Dictionary in the Credit Bill contains detailed definitions of when a person will engage in credit activities, and therefore when the requirements to be registered and licensed arise. This chapter of the explanatory memorandum contains a detailed explanation of these provisions.

Division 3 - Definitions relating to the meaning of credit activity

1.14 There are two broad categories of persons who engage in credit activities:

•

the first category primarily covers lenders and providers of consumer leases, but is extended to also cover activities in respect of mortgages and guarantees where they are taken to secure or guarantee obligations under a credit contract [Part 1-2, Division 3, items 1, 3, 4 and 5 in the table in subsection 6(1)]; and

•

the second category is defined as persons who provide credit services, and primarily, but not exclusively, covers [Part 1-2, Division 3, item 2 in the table in subsection 6(1)]:

-

finance brokers and other intermediaries where they have a role in relation to securing credit for a consumer; and

-

persons who assist consumers in relation to a particular credit contract with a particular credit provider.

1.15 Whether or not a person engages in a credit activity will therefore depend both on the activity they are performing and whether it is in relation to a credit contract, a consumer lease, a mortgage or a guarantee that is regulated by the Credit Bill. This means that a person will not engage in credit activities as defined in the Credit Bill:

•

where they engage in credit activities but not in respect of a credit contract, consumer lease, mortgage or guarantee as defined in the Credit Bill - for example, they lend money but it is for business purposes and therefore not regulated; or

•

where they engage in an activity in respect of credit as defined in the Bill but it is not a specified credit activity - for example, where a person provides credit assistance but not in relation to a particular credit contract with a particular credit provider.

1.16 In order to determine whether a person is engaging in credit activities it is necessary to consider the definitions of:

•

a credit contract;

•

a consumer lease;

•

a mortgage; and

•

a guarantee.

1.17 A 'credit contract' is defined in section 5 of the Credit Bill as having the same meaning as in section 4 of the Code, and this in turn defines it 'as a contract under which credit is or may be provided to which the Code applies'. In broad terms, the Code will apply to the provision of credit where:

•

the debtor is a natural person or a strata corporation; and

•

the credit is provided wholly or predominantly for:

-

personal, domestic or household purposes; or

-

to purchase, renovate, improve or refinance a residential investment property; and

•

a charge is made for the credit.

1.18 A 'consumer lease' is defined in section 5 of the Credit Bill as a consumer lease to which Part 11 of the Code applies. Section 170 of the Code provides that consumer leases are leases with the following characteristics:

•

the goods are hired wholly or predominantly for personal, domestic or household purposes; and

•

a charge is or may be made for the hiring of the goods and the charge, together with any other amount payable under the consumer lease, exceeds the cash price of the goods.

[Credit Bill, Schedule 1, section 170]

1.19 A 'mortgage' is defined in section 7 of the Code as a mortgage to which the Code applies, that is, a mortgage:

•

that secures obligations under a credit contract or a related guarantee; and

•

where the mortgagor is a natural person or a strata corporation.

[Credit Bill, Schedule 1, section 7]

1.20 A 'guarantee' is defined in section 8 of the Code as a guarantee to which the Code applies, that is a guarantee:

•

that guarantees obligations of a debtor under a credit contract; and

•

where the guarantee is given by a natural person or a strata corporation.

[Credit Bill, Schedule 1, section 8]

1.21 The definitions in the first category mean that a person will engage in credit activities where:

•

they are credit providers who provide credit, or lessors who provide consumer leases (as defined in the Code). They will continue to engage in credit activities as long as they are a party to a contract. The need to be licensed will therefore remain while they are still collecting money due under credit contracts or leases, even where they no longer enter into new credit contracts or leases [Part 1-2, Division 3, paragraphs 1(a) and 3(a) in the table in subsection 6(1)];

•

they carry on a business of providing credit or leases, and will therefore need to hold a licence where they engage in pre-contractual conduct before entering into credit contracts or leases [Part 1-2, Division 3, paragraphs 1(b) and 3(b) in the table in subsection 6(1)];

•

they perform obligations or exercise rights in relation to a credit contract or lease, or a proposed credit contract or lease [Part 1-2, Division 3, paragraphs 1(c) and 3(c) in the table in subsection 6(1)]. This applies to:

-

persons performing statutory obligations arising before a credit contract or lease has been entered into; and

-

mortgage managers where they are managing the credit contract on behalf of the credit provider;

•

they are either [Part 1-2, Division 3, item 4 in the table in subsection 6(1)]:

-

a mortgagee under a mortgage that secures the obligations of a borrower under a credit contract; or

-

they perform obligations or exercise rights in relation to a mortgage;

•

they are either [Part 1-2, Division 3, item 5 in the table in subsection 6(1)]:

-

the beneficiary of a guarantee that guarantees the obligations of a borrower under a credit contract; or

-

they perform obligations or exercise rights in relation to a guarantee; and

•

a person who receives, by assignment, the rights of a credit provider or a lessor, will be engaging in credit activities where they exercise those rights [Part 1-2, Division 3, section 10]. This requirement arises irrespective of whether they receive the rights directly from the credit provider or lessor, or from a person who was themselves as assignee.

1.22 The definitions in respect of mortgages and guarantees are intended to regulate the following situations:

•

where the same person is the credit provider, the mortgagee and the beneficiary of the guarantee; or

•

where the credit provider is a different party from the mortgagee and a beneficiary of a guarantee. This is intended to cover two situations:

-

it addresses the risk of the licensing requirements being able to be avoided by the transaction being structured so that the credit provider or lessor is a different person from the mortgagee or the beneficiary of the guarantee; and

-

it will mean that a person needs to hold a licence where they are an assignee only of rights under a mortgage or a guarantee, but not under the credit contract. They will only need to meet the obligations in a more limited way in relation to this activity only, should this be the case.

1.23 A person will be in the second category of persons who engage in credit activities, and will 'provide credit services' where they either:

•

provide credit assistance; or

•

act as an intermediary.

[Part 1-2, Division 3, section 7]

1.24 A person provides 'credit assistance' to a consumer where they:

•

suggest that the consumer:

-

apply for a provision of credit (in respect of either a particular credit contract with a particular credit provider or a particular lease with a particular lessor);

-

apply for an increase to the credit limit of a particular credit contract with a particular credit provider; or

-

remain in their current credit contract or lease; or

•

assist the consumer to:

-

apply for a provision of credit (in respect of either a particular credit contract with a particular credit provider or a particular lease with a particular lessor); or

-

apply for an increase to the credit limit of a particular credit contract.

[Part 1-2, Division 3, section 8]

1.25 A person will provide credit assistance regardless of whether they deal directly with the consumer or with the consumer's agent. This will cover the situation where, for example, the person is assisting an elderly parent to apply for a credit contract, but is dealing with their children.

1.26 The definition applies to situations such as:

•

finance brokers where they recommend a particular credit contract or lease; and

•

a person who suggests a consumer apply for a particular credit contract or lease, but does not necessarily proceed to arrange the credit contract for the consumer.

1.27 A person will 'act as an intermediary' where they act as an intermediary between a credit provider and a consumer for the purposes of securing a provision of credit, or between a lessor and a consumer for the purposes of securing a lease. [Part 1-2, Division 3, section 9]

1.28 The definition is intended to regulate every person who may be an intermediary between the consumer and the credit provider. Innovations in credit product design and delivery now mean that a consumer may pass through a number of hands between the first person they deal with and the lender, and may be uncertain as to the roles or functions of all these different parties. It is intended that the licensing requirements will apply to all these persons.

1.29 A person will act as an intermediary notwithstanding that the type of credit or the identity of the credit provider is not yet known. It differs from the definition of 'providing credit assistance', as it does not require a person to engage in an activity in relation to a particular credit contract with a particular credit provider, or a particular lease with a particular lessor. It may be, for example, that it is only the intermediary who finally deals with the credit provider who determines or is aware of the particular credit contract to be arranged.

1.30 A person can act as an intermediary either directly or indirectly. The intention is to require a person to hold a licence even where they may have no direct or face-to-face contact with the consumer, but, nevertheless act as an intermediary by preparing or passing on information, and their role is wholly or partially to secure a provision of credit or a lease.

1.31 The definition is intended to apply to situations such as:

•

finance brokers where, after recommending a particular credit contract, they proceed to arrange the credit with the credit provider;

•

aggregators, in acting as a conduit between an individual broker and a credit provider;

•

mortgage managers, where they are involved in arranging the credit (in addition to managing the credit once it has been provided); and

•

persons who refer the consumer to another person, where this is done for the purpose of securing credit (including where the referrer does not need to be contemplating a particular credit contract with a particular credit provider or a particular lease with a particular lessor).

Division 4 - Other definitions

1.32 In most instances a person will only engage in a credit activity if they do so in the course of, as part of, or incidentally to, a business 'carried on in this jurisdiction' by the person.

1.33 A business is taken to be 'carried on in this jurisdiction' where a person engages in conduct that is intended to induce people in Australia to use the goods or services the person provides, or is likely to have that effect. [Part 1-2, Division 4, section 12]

1.34 The Credit Bill will apply where the person engaging in credit activities is:

•

a natural person;

•

a body corporate;

•

a partnership; or

•

a trustee.

[Part 1-2, Division 4, sections 14 and 15]

1.35 There is also provision made to allow for additional activities requiring a person to hold a licence to be prescribed by the regulations. No regulations have been made yet, and this is to allow for future contingencies. [Part 1-2, Division 3, item 6 in the Table in subsection 6(1)]

Part 1-3 - Application of this Act

Division 1 - Introduction

1.36 Division 2 is about the constitutional basis and geographical application of the Credit Bill. It also deals with the application of this Credit Bill to the Crown. [Part 1-3, Division 1, section 17]

Division 2 - Constitutional basis and application of the Credit Bill and the Transitional Bill

Constitutional basis for this Bill and the Transitional Bill

Application in a referring State

1.37 The Credit Bill provides the constitutional basis for its effective operation; that is, the States will be referring constitutional power of the States to the Parliament of the Commonwealth.

1.38 The application of the Credit Bill and Transitional Bill (Bills) in the referring States is based on:

•

the legislative powers of the Commonwealth Parliament under section 51 of the Constitution, apart from paragraph 51(xxxvii); and

•

the legislative powers of the Commonwealth Parliament which it has as a result of matters referred to it by the Parliament of the referring States under paragraph 51(xxxvii) of the Constitution.

[Part 1-3, Division 2, section 18]

1.39 The State referrals cover matters to the extent to which they are not otherwise included in the legislative powers of the Commonwealth Parliament.

Application in a Territory

1.40 In the Northern Territory, the Australian Capital Territory and the Jervis Bay Territory, the application of the Bills is based on the legislative powers of the Commonwealth Parliament under section 122 of the Constitution to make laws for the government of those Territories, and under section 51 of the Constitution. The Credit Bill applies in those Territories as a law of the Commonwealth, therefore overriding subsection 22(3) of the Acts Interpretation Act 1901. [Part 1-3, Division 2, subsection 18(2)]

Application outside Australia

1.41 Outside Australia, the application of the Bills is based on:

•

the legislative power the Commonwealth Parliament has under paragraph 51(xxix) of the Constitution; and

•

the other legislative powers that the Commonwealth Parliament has under section 51 of the Constitution; and

•

the legislative powers that the Commonwealth Parliament has under section 122 of the Constitution to make laws for the government of those Territories.

[Part 1-3, Division 2, subsection 18(3)]

Application in a non-referring State

1.42 Application of the Bills in a State that is not a referring State is based on:

•

the legislative powers that the Commonwealth Parliament has under section 51 (other than paragraph 51(xxxvii)) and section 122 of the Constitution; and

•

the legislative powers that the Commonwealth Parliament has in relation to matters to which this Act relates because those matters are referred to it by the Parliaments of the referring States under paragraph 51(xxxvii) of the Constitution.

Meaning of Referring State

Reference of matters by State Parliament to Commonwealth Parliament

1.43 A State which has referred powers on this basis is a 'referring State':

•

if and to the extent that the matters are not otherwise included in the legislative powers of the Parliament of the Commonwealth (otherwise than by a reference under paragraph 51(xxxvii) of the Constitution); and

•

if and to the extent to which the matters are included in the legislative powers of the Parliament of the State.

[Part 1-3, Division 2, subsection 19(1)]

1.44 A State is a referring State even if a law of the State provides that the reference to the Commonwealth Parliament is to terminate in particular circumstances. [Part 1-3, Division 2, subsection 19(2)]

1.45 The reference of powers is in two parts, the first enabling the initial enactment of the Bills, and the second enabling subsequent amendment of the Bills by the Commonwealth Parliament. These references of power are explained in more detail as follows.

Reference covering initial Bills

1.46 The first part of the reference of powers relate to the extent of the making of laws with respect to those matters by including the referred provisions in the initial Bills. [Part 1-3, Division 2, subsection 19(3)]

Reference covering amendments of the Bills

1.47 The second part of the reference of powers covers the referred credit matter to the extent of the making of laws with respect to those matters by making express amendments of the Credit Bills. [Part 1-3, Division 2, subsection 19(4)]

Effect of termination of reference

1.48 A State will cease to be a referring State if its initial reference terminates. [Part 1-3, Division 2, subsection 19(5)]

1.49 Moreover, a State ceases to be a referring State if:

•

the State's amendment reference terminates; and

•

the exception to the amendment reference termination [Part 1-3, Division 2, subsection 19(7)] does not apply to the termination [Part 1-3, Division 2, subsection 19(6)].

1.50 A State whose amendment reference has terminated will not cease to be a referring State if the termination is to take effect on a day to be fixed by proclamation; that day is no earlier than six months after the proclamation date; and the State' amendment reference, and the amendment reference of every other State, terminates on that day [Part 1-3, Division 2, subsection 19(7)]. The effect of this provision is that a State can remain part of the national scheme for the regulation of credit if it terminates its amendment reference, but only if it gives at least six months notice of the termination and if every other referring State terminates its amendment reference on the same day.

1.51 There are various definitions relevant to explaining the terms used in the operation of Division 2. For example; there is a definition of the term 'amendment reference' of a State which means the reference by the Parliament of the State to the Parliament of the Commonwealth of the referred credit matter. [Part 1-3, Division 2, subsection 19(8)]

Meaning of referred credit matter

Referred credit matter

1.52 'Referred credit matter' is defined in the Credit Bill as follows:

•

credit, being credit the provision of which would be covered by the expression 'provision of credit to which this Code applies' in the initial National Credit Code; and,

•

consumer leases, being consumer leases each of which would be covered by the expression 'consumer lease to which Part 11 applies' in the National Credit Code.

[Part 1-3, Division 2, subsection 20(1)]

1.53 A referred credit matter does not include the making of laws with respect to the following:

•

the creation, holding, transfer, assignment, disposal or forfeiture of a State statutory right;

•

limitations, restrictions or prohibitions concerning the kinds of interests that may be created or held in, or the kinds of persons or bodies that may create or hold interests in, a State statutory right;

•

any matters involving the forfeiture, or disposal, of property or in connection with the enforcement of the general law or the transfer of property from a person to another person; or

•

an excluded State statutory right.

[Part 1-3, Division 2, subsection 20(2)]

1.54 Despite the definitions in the new Credit Code, certain terms are given different definitions for the purpose of these provisions. These terms include: credit, credit activity, licence, personal property lease and property. [Part 1-3, Division 2, subsection 20(3)]

General application of the Bills

Application in this jurisdiction

1.55 Each provision of the Bills applies in this jurisdiction. [Part 1-3, Division 2, subsection 21(1)]

Geographical coverage of 'this jurisdiction'

1.56 Subject to a referral of constitutional power by all of the States, the Bills extend to every jurisdiction covering each geographical area that consists of each 'referring State', the Australian Capital Territory, the Jervis Bay Territory and the Northern Territory. [Part 1-3, Division 2, subsection 21(2)]

1.57 Therefore, jurisdiction throughout the Bills consists of either the whole of Australia (if all of the States are referring States); or Australia (other than any State that is not a referring State) if one or more States are not referring States. [Part 1-3, Division 2, subsection 21(3)]

Application outside Australia

1.58 Subject to subsection 21(6), each provision of the Bills applies, according to their tenor, in relation to acts and omissions outside this jurisdiction. [Part 1-3, Division 2, subsection 21(4)]

Application in non-referring States

1.59 The Credit Bill does not apply to an act or omission in a State that is not a referring State to the extent to which that application would be beyond the legislative powers of the Parliament (including powers it has under paragraphs 51(xxxvii) and (xxxix) of the Constitution). [Part 1-3, Division 2, subsection 21(5)]

Residence, place of formation etc.

1.60 Each provision of the Bills applies to natural persons and all bodies corporate and unincorporated. [Part 1-3, Division 2, subsection 21(5)]

Bills bind Crown

1.61 It is expressly provided that the Code binds the Crown in each of its capacities [Part 1-3, Division 2, subsection 22(3)]. This maintains consistency with the way in which the Uniform Consumer Credit Codes in force as State or Territory law currently apply to the Crown.

1.62 The Crown is expressly stated not to be otherwise bound by the Credit Bill or the Transitional Bill [Part 1-3, Division 2, subsection 22(1)].

1.63 However, there is a specific power to make regulations, so that the Credit Bill or the Transitional Bill, in full or specified provisions, may bind the Crown either in right of the Commonwealth or in all of its other capacities [Part 1-3, Division 2, subsection 22(2)]. It is considered preferable to allow for this by regulation, as this gives greater flexibility in adapting the law so that the Crown is bound in appropriate circumstances.

1.64 It is specifically provided that nothing in the Credit Bill or the Transitional Bill renders the Crown liable to be prosecuted for an offence or to a pecuniary penalty [Part 1-3, Division 2, subsection 22(4)].

Division 3 - Interaction between Commonwealth credit legislation and State and Territory laws

Concurrent operation intended

1.65 A provision provides that the Bills are not intended to exclude or limit the concurrent operation of any law of a State or Territory [Part 1-3, Division 3, section 23]. This provision is in terms similar to those of several other Commonwealth legislative provisions, including section 75 of the Trade Practices Act 1974, section 250B of the Water Act 2007 and section 5E of the Corporations Act 2001 (Corporations Act).

1.66 Where a person commits an act or omission which is an offence against either of the Bills and an offence against the law of a State or Territory; and that person is convicted of either of those offences, the person is not liable to be convicted of the other of those offences. [Part 1-3, Division 3, section 23]

1.67 The concurrent operation provision provides that in all circumstances where a Commonwealth law and a State law can operate concurrently, they are intended to do so. This means, for example, that if a State government sets additional conditions or requirements in relation to the registration of a mortgage or charge over real property interests in that State, then those conditions or requirements would not be inconsistent with the Credit Bill.

When Commonwealth credit legislation does not apply

1.68 A provision of a State or Territory law may declare a matter to be an excluded matter, in relation to either the whole of the Commonwealth credit legislation or a specified provision of the legislation. As a result, the Bills (or the provision specified) will not apply in that State or Territory in relation to the declared matter [Part 1-3, Division 3, subsections 24(1) and (2)]. A regulation may provide that the provision does not apply to the declaration [Part 1-3, Division 3, subsection 24(3)]. This provision is in terms similar to section 5F of the Corporations Act.

Avoiding direct inconsistency between Commonwealth and State and Territory laws

1.69 There is a provision which limits or qualifies the operation of the Bills if a valid displacement provision is in effect. The key rule is that this provision of the Credit Bill does not prohibit the doing of an act, or impose a civil or criminal liability for doing an act, if a provision of a State or Territory law (displacement provision) specifically authorises or requires the doing of that act [Part 1-3, Division 3, section 25]. This provision is in terms similar to section 5G of the Corporations Act.

Regulations to deal with interaction between laws

1.70 A provision provides that regulations can be made modifying the operation of the Credit Bill and Transitional Bill so that it does not apply to a matter dealt with by a State or Territory law, or is not inconsistent with the operation of a State or Territory law specified in the regulations. The regulation-making power allows regulations to be made regarding the interaction between the Credit Bill and Transitional Bill, independently of the displacement provision mechanism discussed above. [Part 1-3, Division 3, section 26]