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 3 - Responsible lending conduct

Outline of chapter

3.1 Chapter 3 of this explanatory memorandum discusses the imposition of responsible lending conduct obligations on all holders of Australian credit licences. These obligations are contained in Chapter 3 of the National Consumer Credit Protection Bill 2009 (Credit Bill).

3.2 The obligations arise in respect of certain conduct in relation to contracts as defined in sections 4 and 5 of the National Credit Code (Code) and consumer leases to which Part 11 of the Code applies. Where the term 'credit contract' or 'contract' is used in this Chapter, it includes both credit contract and consumer lease (unless the contrary intention appears).

3.3 In addition to general conduct obligations for licensees to operate efficiently, fairly and honestly, licensees who provide credit or credit assistance will be required to meet specific conduct obligations in relation to lending and leasing responsibly.

3.4 The responsible lending conduct obligations set in place expected standards of conduct of licensees when they enter into a consumer credit contract, where they suggest a credit contract to a consumer or where they assist a consumer to apply for a credit contract.

3.5 The key obligation for licensees is to ensure they do not provide, suggest, or assist with a credit contract that is unsuitable for the consumer. This obligation requires licensees to reasonably inquire and verify a customer's financial circumstances to make an assessment that the credit contract will meet the consumer's requirements and that the consumer has the capacity to repay the contract.

3.6 Further, licensees must disclose key details about themselves that will assist the consumer to understand who they are dealing with, the dispute resolution services available to the consumer, an indication of any costs the consumer may incur, and other matters.

3.7 The Australian Securities and Investments Commission (ASIC) and consumers will be able to take action against a licensee for non-performance of the responsible lending conduct obligations.

Context of new law

3.8 The May 2008 final Productivity Commission's report on the Review of Australia's Consumer Policy Framework (the PC Report) noted an increased use of credit in Australia over the last 20 years. Increased use of credit has led to higher levels of household indebtedness which impacts on household financial capacity and ability to respond to changing circumstances such as interest rate increases, a slowdown in economic conditions or rising unemployment. Evidence suggests that these increases have come about mostly as a result of the growth in the size of home loans over the years.

3.9 In addition, the distribution channels for credit to consumers (such as the use of various intermediaries) and the development of products such as no and low documentation loans have often placed the borrower at arm's length from the lender and have limited the documentation and inquiries regarding a consumer's financial position that lenders have before them, when deciding whether or not to approve an application. The consumer is in a position where they are dependent on the intermediary's skill and expertise. The level of regulation of market participants providing such services varies significantly from State to State.

3.10 In recognition of the need for national regulation of brokers the Ministerial Council on Consumer Affairs (MCCA) released the draft Finance Brokers Bill (NSW) in November 2007.

3.11 The regulation impact statement developed in the preparation of the Finance Brokers Bill (NSW) documented in detail a number of undesirable market practices, including:

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brokers recommending products that earned them higher commissions but which are inappropriate, higher cost or unaffordable for their clients;

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brokers misrepresenting the applicants' financial details so that the loan is approved, and the broker receives commissions, when, if the lender was aware of the borrower's actual financial position, they would reject the application;

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brokers 'upselling' loans to higher amounts to increase commissions; and

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brokers and lenders engaging in 'equity stripping', that is, arranging or providing high-cost loans for borrowers in financial difficulty (particularly those facing foreclosure of the family home), in the expectation that the borrower will default with subsequent transfer of the consumer's equity in their home to the broker and the lender through fees, charges and default interest.

3.12 Before the draft Finance Brokers Bill (NSW) was finalised the States agreed to the transfer of responsibility for credit to the Commonwealth allowing for the introduction of a national approach to licensing that extends to all persons engaging in credit activities.

3.13 The Productivity Commission in its review of consumer protection noted that poor lending practices have contributed to a growing number of borrowers experiencing financial stress, and recommended consideration, in the context of a national credit regime, of what, if any, initiatives are required to promote 'responsible lending'.

3.14 The Productivity Commission commented that the purchase of financial services can entail significant monetary commitments, sometimes over long periods of time. Where imprudent lending decisions are made, the consequences for consumers can be particularly costly. Moreover, purchasing decisions will often involve complex product comparisons, with consumers frequently relying on intermediaries to make these comparisons on their behalf. However, assessing the quality of such advice, even after the event, can be problematic. Accordingly, effective consumer protection measures are particularly important for these services.

3.15 Current regulation of credit for consumers, under the Uniform Consumer Credit Code (UCCC), primarily regulates credit providers (rather than credit assistants or intermediaries) in relation to matters such as the disclosure requirements to be met in order to provide consumers with credit contracts, or how to vary those contracts in the event of hardship or default. It does not comprehensively address the appropriateness of the initial provision of the credit to the consumer. That is to say, it does not regulate whether or not it was responsible to lend to the consumer in the first place. However, most lending institutions apply lending criteria to determine who they will lend to, which in large part consider the borrower's circumstances and the risk the loan poses to the lending institution.

3.16 Responsible lending conduct regulation encourages prudent lending and leasing to continue and imposes sanctions in relation to irresponsible lending and leasing.

3.17 The Code contains a provision that imposes 'up front' obligations on any party to a credit transaction. These obligations set out that 'a person must not a make a false or misleading representation in relation to a matter that is material to entry into a credit contract or a related transaction or in attempting to induce another person to enter into a credit contract or related transaction'. This places accountability on all parties to a credit transaction, borrower, credit assistant and lender alike to conduct themselves honestly and transparently.

3.18 Several Australian lending institutions have established responsible lending charters and processes. The United Kingdom introduced responsible lending laws in 2006.

Summary of new law

3.19 Chapter 3 of the Credit Bill includes the requirements and obligations in relation to lending and leasing responsibly to consumers.

3.20 These obligations are placed on licensees who:

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enter into credit contracts or consumer leases;

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suggest a consumer enter into a particular credit contract or consumer lease with a particular credit provider or lessor; or

•

assist a consumer to apply for a particular credit contract or consumer lease with a particular credit provider or lessor.

3.21 Persons who lend or lease solely proprietary contracts are not caught by the obligations applying to the provision of credit assistance. In contrast, a credit provider or lessor who deals in contracts from other providers, in addition to their proprietary contracts, is required to meet the credit assistance requirements.

3.22 The obligations also apply when a relevant licensee increases an existing credit limit, suggests a consumer increase the limit of a credit contract or assists a consumer to apply for an increase in a credit limit.

3.23 When a licensee suggests to a consumer that they remain in an existing credit contract or consumer lease the obligations also apply. This results in an equivalent regulatory treatment of a suggestion to refinance to an alternative credit contract or remain in an existing credit contract.

3.24 A particular credit contract with a particular credit provider or lessor is key to when the responsible lending conduct obligations are triggered. The obligations with regard to the suggestion of credit are not triggered when, for example, a home loan generally, or a credit card generally are suggested to a consumer.

3.25 The primary obligations in relation to the provision of credit (for example, lending); or the provision of credit assistance (for example, suggesting a particular credit contract or assisting with a particular credit contract) are: to make an assessment that the loan is not unsuitable for the consumer; and to assess that the consumer has the capacity to meet the financial obligations under the contract without substantial hardship.

3.26 The consumer will have the right to request a copy of an assessment. However, there is no obligation to provide the consumer with a copy of the assessment if the credit assistance or contract is not provided to the consumer.

3.27 The assessment obligations are supplemented by disclosure obligations. A licensee who triggers the responsible lending obligations must disclose key details about themselves to:

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assist the consumer to understand who they are dealing with;

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advise the consumer of their access to dispute resolution services; and

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provide an indication of any costs the consumer may incur.

3.28 Licensees will also be obliged to ensure actual fees to be incurred are known to the consumer before the credit or assistance is provided. Many fee and commission disclosure obligations already exist for credit providers in the Code (see section 17 of the Code). The proposed legislation requires credit assistants to make fee and commission disclosures.

3.29 Breaches of the responsible lending obligations can result in a range of sanctions including:

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criminal penalties of up to two years imprisonment and/or 200 penalty units; and

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civil penalties up to 2,000 penalty units.

3.30 Details of the sanctions regime are in Chapter 4 (Remedies) of the Credit Bill. Some civil penalties will attract the infringement notice regime. The infringement notice regime is set out in section 331 of Chapter 7 (Miscellaneous) of the Credit Bill.

Detailed explanation of new law

Part 3-1 - Licensees that provide credit assistance in relation to credit contracts

3.31 This Part of the Credit Bill does not apply to licensees who deal only with their proprietary credit contracts or proprietary consumer leases. The responsible lending conduct obligations applying to these licensees are different in some significant respects, and are set out in Part 3-2.

3.32 Credit assistance is defined in section 8 of the Dictionary in Chapter 1. In summary, a person provides credit assistance to a consumer where they suggest that the consumer:

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apply for a provision of credit in respect of a particular credit contract or lease;

•

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

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remain in a particular credit contract or lease. [Part 1-2, Division 3, paragraphs 8(a), (b), (c), (f) and (g)]

3.33 A person also provides credit assistance where they assist the consumer:

•

in respect of a particular credit contract or lease, to apply for a provision of credit in respect of a particular credit contract or lease; or

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to apply for an increase to the credit limit of a particular credit contract or lease. [Part 1-2, Division 3, paragraphs 8(d), (e) and (h)]

3.34 A person provides credit assistance whether they deal directly with the consumer or with the consumer's agent. This is intended to apply in situations where, for example, the person is assisting an elderly parent to apply for a credit contract, but is dealing with one or more of their children.

Division 2 - Credit guide of credit assistance providers

3.35 When a licensee, who is a credit assistance provider (credit assistant), considers it likely they will be providing credit assistance, they will be required to provide the consumer with a credit guide. The credit guide must be provided to the consumer as soon as practicable after it becomes apparent to the credit assistant that they are likely to provide credit assistance to the consumer. Failure to comply with this requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units are in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 2, subsection 113(1)]

3.36 The purpose of the credit guide is to provide the consumer with key information early in the credit transaction so that they are informed and aware of necessary matters before deciding to use the services of the credit assistant.

3.37 The credit guide gives the consumer some preliminary information about the credit assistant and disclosure of key conduct obligations of the credit assistant and key rights of the consumer (such as the requirement not to suggest or assist with unsuitable credit contracts, the consumer's right to request a copy of the preliminary assessment and access to information about procedures for resolving disputes).

3.38 The guide must also include information about the possible nature and size of fees and charges that the consumer may incur if they use the credit assistant's services. This is likely to include the basis on which the consumer would pay the credit assistant, for example, the fees information might set out the hourly rate that the credit assistant charges or the percentage of the amount of credit secured (if that is the basis on which the fee is charged to the consumer). [Part 3-1, Division 2, paragraph 113(2)(e)]

3.39 The guide also includes information about the six credit providers with whom the credit assistant conducts the most business. [Part 3-1, Division 2, paragraph 113(2)(f)]

3.40 The guide must also set out an overview of the commission arrangements between the credit assistant and the credit providers with whom they deal for providing credit assistance.

•

For example, this disclosure may set out that the credit assistant receives upfront commission of a certain rate or a range of rates and trailing commission of a certain rate or range of rates upon the successful securing of the credit contract.

•

The reasonable estimate of the amounts may, for example, be set out in percentage or dollars (for example, per $1,000 of credit secured).

•

The information about the method for working out these amounts may, for example, state that it is a flat rate or relates to a volume of sales.

[Part 3-1, Division 2, paragraph 113(2)(g)]

3.41 A regulation-making power is included in order to allow for the content of the credit guide to be revised as necessary [Part 3-1, Division 2, paragraph 113(2)(b)]. A further regulation-making power is included to prescribe any information that need not be included in the credit guide. The power also allows for further specificity to be prescribed in relation to providing information regarding commissions as required in subsection 113(2)(g) [Part 3-1, Division 2, subsection 113(3)].

3.42 It is envisaged that the credit assistant could meet the requirements of a credit guide through the provision of a standardised document as the information is not generally tailored to a specific contract.

3.43 The credit guide may be provided in the most suitable manner for the circumstance, for example either in person, in writing, (for example, by post or an email) or as a notice appearing on the Internet website which is accepted by the consumer.

3.44 A regulation-making power is included in order to prescribe the manner for giving the credit guide if prescription becomes necessary. For example, regulations could be made that set out how a credit guide may be given where the conduct takes place over the telephone. [Part 3-1, Division 2, subsection 113(4)]

3.45 A breach of section 113 is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions. [Part 3-1, Division, subsections 113(5) and (6)]

Division 3 - Quote for providing credit assistance etc. in relation to credit contracts

3.46 Before providing credit assistance to a consumer, a licensee must provide a quote for the credit assistance that is to be provided and any other services the quote covers. The quote advises the consumer of the maximum cost to them in relation to using the services of the credit assistant. It includes all costs that the consumer will be likely to incur either out of their own pocket or disbursed from the credit for the credit assistant's services. It is possible that the final cost to the consumer may be less than the quoted amount.

3.47 The quote must advise the consumer of whether or not the costs will be incurred by the consumer irrespective of whether the credit is successfully secured. It is envisaged that under the business arrangements of some credit assistants, the consumer could possibly still be required to pay the credit assistant for their services and pay for services such as a property valuation (via the credit assistant) despite the credit application not being successful.

3.48 The quote must be signed (or otherwise accepted) and dated by the consumer and then a copy of the accepted quote must be provided to the consumer before the credit assistance is provided. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units are in line with the civil penalties regime in the Corporations Act 2001 (Corporations Act). [Part 3-1, Division 3, subsection 114(1)]

3.49 The quote, in writing, must set out:

•

information about the credit assistance and other services that the quote covers, for example, this might include the scope of the credit assistance to be provided such as the consumer's requirements or the type of loan the consumer is looking for and any other services that will incur a cost to be paid to the credit assistant (either for their services or for payment to another service provider, such as a valuer);

•

the maximum amount payable in relation to the credit assistance set out in paragraph 114(2)(c), detailing:

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in dollars, the maximum fee payable by the consumer for using the credit assistance;

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in dollars, the maximum of any other charges the licensee will incur for providing the credit assistance that they will pass on to the consumer (for example postage or photocopying); and

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in dollars, the maximum of any other fees and charges payable to the credit assistant that the consumer may incur as a result of the licensee making payments to another person on their behalf (such as valuation fees or legal fees).

•

whether the amount is payable if the credit contract is not secured or the credit limit is not increased. [Part 3-1, Division 3, subsection 114(2)]

3.50 A regulation-making power is included in order to allow for any other requirements to be prescribed in relation to the quote. [Part 3-1, Division 3, paragraph 114(2)(f)]

3.51 The quote may be given in the most appropriate manner for the circumstances, for example, either in person, in writing (by post or electronically, for example, as an attachment to an email).

3.52 A regulation-making power is included in order to prescribe the manner for giving the quote if prescription becomes necessary. [Part 3-1, Division 3, subsection 114(3)]

3.53 The credit assistant must neither request nor demand payment of the quoted amount prior to providing the credit assistance nor demand payment of an amount that exceeds the maximum amount set out in the quote. Failure to comply with these requirements attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 3, subsections 114(4) and (5)]

3.54 The credit assistant must not claim an estate or interest in any land by lodging or threatening to lodge a caveat in order to induce the consumer to pay any amounts the consumer may owe the credit assistant. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 3, subsection 114(6)]

Division 4 - Obligations of credit assistance providers before providing credit assistance for credit contracts

3.55 Before providing credit assistance, the credit assistant must make a preliminary assessment as to whether the proposed contract will be unsuitable for the consumer or the increased credit limit will be unsuitable for the consumer.

3.56 The preliminary assessment must be made no more than 90 days before the suggestion or assistance is given and must be an assessment that relates to the period in which the consumer proposes to enter the contract or increase the credit limit. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units are in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsection 115(1)]

3.57 For different types of credit it may be appropriate to provide for a longer or shorter length of time in which the preliminary assessment is to be made before the assistance day. This period may be prescribed by the regulations.

3.58 The credit assistant must also have made the inquiries and verification as set out in detail in section 117. Failure to make an assessment as required incurs a civil penalty.

Example 3.1

A consumer visits a finance broker in January saying she would like to buy a house later that year, probably around June, as she is going to get a payrise and could the broker suggest a loan that meets the consumer's requirements (not discussed in this example). The broker makes the relevant inquiries and a month later the consumer provides the broker with the relevant documents in order to verify the consumer's financial situation. With these matters complete, the broker suggests a loan to the consumer on 15 February. This is the assistance day.

The preliminary assessment was completed earlier in February, prior to the assistance day, and is therefore compliant with the requirement to be no more than 90 days old from the assistance day.

The assessment establishes that the proposed loan will be suitable for the consumer in June, the period in which the consumer is looking to enter the contract, and therefore complies with the requirement to cover the period in which the contract is proposed to be entered into.

If the consumer found a house earlier than June and seeks to apply for the loan earlier, then the preliminary assessment would not necessarily establish that the contract was not unsuitable, as it was based on the contract being entered into in June, to take into account a contemplated financial circumstance (the payrise) that would only apply at that time.

Suggestions to remain in a credit contract

3.59 A preliminary assessment must also be made by a credit assistant no more than 90 days before providing credit assistance which suggests that the consumer remain in a particular credit contract with a particular credit provider and which assesses the time at which the suggestion to remain is made (there is no period in which the consumer could propose to enter the contract as there is not one being suggested). Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsection 115(2)]

3.60 For different types of credit it may be appropriate to provide for a longer or shorter length of time in which the preliminary assessment is to be made before the assistance day. This period may be prescribed by the regulations.

3.61 The credit assistant must also have made the inquiries and verification as set out in detail in section 117. Failure to make an assessment as required incurs a civil penalty.

Preliminary assessment of unsuitability of the credit contract

3.62 In order to have made a compliant preliminary assessment for the purposes of subsection 115(1), the credit assistant must specify the period that the assessment covers (which is to be the period that it is proposed that the contract be entered or the credit limit to be increased). [Part 3-1, Division 4, paragraph 116(1)(a)]

3.63 In order to have made a compliant preliminary assessment for the purposes of subsection 115(2), the credit assistant must specify the period that the assessment covers (which is to be a period which includes the assistance day). [Part 3-1, Division 4, paragraph 116(2)(a)]

3.64 A compliant preliminary assessment must also assess whether the credit contract will be unsuitable for the consumer if the contract is entered or the credit limit is increased in that specified period. [Part 3-1, Division 4, paragraphs 116(1)(b) and 116(2)(b)]

Reasonable inquiries etc. about the consumer

3.65 In order to appropriately meet the requirement to make an assessment about the unsuitability of a suggested contract for the consumer or of a contract application in relation to which they are providing assistance, the credit assistant must:

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make reasonable inquiries about the consumer's requirements and objectives for the credit contract;

•

make reasonable inquiries about the consumer's financial situation;

•

take reasonable steps to verify the consumer's financial situation; and

•

make any inquiries or take any verification steps as prescribed by the regulations.

Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsection 117(1)]

3.66 The purpose of the credit assistant's preliminary assessment of unsuitability is to ensure that credit assistants do not suggest to consumers (or assist consumers to apply for) credit contracts that they do not reasonably believe meet the consumer's requirements and objectives and reasonably believe that the consumer has the capacity to repay the contract without substantial hardship.

3.67 In contrast to an unsuitability assessment made by a credit provider for the purposes of entering a consumer into a credit contract, an unsuitability assessment made by a credit assistant is considered to be a 'preliminary' assessment based on the information available to a credit assistant. This does not diminish the credit assistant's responsibilities with regard to making reasonable inquiries and undertaking reasonable verification of the information they can access. However, it recognises that the credit assistant does not have access to some information that is available to a credit provider (such as credit bureau data and data arising from a banking relationship) and that a credit assistant is not making an assessment that takes into consideration the commercial risk of being the lender.

3.68 The minimum requirement for satisfying reasonable inquiries about the consumer's requirements and objectives will be to understand the purpose for which the credit is sought and determine if the type, length, rate, terms, special conditions, charges and other aspects of the proposed contract meet this purpose or put forward credit contracts that do match the consumer's purpose.

3.69 The purpose for undertaking reasonable inquiries about the consumer's financial situation is to ascertain a reasonable understanding of the consumer's ability to meet all the repayments, fees, charges and transaction costs of complying with the proposed credit contract. The general position is that consumers should be able to meet the contract's obligations from income rather than equity in an asset. However, it is noted that there may be circumstances where this may not be a reasonable position.

Example 3.2

Where interest is prepaid and capitalised into the loan principal, consideration needs to be given to the consumer's ability to meet the credit contract payments and any associated transaction fee that will be incurred after the 'repayment free' period ends in determining whether the proposed credit contract is not unsuitable for the consumer. For example, if it is reasonably foreseeable the consumer will be required to refinance the loan after the interest-free period because they cannot meet the ongoing payments, it is unlikely the loan would be not unsuitable.

3.70 Reasonable inquiries about the consumer's financial situation could include: determining the amount and source of the consumer's income; determining the extent of fixed expenses (such as rent or contracted expenses such as insurance, other credit contracts and associated information); and other variable expenses of the consumer (and drivers of variable expenses such as number of dependents and number of vehicles to run, and any particular or unusual circumstances).

3.71 The significance of these inquiries will be dependent on circumstances. For example, the credit assistant's knowledge of expenses such as the monthly mobile phone expense may be a proportionately significant expense for a low income earner, therefore reasonable inquiries would seek to ensure, to the extent possible, that such matters have been included in the consumer's expenses. In contrast, the mobile phone expense may not be significant to a high net worth individual and may require little inquiry.

3.72 The possible range of factors that may need to be established in relation to a consumer's capacity to repay credit could include:

•

the consumer's current income and expenditure;

•

the maximum amount the consumer is likely to have to pay under the credit contract for the credit;

•

the extent to which any existing credit contracts are to be repaid, in full or in part, from the credit advanced;

•

the consumer's credit history, including any existing or previous defaults by the consumer in making payments under a credit contract;

•

the consumer's future prospects, including any significant change in the consumer's financial circumstances that is reasonably foreseeable (such as a change in the amount the consumer has to pay under the credit contract for the credit or under any other credit contract to which the consumer is party).

3.73 The level of inquiries necessary to meet the level of 'reasonable inquiries' is likely to be greater where the consumer is refinancing, particularly where they are having difficulties meeting the repayments, or are even in arrears, on their existing credit contract. In this situation it will be possible to determine that the consumer cannot meet the repayments of the amount being charged under that contract, and a contract will prima facie be unsuitable where the repayments are at the same or a similar level. Where the current contract is no longer not unsuitable and no alternative contract is considered to be not unsuitable, there is a defence provided that allows the credit assistant to suggest the consumer remain in the existing contract without contravention of the responsible lending obligations (see explanation at subsection 124(7)).

3.74 There are usually transaction costs associated with refinancing, including any fees for using a credit assistant's services. All costs of changing credit contracts are expected to be taken into consideration when assessing the consumer's ability to meet the obligations of the new credit contract over its entire term.

3.75 A regulation-making power is included in order to prescribe particular inquiries or steps that must be made or taken, or do not need to be made or taken in order to have made reasonable inquiries or reasonable verification [Part 3-1, Division 4, subsection 117(2)]. ASIC also expects to provide guidance where appropriate to set out further detail about reasonable inquiries and verification in particular circumstances.

3.76 It is noted that there will be matters that will not be able to be known to the credit assistant. This may arise where the consumer may not disclose the matter, despite the credit assistant's inquiry, and where there was no reasonable way of verifying the information provided.

3.77 The Code contains a provision that imposes up front obligations on any party to a credit transaction. Subsection 154(1) of the Code says 'a person must not a make a false or misleading representation in relation to a matter that is material to entry into a credit contract or a related transaction or in attempting to induce another person to enter into a credit contract or related transaction'.

3.78 It is noted that this imposes an obligation on credit providers, debtors, guarantors as well as any third party (such as a credit assistant). A debtor who makes a false or misleading representation to a credit provider or guarantor to induce them to provide or guarantee the credit may be liable for any loss suffered.

3.79 Any compensation to a consumer or an order in relation to loss or damage can be mitigated (including limiting any compensation) if the consumer has made a false or misleading representation in order to obtain the credit. This is to take into account what is practically just in the circumstances.

When a credit contract must be assessed as unsuitable - entering contract or increasing the credit limit

3.80 There is an obligation on a credit assistant to assess that the credit contract will be unsuitable for the consumer if the contract will be unsuitable (as defined below). However, this does not limit the credit assistant from assessing that the contract will be unsuitable for other reasons. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsection 118(1)]

3.81 A credit contract must be assessed as unsuitable for the consumer if at the time of making the preliminary assessment it is likely that:

•

the consumer will be unable to comply with the financial obligations under the contract, or could only comply with substantial hardship;

•

the contract will not meet the consumer's requirements and objectives; or

•

prescribed circumstances that set out when the contract must be assessed as unsuitable are present,

if the contract were entered in the period proposed or the credit limit increased in the period proposed. [Part 3-1, Division 4, subsection 118(2)]

3.82 For it to be likely that the consumer will be able to comply with the financial obligations under the contract, the credit assistant must take a future view of the reasonable foreseeability of that compliance, given the financial obligations will arise into the future.

3.83 It is presumed that if a consumer will only be able to comply with their financial obligations under the contract by selling their principal place of residence, then the consumer could only comply with those obligations with substantial hardship, unless the contrary is established. [Part 3-1, Division 4, subsection 118(3)]

3.84 The effect of this is that where a consumer establishes that they could only meet the repayments by selling their home, then the onus is on the credit assistant to establish that the contract was not unsuitable.

3.85 The only information that must be taken into account by a credit assistant when making the preliminary unsuitability assessment has two elements.

3.86 The first is information that the credit assistant had reason to believe to be true. That would include, for example, information that has been provided by the consumer about their financial circumstances that has been verified by the credit assistant or is otherwise reasonably believed to be true.

3.87 The second is information that the credit assistant would have had reason to believe if the reasonable steps to verify required had in fact occurred, the intent of this part of the proposed provision is to ensure that credit assistants, in making their assessments regarding unsuitability, are required to take into consideration information that they should have become aware of if the reasonable steps to verify had been taken. Information that does not satisfy these requirements (that is, information that is not reasonably believed to be true) must not be taken into account. [Part 3-1, Division 4, subsection 118(4)]

When the credit contract must be assessed as unsuitable - remaining in credit contract

3.88 Similarly to the requirements in section 118, credit assistance that suggests the consumer remain in a credit contract that they are currently in, also needs to meet the requirement to not be an unsuitable suggestion for the consumer based on the outcome of a preliminary assessment. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsections 119(1) and (2)]

3.89 Further, it is presumed to be unsuitable to suggest a consumer remain in a credit contract that could only be complied with by selling the consumer's principal place of residence, unless the contrary is established. [Part 3-1, Division 4, subsection 119(3)]

3.90 Finally, the credit assistant must only use information that it has reason to believe was true or would have reason to believe was true if it had undertaken the inquiries or verification required. Information that does not satisfy these requirements must not be taken into account. [Part 3-1, Division 4, subsection 119(4)]

Providing the consumer with the assessment

3.91 For the purposes of considering proceeding with a particular credit contract or in the event of a dispute in relation to a suggested credit contract or assisted credit application, a consumer may request a copy of the preliminary assessment that sets out the determination that the proposed or existing credit contract is not unsuitable for them, and the grounds for that assessment.

3.92 A copy of the preliminary assessment may be requested by the consumer within seven years of the date of the credit assistance quote. It must be provided by the credit assistant within:

•

seven business days of the credit assistant receiving the request, if the request is made within two years of the quote; or

•

twenty-one business days thereafter.

There is no obligation on a credit assistant to provide a copy of the assessment if the credit assistance is not provided to the consumer. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsection 120(1)]

3.93 Regulations may prescribe the manner in which the licensee must give the consumer the copy of the assessment if considered necessary. [Part 3-1, Division 4, subsection 120(2)]

3.94 The consumer cannot be charged any costs for being provided a copy of the assessment. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 4, subsection 120(3)]

3.95 A breach of either subsection 120(1) or (3) is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to:

•

enhance the effectiveness of the regulatory regime dealing with ASIC's enforcement powers; and

•

encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions. [Part 3-1, Division 4, subsections 120(4) and (5)]

Division 5 - Fees, commission etc. relating to credit contracts

3.96 The credit assistant must provide, at the same time as providing credit assistance, a credit proposal disclosure in writing, to the consumer. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 5, subsection 121(1)]

3.97 The credit proposal disclosure must contain the following:

•

Commissions

•

A reasonable estimate of the total amount of any commission that the credit assistant, their employee, director or credit representative is likely to receive in relation to the particular credit contract being suggested or for which assistance to apply for the particular credit contract is being provided [Part 3-1, Division 5, paragraph 121(2)(b)].

•

Fees and charges

•

Any fees or charges the consumer is liable to pay to the credit assistant, in relation to applying for the credit contract being suggested by the credit assistant (this figure was foreshadowed in the quote) [Part 3-1, Division 5, paragraph 121(2)(a)].

•

A reasonable estimate of any fees or charges the consumer is liable to pay to the credit provider, in relation to applying for the credit contract being suggested by the credit assistant [Part 3-1, Division 5, paragraph 121(2)(c)].

•

A reasonable estimate of any fees or charges the consumer is liable to pay to any another person in relation to applying for the credit contract (this figure was foreshadowed in the quote) [Part 3-1, Division 5, paragraph 121(2)(d)].

-

Where any of these fees or charges are being disbursed from the credit being applied for, the credit assistant is to provide an estimate of the net amount of credit that will be available to the consumer after those payments are made [Part 3-1, Division 5, paragraph 121(2)(e)].

Example 3.3

Jesse Consumer is applying for a loan of $150,000 for a housing mortgage with the assistance of a credit assistant. The credit assistant previously quoted that his fees to suggest and apply for a loan that met the consumer's requirements (not discussed here) would be $225 plus an estimated $500 for a property valuation and $800 for legal fees.

The loan application fee to be charged by the credit provider for the suggested loan is $100.

The credit assistant receives 2 per cent commission for every $100,000 of credit secured from the suggested credit provider.

The credit proposal disclosure document set out the required information as follows:

3.98 A regulation-making power is included to allow for further specificity to be prescribed in relation to providing information regarding commissions as required in paragraph 121(2)(b). [Part 3-1, Division 5, subsection 121(3)]

3.99 The credit proposal disclosure document may be given in the most suitable manner for the circumstance, for example either in person, in writing, (for example, by post or an attachment to an email).

3.100 A regulation-making power is included in order to prescribe the manner for giving the quote if prescription becomes necessary. [Part 3-1, Division 5, subsection 121(4)]

3.101 A credit assistant must not profit from payments made to another person (third party) by the credit assistant on behalf of the consumer made in the course of providing credit assistance. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 5, subsection 122(1)]

Division 6 - Prohibition on suggesting, or assisting with, unsuitable credit contracts

3.102 There is a prohibition on credit assistants from suggesting to consumers or assisting consumers to apply for the provision of credit under a particular credit contract with a particular credit provider, if the contract will be unsuitable for the consumer. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 6, subsection 123(1)]

3.103 Similarly, there is a prohibition on credit assistants from suggesting that the consumer remain in a particular credit contract with a particular credit provider if the contract is unsuitable for the consumer at that time. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-1, Division 6, subsection 124(1)]

3.104 A credit contract is unsuitable for a consumer if at the time the credit assistant suggests it or assists the consumer to apply for it, it is likely that the consumer will be unable to comply with the consumer's financial obligations under the contract or could only comply with substantial hardship at that time, or the contract does not meet the consumer's requirements and objectives at the time that the contract is proposed to be entered or the credit limit is proposed to be increased. [Part 3-1, Division 6, subsections 123(2) and 124(2)]

3.105 It is presumed that if a consumer will only be able to comply with their financial obligations under the contract by selling their principal place of residence, then the consumer could only comply with those obligations with substantial hardship, unless the contrary is established.

3.106 The effect of this is that there will be an onus on the credit assistant to demonstrate that it was not unsuitable to suggest or assist with a credit contract with a consumer that could only be complied with as a result of the sale of the consumer's primary place of residence. [Part 3-1, Division 6, subsections 123(3) and 124(3)]

3.107 The information that must be taken into account by a credit assistant when determining if the contract will be unsuitable includes two elements.

3.108 The first is information that the credit assistant had reason to believe to be true. That would include, for example, information that has been provided by the consumer about their financial circumstances that has been verified by the credit assistant or is otherwise reasonably believed to be true.

3.109 The second is information that the licensee would have had reason to believe if the reasonable steps to verify required had in fact occurred, the intent of this part of the proposed provision is to ensure that credit assistants, in making their assessments regarding unsuitability, are required to take into consideration information that they should have become aware of if the reasonable steps to verify had been taken. Information that does not satisfy these requirements (that is, information that is not reasonably believed to be true) must not be taken into account. [Part 3-1, Division 6, subsections 123(4) and 124(4)]

3.110 Regulations may allow for specific situations in which a credit contract is taken to be unsuitable or not unsuitable. [Part 3-1, Division 6, subsections 123(5) and 124(5)]

3.111 Breach of the requirement in subsections 123(1) and 124(1) is an offence, punishable by a maximum penalty of 100 penalty units, or 2 years imprisonment, or both. This reflects the importance of the need to deter the most serious 'moral', economic and social harm in relation to consumer credit, that is suggesting a consumer enter into an unsuitable credit contract or assisting a consumer to enter an unsuitable credit contract. ASIC and the courts will be able to target the sanction in accordance with the seriousness of the breach. [Part 3-1, Division 6, subsections 123(6) and 124(6)]

3.112 Where a credit assistant suggests that a consumer remain in an unsuitable contract because there is no other credit contract that is not unsuitable for the consumer, the credit assistant will have a defence to this suggestion if the credit assistant informs the consumer of the procedure for seeking a variation of their contract with their credit provider or a stay of enforcement from their credit provider. The credit assistant bears the burden to evidence that there was no alternative contract that was not unsuitable and that they informed the consumer of the procedures. [Part 3-1, Division 6, subsection 124(7)]

3.113 Regulations may be made that prescribe the particular inquiries that must be made, or do not need to be made, for determining that no other credit contract was not unsuitable for the consumer. [Part 3-1, Division 6, subsection 124(8)]

Part 3-2 - Licensees that are credit providers under credit contracts

Division 2 - Credit guide of credit providers

3.114 A licensee who considers it likely they will be entering into a credit contract with a consumer will be required to provide the consumer with the licensee's credit guide. The guide is required be provided to the consumer as soon as practicable after it becomes apparent to the credit provider that the consumer is likely to enter into a credit contract with them. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 2, subsection 126(1)]

3.115 The credit guide includes the following information about the credit provider:

•

key identification information;

•

procedures for resolving disputes with a consumer; and

•

a description of key obligations of the credit provider (which relate to the requirement not to provide consumers with an unsuitable loan and the consumer's right to request a copy of the credit provider's assessment that the loan is not unsuitable for the consumer).

[Part 3-2, Division 2, subsection 126(2)]

3.116 The purpose of the credit guide is to provide the consumer with key information early in the credit transaction, so that they are informed of relevant matters before deciding to enter a credit contract with the particular credit provider.

3.117 It is envisaged that the credit provider could meet the requirements of a credit guide through the provision of a standardised document as the information is not generally tailored to a specific contract.

3.118 When a credit application is received by a credit provider from a credit assistant, it is anticipated that the credit guide information will be provided to the consumer in the provider's first communication with them, often this will be at the time the pre-contractual disclosure is provided, as required by the Code as it is likely at this time that the credit provider will be entering into a credit contract with the consumer. If the provider's credit guide has already been provided by the credit assistant (and met the requirements of subsection 126(2)), there is no expectation to provide it again.

3.119 A regulation-making power is included in order to allow for the content of the credit guide to be revised and modified as necessary. [Part 3-2, Division 2, subsection 126(3)]

3.120 The credit guide may be provided in the most suitable manner for the circumstance, for example either in person, in writing, (for example, by post or an email) or as an Internet notice accepted by the consumer.

3.121 A regulation-making power is included that will permit prescription regarding the manner for giving the credit guide. [Part 3-2, Division 2, subsection 126(4)]

3.122 A breach of section 126 is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions. [Part 3-2, Division 2, subsections 126(5) and (6)]

Credit guide of credit providers who are assignees

3.123 When the rights or obligations of a consumer credit contract are assigned to another licensee, the new credit provider will be required to provide all debtors with their credit guide as soon as practicable. The provision of this credit guide notifies the debtor of the change in legal ownership of the credit contract, and key information about the assignee's membership of external dispute resolution and compensation arrangements. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 2, subsection 127(1)]

3.124 The credit guide includes some basic information about the assignee, and the procedures for dealing with a dispute with the consumer. [Part 3-2, Division 2, subsection 127(2)]

3.125 A regulation-making power is included in order to allow for the required content of the credit guide to be revised or modified. [Part 3-2, Division 2, subsection 127(3)]

3.126 The assignee's credit guide may be provided in the most suitable manner for the circumstance, for example either in person, in writing, (for example, by post or an email) or as an Internet notice accepted by the consumer.

3.127 A regulation-making power is included that will permit prescription regarding the manner for giving the credit guide. [Part 3-2, Division 2, subsection 127(4)]

3.128 1.121 A breach of section 127 is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions. [Part 3-2, Division 2, subsections 127(5) and (6)]

Division 3 - Obligations of credit providers before entering credit contracts or increasing credit limits

3.129 Before entering into a credit contract with a consumer, the credit provider must make an assessment as to whether the contract will be unsuitable for the consumer. Similarly, when a credit provider is increasing the limit of an existing credit contract, the credit provider must assess whether the new limit for the credit contract will be unsuitable for the consumer before increasing the limit. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 3, section 128]

3.130 The assessment must be made no more than 90 days before the credit contract is entered (the critical day) and must be an assessment that covers the day the contract is to be entered or the credit limit increased.

3.131 For different types of credit contracts, it may be appropriate to provide for a longer or shorter length of time in which the assessment is to be made before the critical day. This period may be prescribed by the regulations.

3.132 The credit provider must also have made the inquiries and verification as set out in detail in section 130. Failure to make an assessment as required incurs a civil penalty.

Assessment of unsuitability of the credit contract

3.133 In order to make a compliant assessment for the purposes of section 128, the credit provider must specify the period that the assessment covers (which is to be a period which includes the critical day). [Part 3-2, Division 3, section 129]

3.134 A compliant assessment must also assess whether the credit contract will be unsuitable for the consumer if the contract is entered or the credit limit is increased in that specified period. [Part 3-2, Division 3, section 129]

Reasonable inquiries etc. about the consumer

3.135 In order to appropriately meet the requirement to make an assessment about the unsuitability of the contract for the consumer, the credit provider must:

•

make reasonable inquiries about the consumer's requirements and objectives for the credit contract;

•

make reasonable inquiries about the consumer's financial situation; and

•

take reasonable steps to verify the consumer's financial situation.

Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 3, subsection 130(1)]

3.136 Regulation-making power allows for specific matters or steps to be undertaken that are considered mandatory to meet the assessment requirement. Regulations may also prescribe steps or particular inquiries that do not need to be taken to meet the assessment requirement. [Part 3-2, Division 3, subsection 130(2)]

3.137 ASIC also expects to provide guidance where appropriate to set out further detail about reasonable inquiries and verification process in particular circumstances.

3.138 Consideration of what is reasonable will depend on the circumstances. Generally, the minimum requirement for satisfying reasonable inquiries about the consumer's requirements and objectives will be to understand the purpose for which the credit is sought and determine if the type, length, rate, terms, special conditions, charges and other aspects of the proposed contract meet this purpose or put forward credit contracts that do match the consumer's purpose.

Example 3.4

It could be unlikely that a small amount loan for the purpose of meeting a living expense (such as fixing the car) that had a high interest rate and a term of several years would meet the consumer's requirements and not be unsuitable.

Example 3.5

A consumer may apply directly to the credit provider for a credit card. Often a credit card has no particular purpose and therefore there would be limited requirement to understand the consumer's requirements and objectives in this case. However, there would remain the requirement to assess the consumer's capacity to repay the contract and not to offer the consumer more credit than they requested. Where the credit provider knew the initial use of the credit card (for example, a major purchase such as a car) it would need to take that into account in considering whether or not the credit contract was not unsuitable.

Example 3.6

A consumer applies for a short term, small amount loan to meet an urgent expense. It is assumed that the consumer in this situation does not have savings and therefore that the ability to meet the repayments is entirely from future income. The purpose of the loan (for example, to meet rent or utilities bills) and the inquiries into the borrower's financial circumstances indicate that there is very little discretionary expenditure that could be reduced in order to free-up income or meet high interest payments or fees. Reasonable inquiries to make an assessment of the consumer's capacity to repay the loan would include recent payslips and bank statements confirming details of pay dates and amounts, number of dependents, time employed, period at home address and other factors that influence the consumer's capacity to repay.

3.139 The purpose for undertaking reasonable inquiries about the consumer's financial situation is to ascertain a reasonable understanding of the consumer's ability to meet all the repayments, fees, charges and transaction costs of complying with the proposed credit contract. The general position is that consumers should be able to meet the contract's obligations from income rather than equity in an asset.

3.140 Reasonable inquiries about the consumer's financial situation could ordinarily include inquiries about the amount and source of the consumer's income, determining the extent of fixed expenses (such as rent or contracted expenses such as insurance, other credit contracts and associated information) and other variable expenses of the consumer (and drivers of variable expenses such as the number of dependents and the number of vehicles to run, particular or unusual circumstances). The extent of inquiries will however depend on the circumstances.

3.141 The possible range of factors that may need to be established in relation to a consumer's capacity to repay credit could include:

•

the consumer's current income and expenditure;

•

the maximum amount the consumer is likely to have to pay under the credit contract for the credit;

•

the extent to which any existing credit contracts are to be repaid, in full or in part, from the credit advanced;

•

the consumer's credit history, including any existing or previous defaults by the consumer in making payments under a credit contract; and

•

the consumer's future prospects, including any significant change in the consumer's financial circumstances that is reasonably foreseeable (such as a change in repayments for an existing home loan, due to the ending of a honeymoon interest rate period).

3.142 It is noted that there will be matters that will not be able to be known to the credit provider. This may arise where the consumer may not disclose the matter, despite the credit provider's inquiry, and where there was no reasonable way of verifying the information provided.

3.143 The Code contains a provision that imposes up front obligations on any party to a credit transaction. Subsection 154(1) says 'a person must not a make a false or misleading representation in relation to a matter that is material to entry into a credit contract or a related transaction or in attempting to induce another person to enter into a credit contract or related transaction'.

3.144 It is noted that this imposes an obligation on credit providers, debtors, guarantors as well as any third party. A debtor who makes a false or misleading representation to a credit provider or guarantor to induce them to provide or guarantee the credit may be liable for any loss suffered.

3.145 Any compensation to a consumer or an order in relation to loss or damage can be mitigated (including limiting any compensation) if the consumer has made a false or misleading representation in order to obtain the credit. This is to take into account what is practically just in the circumstances.

Reasonable steps to verify

3.146 In undertaking the assessment, credit providers are required to take into account information about the client's financial situation and other matters required by the regulations that they either already possess, or which would be known to them if they made reasonable inquiries and took reasonable steps to verify it. This provision means that credit providers must ask the client about their financial situation and the other matters prescribed in the regulations, and must make such efforts to verify the information provided by the client as would normally be undertaken by a reasonable and prudent lender in those circumstances. Conducting a credit reference check is, for instance, likely to be an action that would be reasonable to undertake in most transactions. Credit providers are not expected to take action going beyond prudent business practice in verifying the information they receive.

3.147 ASIC may also provide guidance, where appropriate, to set out further detail about reasonable inquiries and verification in particular circumstances.

Refinancing

3.148 The level of inquiries necessary to meet the level of 'reasonable inquiries' is likely to be greater where the consumer is refinancing, particularly where they are having difficulties meeting the repayments, or even in arrears, on their existing credit contract. In this situation it will usually be possible to determine that the consumer cannot meet the repayments of the amount being charged under that contract, and a contract will prima facie be unsuitable where the repayments are at the same or a similar level.

3.149 There are usually transaction costs associated with refinancing, including any fees for using a credit assistant's services. All costs of changing credit contracts are expected to be taken into consideration when assessing the consumer's ability to meet the obligations of the new credit contract over its entire term.

When a credit contract must be assessed as unsuitable

3.150 A credit provider must assess that the credit contract will be unsuitable for the consumer if the contract will be unsuitable for the consumer. [Part 3-2, Division 3, subsection 131(1)]

3.151 A credit contract must be assessed as unsuitable for the consumer if it is likely that at the time of entering the contract it is reasonably foreseeable that:

•

the consumer will be unable to comply with the consumer's financial obligations under the contract, including by not being able to make payments, or could only comply with substantial hardship;

•

the contract will not meet the consumer's requirements and objectives; or

•

prescribed circumstances set out that the contract must be assessed as unsuitable.

Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 3, subsection 131(2)]

3.152 Even if the contract will not be unsuitable for the consumer as assessed, the credit provider may still assess that the contract will be unsuitable for other reasons.

3.153 The standard for the consumer being likely to meet the financial obligations in the contract is an objective one. It is not directly linked to the credit provider's own internal standards and guidelines regarding assessing a capacity to repay. Such internal standards and guidelines would be expected to factor in the credit provider's own policies on risk exposures and may vary from time to time, in line with changes to the risk appetite of the credit provider, and the commercial and economic environment. Accordingly, the fact that an application for credit satisfied a credit provider's own policies for affordability does not necessarily mean that it met the standard in the legislation. However, it is expected that the types of inquiries made and assessments conducted for the purposes of the credit provider's internal standards and guidelines on affordability would, in most cases, be very similar to those that are required in order to assess the likelihood that a consumer can meet the financial obligations under the proposed contract.

3.154 The concept of substantial hardship is used in paragraph 76(2)(l) of the Code and is applied similarly for responsible lending.

3.155 It is presumed that if a consumer will only be able to comply with their financial obligations under the contract by selling their principal place of residence, the consumer could only comply with those obligations with substantial hardship, unless the contrary is established.

3.156 The effect of this that there will be an onus on the credit provider to demonstrate that it was not unsuitable to enter into a credit contract with a consumer that could only be complied with as a result of the sale of the consumer's primary place of residence. [Part 3-2, Division 3, subsection 131(3)]

3.157 The information that must be taken into account by a credit provider for determining if the credit contract is unsuitable includes two elements.

3.158 The first is information that the credit provider had reason to believe to be true. That would include, for example, information that has been provided by the consumer about their financial circumstances that has been verified by the credit provider or is otherwise reasonably believed to be true.

3.159 The second is information that the licensee would have had reason to believe if the required reasonable steps to verify had in fact occurred, the intent of this part of the proposed provision is to ensure that credit providers, in making their assessments regarding unsuitability, are required to take into consideration information that they should have become aware of if the reasonable steps to verify had been taken. Information that does not satisfy these requirements (that is, information that is not reasonably believed to be true) must not be taken into account. [Part 3-2, Division 3, subsection 131(4)]

Giving the consumer the assessment

3.160 For the purposes of considering entering a particular credit contract or in the event of a dispute in relation to an existing credit contract, a consumer may request a copy of the assessment that sets out determination that the proposed or existing credit contract is not unsuitable for them and the grounds for that assessment. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units are in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 3, subsection 132(1)]

3.161 The consumer has the right to request this assessment up to seven years after the critical day (ordinarily, the day the credit contract is entered or increased). A copy of the assessment must be provided to the consumer within seven business days of the credit provider receiving a request made within two years of the critical day and within 21 business days of the credit provider receiving a request made thereafter. There is no obligation on a credit provider to provide a copy of the assessment if the credit contract is not entered into or the credit limit is not increased. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units are in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 3, subsection 132(2)]

3.162 The consumer cannot be charged any costs for being provided a copy of the assessment. [Part 3-2, Division 3, subsection 132(4)]

3.163 Regulations may prescribe the manner in which the licensee must give the consumer the copy of the assessment if considered necessary. [Part 3-2, Division 3, subsection 132(3)]

3.164 A breach of either subsection 132(1), (2) or (4) is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to:

•

enhance the effectiveness of the regulatory regime dealing with ASIC's enforcement powers; and

•

encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions.

[Part 3-2, Division 2, subsections 126(5) and (6)]

Division 4 - Prohibition on entering , or increasing the credit limit of, unsuitable credit contracts

3.165 There is a prohibition on credit providers from entering into a consumer credit contract or increasing the limit of an existing credit contract if the contract is unsuitable for the consumer at the time the contract is entered into or the limit is increased.

3.166 A credit contract is unsuitable for a consumer if at the time it is entered or the credit limit is increased it is likely that the consumer will be unable to comply with the consumer's financial obligations under the contract, or could only comply with substantial hardship at that time or the contract does not meet the consumer's requirements and objectives at that time. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-2, Division 4, subsections 133(1) and (2)]

3.167 For it to be likely that the consumer will be able to comply with the financial obligations under the contract, the credit provider must take a future view of the reasonable foreseeability of that compliance, given the financial obligations will arise into the future.

3.168 It is presumed that if a consumer will only be able to comply with their financial obligations under the contract by selling their principal place of residence, then the consumer could only comply with those obligations with substantial hardship, unless the contrary is established.

3.169 The effect of this that there will be an onus on the credit provider to demonstrate that it was not unsuitable to enter into a credit contract with a consumer that could only be complied with as a result of the sale of the consumer's primary place of residence. [Part 3-2, Division 4, subsection 133(3)]

3.170 The information that must be taken into account by a credit provider when determining the contract is unsuitable includes two elements.

3.171 The first is information that the credit provider had reason to believe to be true. That would include, for example, information that has been provided by the consumer about their financial circumstances that has been verified by the credit provider or is otherwise reasonably believed to be true.

3.172 The second is information that the credit provider would have had reason to believe if the required reasonable steps to verify had in fact occurred, the intent of this part of the proposed provision is to ensure that credit providers, in making their assessments regarding unsuitability, are required to take into consideration information that they should have become aware of if the reasonable steps to verify had been taken. Information that does not satisfy these requirements (that is, information that is reasonably believed to be true) must not be taken into account. [Part 3-2, Division 4, subsection 133(4)]

3.173 Regulations may allow for specific situations in which a credit contract is taken to be unsuitable or not unsuitable. [Part 3-2, Division 4, subsection 133(5)]

3.174 Breach of the requirement in subsection 133(1) is an offence, punishable by a maximum penalty of 100 penalty units, or 2 years imprisonment, or both. This reflects the importance of the need to deter the most serious 'moral', economic and social harm in relation to consumer credit; that is entering into an unsuitable credit contract with a consumer. ASIC and the courts will be able to target the enforcement action and sanction in accordance with the seriousness of the breach. [Part 3-2, Division 4, subsection 133(6)]

Part 3-3 - Licensees that provide credit assistance in relation to consumer leases

3.175 Divisions 2 to 6 largely replicate the same requirements on licensees where they are providing credit assistance in respect of a consumer lease, as those applying in respect of a credit contract. [Part 3-3, sections 136 to 147]

Part 3-4 - Licensees that are lessors under consumer leases

3.176 Divisions 2 to 4 largely replicate the same requirements on licensees where they enter into consumer leases as lessors, as those applying where they enter into credit contracts. [Part 3-4, sections 149 to 156]

Part 3-5 - Credit representatives

Division 2 - Credit guide of credit representatives

3.177 A registered person or a licensee can authorise third parties to engage in credit activities on its behalf, without these persons having to hold a licence in their own right. These persons are known as 'credit representatives'. The registered person or licensee has responsibility for supervising these persons, and must specify in writing the credit activities they can engage in. A credit representative may be authorised to act for more than one principal.

3.178 As a result of this arrangement, that allows for the representative to be authorised to act for more than one principal, a credit representative is required to provide in its credit guide information that sets out the credit representative's separate identity and information about the parties for which they act, and other relevant information.

3.179 The credit representative must provide this information in their own credit guide, which they must give to a consumer at the same time they provide a consumer a licensee's credit guide. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-5, Division 2, subsection 158(1)]

3.180 The credit representative's guide gives the consumer some basic information about the credit representative, the six licensees with whom they conduct the most business, commissions the credit representative is likely to receive from those licensees, disclosure of the authorised services of the credit assistant and information that flags the possible nature and size of fees and charges that the consumer may incur if they use the credit representative's services. [Part 3-5, Division 2, subsection 158(2)]

3.181 A regulation-making power is included in order to allow for the content of the credit guide to be revised as necessary. [Part 3-5, Division 2, subsection 158(3)]

3.182 The credit guide may be provided in the most suitable manner for the circumstance, for example either in person, in writing, (for example, by post or an email) or as an Internet notice accepted by the consumer.

3.183 A regulation-making power is included in order to prescribe the manner for giving the credit guide if prescription becomes necessary. [Part 3-5, Division 2, subsection 158(4)]

3.184 A breach of section 158 is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions. [Part 3-5, Division 2, subsections 158(5) and (6)]

Part 3-6 - Debt collectors

Division 2 - Credit guide of debt collectors

3.185 When a debt collector is authorised to collect, on the credit provider's behalf, repayments made by a debtor under a credit contract, the person authorised to do so will be required to provide the debtor with their credit guide as soon as practicable. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units are in line with the civil penalties regime in the Corporations Act. [Part 3-6, Division 2, subsection 160(1)]

3.186 When a debt collector is authorised to collect, on the lessor's behalf, payments made by a lessee under a lease, the person authorised to do so will be required to provide the debtor with their credit guide as soon as practicable. Failure to comply with the requirement attracts a civil penalty, of a maximum of 2,000 penalty units. The maximum civil penalty units is in line with the civil penalties regime in the Corporations Act. [Part 3-6, Division 2, subsection 160(2)]

3.187 The provision of this credit guide notifies the debtor of the identity of the person collecting the debt and key information about the collector's membership of external dispute resolution and compensation arrangements. [Part 3-6, Division 2, subsection 160(3)]

3.188 A regulation-making power is included in order to allow for the content of the credit guide to be revised as necessary. [Part 3-6, Division 2, subsection 160(4)]

3.189 The credit guide may be provided in the most suitable manner for the circumstance, for example either in person, in writing, (for example, by post or an email) or as an Internet notice accepted by the consumer.

3.190 A regulation-making power is included in order to prescribe the manner for giving the credit guide if prescription becomes necessary. [Part 3-6, Division 2, subsection 160(5)]

3.191 The requirement will only apply to debt collectors who are not exempt from this obligation.

3.192 A breach of section 160 is also an offence of strict liability, subject to a maximum penalty of 50 penalty units. The imposition of a strict liability offence is considered appropriate in order to encourage the relevant parties to put in place systems and policies that minimise the risk of contraventions of the relevant provisions. [Part 3-6, Division 2, subsections 161(6) and (7)]

Part 3-7 - Exemptions and modifications relating to this Chapter

Division 2 - Exemptions and modifications relating to this chapter

3.193 Exemptions and modifications can be effected both by ASIC and through the regulations to the following provisions:

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this chapter;

•

the definitions in the Credit Bill, as they apply to references in this chapter; and

•

instruments made for the purposes of this chapter.

[Part 3-7, Division 2, section 162]

3.194 There are three different ways in which the application of these provisions can be modified or changed:

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by ASIC exempting or modifying their application to a particular person (or that person and all their credit representatives), credit contract or consumer lease [Part 3-7, Division 2, subsection 163(1)];

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by ASIC exempting or modifying their application to a class of persons, credit contracts or consumer leases [Part 3-7, Division 2, subsection 163(3)]; or

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by an exemption or modification of their application in the regulations to [Part 3-7, Division 2, section 164]:

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a person or class of persons;

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a credit contract or class of credit contracts; or

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a consumer lease or class of consumer leases.

3.195 An exemption or modification by ASIC in respect of a particular person, credit contract or consumer lease is stated not to be a legislative instrument. This statement is declaratory of the position, consistent with section 5 of the Legislative Instruments Act 2003. [Part 3-7, Division 2, subsection 163(2)]

3.196 An exemption by ASIC of a particular person or a credit activity that is engaged in relation to a specified credit contract, mortgage, guarantee or consumer lease must be in writing and must be published by ASIC on its website. [Part 3-7, Division 2, subsection 163(5)]

3.197 A person will not commit an offence where their conduct:

•

is only an offence because of the nature of the exemption by ASIC (for example, where the exemption is conditional and the condition is not met); and

•

at the time of the conduct the person had not been given notice of the exemption (either because they had not been given written notice of it by ASIC or because it had not been published by ASIC on its website).

[Part 3-7, Division 2, subsections 163(6) and (7)]