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 2 - Licensing of persons engaging in credit activities

Outline of chapter

2.1 Chapter 2 of this explanatory memorandum explains the requirement for persons engaging in credit activities to be holders of an Australian credit licence (ACL) and the obligations that are imposed on such licensees, as set out in Chapter 2 of the National Consumer Credit Protection Bill 2009 (Credit Bill).

2.2 In order to facilitate a smooth transition to licensing, persons currently engaging in credit activities will first need to be registered with the Australian Securities and Investments Commission (ASIC). These arrangements are set out in Schedule 2 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill). A detailed explanation of registration is in Chapter 3 of the explanatory memorandum to that Bill.

2.3 The key elements of the scheme are that:

•

it requires persons who engage in credit activities to, initially, be registered with ASIC, and to subsequently hold an ACL;

•

it imposes entry standards for registration and licensing, and enables ASIC to refuse an application where the person does not meet those standards;

•

it requires registered persons and licensees to meet ongoing standards of conduct while they engage in credit activities; and

•

ASIC has the power to suspend or cancel a licence or registration, or to ban an individual from engaging in credit activities.

Context of amendments

2.4 Currently there is no consistency in the way in which the States and Territories regulate providers of credit and related services. Western Australia has a licensing system for both lenders and brokers. Victoria and the Australian Capital Territory have registration systems covering credit providers and brokers. The remaining States and Territories do not impose any entry requirements on credit providers. As a result, a finance broker who operates nationally is required to hold three different licences or registrations.

2.5 The proposed national licensing scheme therefore has benefits for industry in removing the need for lenders and brokers who operate nationally to meet different requirements.

2.6 At the same time the development of a greater and more complex range of credit products in the market has made it much less straightforward for consumers to determine whether a product is suitable for their needs and increased their dependence on intermediaries. As a result there are considerable information asymmetries that justify regulatory intervention. These issues have been evident for some time in the relationship between consumers and finance brokers or other intermediaries.

2.7 ASIC considered the scope for consumers to suffer financial loss as a result of incompetent, conflicted or misleading conduct by intermediaries in a 2003 report ^[1] . For example, if, as a result of unsuitable advice about a loan, the borrower is placed in a loan with an interest rate 0.5 per cent higher, then as a result the borrower would pay an additional $15,500 in interest on a loan of $175,000 over 25 years. It considered that the lack of uniform regulation contributed to these outcomes.

2.8 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.

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

•

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

•

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;

•

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

•

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.

2.10 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.

2.11 Concerns such as those discussed above were considered in 2008 when both the Australian Government and the Council of Australian Governments decided that providers of credit and related services should be subject to a national licensing system administered by ASIC.

2.12 Developments in the delivery of credit mean that the distinctions between lenders, brokers and intermediaries are no longer straightforward, and that a comprehensive approach to licensing all market participants is therefore preferable.

2.13 This approach is consistent with the 2008 findings of the Productivity Commission, which recommended a licensing scheme for finance brokers and a licensing or registration scheme for lenders. ^[2]

2.14 The objectives in introducing the licensing system are to improve the conduct of the industry over time, and to address concerns such as those identified above, by having a market environment for credit in which:

•

lenders and intermediaries act honestly and have adequate resources and competency to carry on their businesses;

•

borrowers who suffer losses because of a breach of their obligations by lenders or intermediaries are able to obtain compensation; and

•

dishonest or incompetent lenders and intermediaries are prevented from continuing to operate.

2.15 It was decided to provide a stand-alone national licensing scheme that is to be distinguished from the regulation of financial services under the Corporations Act 2001 (Corporations Act). This is because credit involves consumers receiving money that they must repay, rather than the purchase of, or investment in, a financial product that generally includes the expectation of a benefit or return from the payment. From the outset the ACL is tailored to meet the issues arising in the credit context, thereby avoiding the need to extensively modify or vary elements of the Corporations Act.

Summary of new law

2.16 The Credit Bill implements a national licensing scheme for persons engaging in credit activities. It is complemented by the Transitional Bill which establishes transitional arrangements that require persons who currently engage in credit activities to be registered by 30 June 2010, before becoming holders of an ACL.

2.17 The key elements of the scheme are that:

•

it requires persons who engage in credit activities to, initially, be registered with ASIC, and to subsequently hold an ACL;

•

it imposes entry standards for registration and licensing, and enables ASIC to refuse an application where the person does not meet those standards;

•

it requires registered persons and licensees to meet ongoing standards of conduct while they engage in credit activities; and

•

ASIC has the power to suspend or cancel a licence or registration, or to ban an individual from engaging in credit activities.

2.18 Participants will need to be registered or hold a licence if they engage in any of the following credit activities:

•

entering into credit contracts or consumer leases;

•

collecting money due under a credit contract (including where the lender has ceased providing credit, and where an assignee has purchased the debts from the original credit provider);

•

acting as an intermediary between the borrower and the lender (principally as finance brokers, but not exclusively so, with the definition also covering bodies such as introducers, mortgage managers and aggregators); or

•

suggesting or providing assistance in respect of a specific credit product with a particular credit provider.

2.19 Section 5 of the National Credit Code (Code) sets out the circumstances in which the Code will apply to the provision of credit. Generally it regulates the provision of credit where it is provided:

•

for personal domestic or household use;

•

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

•

to refinance such credit.

2.20 The definition of 'credit' otherwise expressly excludes credit provided for business or investment use.

2.21 There are only limited and specific circumstances in which ASIC can refuse to register a person. Generally ASIC must register a person except where they meet any of the criteria resulting in automatic rejection of the application. The criteria relate to matters where there is an unacceptable risk, established by a public finding or outcome, to consumers; for example, members of organised criminal groups who are subject to court orders as prescribed in the Bill would be unable to be registered.

2.22 Once registered a person must meet set standards of conduct; for example, they will be required to act efficiently, honestly and fairly, to comply with the law, and to remain a member of an External Dispute Resolution Scheme (EDR Scheme) (as approved by ASIC). This will give consumers an avenue for the expeditious resolution of complaints through a no-cost forum, outside of the court system.

2.23 After becoming registered a person will then have to apply for a licence in the period from 1 July 2010 to 31 December 2010. A person engaging in credit activities for the first time after 1 July 2010 can no longer be registered and will need to apply for an ACL.

2.24 The entry requirements for licensing are more rigorous and will require ASIC to consider two key elements in respect of the application.

2.25 First, ASIC must assess whether the applicant has adequate organisational capacity, systems and competence to be able to comply with their obligations under the Credit Bill when engaging in credit activities. For example, ASIC will need to consider whether the applicant has systems in place both to meet responsible lending obligations, and to deal with conflicts of interest so that their clients are not disadvantaged where any such conflict exists.

2.26 Secondly, ASIC must assess whether there is any reason to doubt the applicant is a fit and proper person to be involved in the provision of credit services. In considering this question ASIC is able to take into account a broad range of relevant matters, such as their past conduct and compliance with credit laws of States and Territories (including prior to the enactment of the Credit Bill).

2.27 A special process (called streamlining) has been designed for authorised deposit-taking institutions (ADIs). It is considered that ADIs are subject to levels of government supervision that are sufficiently rigorous so that they do not need to demonstrate, in order to obtain a licence, their competencies and qualifications. Once licensed they will be subject to the same obligations as all other holders of an ACL.

2.28 The regulations may describe other categories of participants who may also be streamlined to an ACL.

2.29 These will be the only categories of person who will be streamlined, given the lack of uniformity in relation to registration and licensing of other credit providers and brokers or intermediaries at a State and Territory level.

2.30 A registered person or a licensee can authorise third parties to engage in credit activities on their 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 is generally responsible for their conduct, and must specify in writing the credit activities they can engage in.

2.31 ASIC has the power to suspend or cancel a licence or registration, or to ban individuals from engaging in credit activities. ASIC can take action as it considers appropriate in a broad range of circumstances to protect consumers from the risk of financial harm and to maintain the integrity of the scheme.

2.32 The national scheme means that a person who is banned or loses their licence or is deregistered by ASIC will be unable to legally engage in credit activities throughout Australia. At present there is nothing to prevent a person who has been banned in one State or Territory from continuing to operate as a broker or lender simply by moving to a different jurisdiction.

Comparison of key features of new law and current law

Detailed explanation of new law

When does a person engage in a credit activity?

2.33 The Dictionary to 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. Paragraphs 2.34 to 2.43 contain a summary of these provisions; a more detailed explanation is in Chapter 1 of this explanatory memorandum.

2.34 There are two broad categories of persons who are engaging in a credit activity:

•

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

•

The second category is defined as persons who provide credit services, and primarily, but not exclusively, covers finance brokers and other intermediaries where they have a role in relation to securing credit for a consumer [Part 1-2, Division 3, item 2 in the table in subsection 6(1)].

2.35 In respect of the first category 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 engage in credit activities as long as they are a party to a contract. Credit providers and lessors will therefore need to remain licensed where they are still collecting money due under credit contracts or leases, notwithstanding that they no longer enter into new credit contracts or leases [Part 1-2, Division 3, items 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, items 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, items 1(c) and 3(c) in the table in subsection 6(1)]. Examples of persons who fall within this definition include:

-

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

•

they are a person who receives, by assignment in law, the rights of a credit provider or a lessor, and exercises those rights. This requirement arises irrespective of whether they receive the rights directly from the credit provider or lessor, or from a person who was themselves an assignee [Part 1-2, Division 3, section 10]. The definition does not extend to equitable assignees.

2.36 A person will be in the second category of persons who engage in credit activities by 'providing credit services' where they either:

•

provide credit assistance; or

•

act as an intermediary.

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

2.37 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;

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

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remain in a particular credit contract or lease; or

•

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

-

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

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

2.38 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.

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

•

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

•

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

2.40 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]

2.41 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.

2.42 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, as the result of a request by a consumer or by another intermediary, and their role is wholly or partially to secure credit or a lease.

2.43 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.

Registration and licensing of persons who engage in credit activities

2.44 Paragraphs 2.45 to 2.56 summarise the transitional arrangements for registered persons. These paragraphs discuss the timetable for the transition from registration to licensing, enabling the changing requirements to be followed in sequence.

2.45 Initially, a person who engages in credit activities will have to register with ASIC between 1 April 2010 and 30 June 2010. [Transitional Bill, Schedule 2, Part 3, item 11]

2.46 From 1 July 2010 persons engaging in credit activities for the first time, or those who failed to register, must first obtain for a licence. [Transitional Bill, Schedule 2, Part 2, item 4]

2.47 A registered person will then need to apply for a licence between 1 July 2010 and 31 December 2010. The effect is that:

•

a person who is registered as at 1 July 2010 has until 31 December 2010 to apply for a licence; and

•

they can continue to engage in credit activities as a registered person until their licence application is determined by ASIC.

2.48 Table 2.1 summarises the changes in requirements over time.

Table 2.1

2.49 A person must apply to ASIC to be registered by lodging an application in the approved form. They cannot be registered if:

•

they are not a member of an EDR Scheme that has been approved by ASIC; and

•

any of the criteria resulting in automatic exclusion apply (such as insolvency or convictions for serious fraud). The criteria relate to matters where there is an unacceptable risk, established by a public finding or outcome, to consumers were the applicant to be allowed to engage in credit activities. [Transitional Bill, Schedule 2, Part 3, item 12]

2.50 A registered person is required to conduct their business in accordance with a number of specific obligations, such as that they will engage in credit activities efficiently, honestly and fairly, and they will comply with the credit legislation and with any conditions imposed by ASIC on the registration. [Transitional Bill, Schedule 2, Part 3, item 16]

2.51 Given that applicants engaging in credit activities will not previously have been registered under the Commonwealth law the obligations applying to registered persons are limited to those that can be met immediately. Licensing will build on these requirements by requiring the registered person to demonstrate, for example, the necessary operational capacity and an appropriate commitment of resources to meet the required conduct standards.

2.52 The Transitional Bill also imposes specific obligations on registered persons to assist ASIC in gathering intelligence and information about registered persons, in order to assist it in its functions in regulating those engaging in credit activities. [Transitional Bill, Schedule 2, Part 3, items 17 to 19]

2.53 ASIC is given power to:

•

impose a condition on a registration, or vary or revoke a condition [Transitional Bill, Schedule 2, Part 3, items 14 and 15]; and

•

suspend or cancel a registration [Transitional Bill, Schedule 2, Part 3, items 21 to 26].

2.54 All registered persons are required to apply for a licence by 31 December 2010. The entry requirements for licensing are more onerous and it may be that not all registered persons will be able to meet the requirements for holding a licence. Where a person's licence application is rejected by ASIC then their registration is automatically cancelled [Transitional Bill, Schedule 2, Part 3, item 20]. They can no longer legally engage in credit activities unless they make a fresh licence application which is approved by ASIC. [Transitional Bill, Schedule 2, Part 3, item 6]

2.55 If the person is granted a licence by ASIC then the registration no longer has any effect, as it has been superseded by the licence. For the purposes of certainty, it is expressly provided that all registrations cease to operate on 30 June 2011. [Transitional Bill, Schedule 2, Part 3, item 21]

2.56 The Transitional Bill allows for the dates by which a person must be registered or have applied for a licence to be varied by regulation. [Transitional Bill, Schedule 2, Part 3, items 3 and 5]

National Consumer Credit Protection Bill

Part 2-1 - Requirement to be licensed to engage in credit activities

Division 2 - Engaging in credit activities without a licence

2.57 A person who engages in credit activities after 1 July 2011 will need to hold a licence or they will commit an offence. It is expected that by this date, at the very latest, there will no longer be any need for transitional arrangements. [Part 2-1, Division 2, subsection 29(1)]

2.58 However a person who engages in a credit activity without holding a licence has a defence where:

•

that person engages in the credit activity on behalf of a licensee;

•

the licensee is authorised to engage in credit activities of that type;

•

the person's conduct is within the authority of the licensee; and

•

the person themselves is either:

-

an employee or a director of the licensee, or of a related body corporate of the licensee; or

-

a credit representative of the licensee.

[Part 2-1, Division 2, subsection 29(3)]

2.59 A 'credit representative' is a person formally appointed to act on behalf of the licensee, in accordance with section 64 or section 65.

2.60 A person will also have a defence where they are a representative of a person who is exempt from requiring a licence, and they are acting within the authority of their principal. [Part 2-1, Division 2, subsection 29(4)]

2.61 Such an exemption could be granted by ASIC under paragraph 109(1)(a), or as a result of a class order exemption by ASIC under paragraph 109(3)(a), or an exemption by regulation under paragraph 110(a).

2.62 A person's conduct is within the authority of another person as follows:

•

where they are an employee of the person or of a related body corporate of the person - the conduct is within the scope of the employee's employment;

•

where they are a director of the person or of a related body corporate of the person - the conduct is within the scope of the director's duties as director; or

•

where they are a credit representative - the conduct is within the scope of the authorisation in writing specifically granted to the credit representative under subsection 64(1) or 65(1).

[Part 1-2, Division 2, section 5]

2.63 These provisions place the onus of proof on any defendant where the defence is that they have been engaging in credit activities on behalf of the licensee, and that their conduct was authorised by or conducted on behalf of that person.

2.64 The reason for the reversal of the onus of proof is that a defence of this type may raise complex factual matters that cannot be readily established by ASIC, but that will be squarely within the knowledge of the employee, director or credit representative. That person will be in the best position to both know and establish that their conduct has been authorised by their principal.

2.65 This offence has a criminal penalty of 200 penalty units, or imprisonment for 2 years or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision).

2.66 Consumers have specific remedies against persons where they engage in credit activities while unlicensed, as there is a clear need to deter this type of behaviour, and it is intended that consumers should only deal with those who have demonstrated they meet the entry requirements.

Division 3 - Other prohibitions relating to the requirement to be licensed and to credit activities

2.67 A person will commit an offence where:

•

they hold out that they are authorised to engage in a credit activity when this is not the case (for example, that they hold an ACL when this is not the case) [Part 2-1, Division 3, subsection 30(1)];

•

they hold out or advertise that they can engage in credit activities when they would commit an offence if they actually engaged in those credit activities [Part 2-1, Division 3, subsection 30(2)];

•

where although licensed themselves, they conduct business with another person who is not licensed themselves but is still engaging in a credit activity [Part 2-1, Division 3, section 31]; and

•

they demand or receive a fee from a consumer in relation to a credit activity, when they are unable to engage in the credit activity because they are not licensed [Part 2-1, Division 3, section 32].

2.68 A person must not, in the course of engaging in a credit activity, give information or a document to another person if they know, or are reckless, as to whether the information or document is false or misleading. The main purpose of this provision is to make it an offence for a person to forward an application for a credit contract or a lease that is false or misleading. [Part 2-1, Division 3, section 33]

2.69 These offences all have a criminal penalty, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision).

Part 2-2 - Australian credit licences

Division 2 - Australian credit licences

2.70 The holder of an ACL is only authorised to engage in the credit activities which are expressly specified by ASIC in a condition of the licence. [Part 2-2, Division 2, section 35]

Division 3 - How to get an Australian credit licence

2.71 A person applies for a licence by lodging their application with ASIC. The latest date at which a registered person can lodge their application is 31 December 2010. However, from 1 July 2010 a person who is not registered must obtain a licence before engaging in credit activities. [Part 2-2, Division 3, section 36]

2.72 ASIC must grant the licence if the following requirements are satisfied:

•

the application was made properly, that is, in the approved form and with all supporting information;

•

ASIC has no reason to believe that the applicant is likely to breach the obligations that are imposed on a licensee under section 47; and

•

ASIC has no reason to believe that the applicant is not a fit and proper person to engage in credit activities.

[Part 2-2, Division 3, subsection 37(1)]

2.73 Notwithstanding these requirements it is specifically provided that ASIC must not grant a licence where:

•

the person is subject to a banning or disqualification order under Part 2-4 of the Credit Bill; or

•

a prescribed State or Territory order is in effect:

-

where the applicant is a natural person - against that person;

-

where the applicant is a body corporate - against a director, secretary or senior manager who would perform duties in relation to the credit activities to be authorised by the licence; and

-

where the applicant is a partnership or trustee - against a partner or trustee who would perform duties in relation to the credit activities to be authorised by the licence.

[Part 2-2, Division 3, section 40]

2.74 In considering the latter two substantive grounds the onus of proof is on ASIC to establish reasons why the licence should be refused. ASIC is specifically directed to consider the following matters:

•

whether a registration, licence or Australian financial services licence of the person has ever been suspended or cancelled;

•

whether a banning order or disqualification order under Part 2-4 has ever been made against the person;

•

whether a banning order or disqualification order under Division 8 of Part 7.6 of the Corporations Act has ever been made against the person;

•

whether the person has ever been banned from engaging in a credit activity under a law of a State or Territory;

•

whether the person has ever been insolvent (if they are not the trustees of a trust);

•

whether the person has ever been disqualified from managing corporations under Part 2D.6 of the Corporations Act;

•

any criminal conviction of the person, within 10 years before the application was made;

•

any other matters that ASIC considers relevant; and

•

any other matter prescribed by the regulations.

[Part 2-2, Division 3, subsection 37(2)]

2.75 ASIC is specifically directed to consider these matters in relation to:

•

where the applicant is a natural person - that person;

•

where the applicant is a body corporate - every director, secretary or senior manager who would perform duties in relation to the credit activities to be authorised by the licence; and

•

where the applicant is a partnership or trustee - every partner or trustee who performs duties in relation to the credit activities to be authorised by the licence.

[Part 2-2, Division 3, paragraphs 37(2)(g) and (h) and subsection 37(3)]

2.76 The extent to which the conduct or characteristics of any of these persons will mean that the applicant may not meet the fit and proper requirement will depend on factors such as the background of the individual and the level of day-to-day control and power they exert over the credit activities engaged in by the applicant.

2.77 In the case of bodies corporate, the persons to be considered has been extended beyond directors or secretaries to include senior managers. A senior manager is defined as a person who:

•

makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

•

has the capacity to affect significantly the corporation's financial standing.

[Part 1-2, Division 2, section 5]

2.78 The skills and character of senior managers is relevant to ASIC's consideration of whether an application should be granted, as it is expected that they would be involved in setting the policies and procedures to be followed by those having direct contact with clients, including employees or credit representatives. They are also, in practice, usually responsible for ensuring that their representatives comply with the law. Their credentials and suitability are therefore critical to ASIC's assessment of the applicant.

2.79 The matters identified in subsection 37(2) are relevant to determining both whether or not the applicant is likely to contravene the obligations in section 47 and whether the fit and proper person requirement is met. Where present they will not necessarily be grounds for refusing a licence but they will be matters that always need to be considered by ASIC. For example, where a person has been convicted of serious fraud, the circumstances of the offence may show such a disregard for the interests of other persons or so great an abuse of their confidence or trust that ASIC can conclude the person is not a fit and proper person. [Part 2-2, Division 3, subsection 37(2)]

2.80 Apart from the specific matters listed in subsection 37(2) ASIC may also take into account any other matters it considers relevant, in deciding whether or not to grant the applicant an ACL. The scope of the information is only limited by the extent to which it is relevant to this question. It would generally include the past business practices of the applicant, as this can be seen as an indicator of future behaviour. For example, a history of having provided credit or financial services without holding a licence when this would be required in law, would usually be relevant, and may be more relevant than a breach of the law that can be characterised as technical.

2.81 The first ground on which ASIC can refuse a licence is if it believes that the applicant is likely to contravene the obligations that are imposed on a licensee under section 47.

2.82 The statutory test is whether the person is likely to contravene the obligations, rather than whether they will contravene the obligations. On a restricted view of the latter phrase ASIC would be required to believe, as a matter of certainty, that the applicant will contravene the obligations in the future. Such a standard would be so onerous that it could result, in practice, in ASIC never being able to refuse a licence.

2.83 The test is whether they are likely to contravene the obligations under section 47. ASIC may take into account any information relevant to this question, such as:

•

the extent of compliance by the applicant with analogous obligations while a registered person (where applicable);

•

a history of the applicant that exhibits a reluctance to comply with State or Territory credit legislation prior to applying for the licence or while it is being considered;

•

conduct of the applicant that shows deliberation and planning in wilfully disregarding the law; or

•

any other conduct of the applicant that may lead ASIC to conclude, on reasonable grounds, that the applicant is not likely to comply (for example, where information from a State or Territory as to the activities of the applicant as a member of an organised criminal group warrants this conclusion).

2.84 Secondly, ASIC must have no reason to believe that the applicant is not a fit and proper person to engage in credit activities [Part 2-2, Division 3, paragraph 37(1)(c)]. This may cover situations such as where the person:

•

lacks appropriate knowledge, skills, judgment or character;

•

has been subject to adverse findings in relevant criminal or civil proceedings, reflecting on their character; or

•

breached fiduciary obligations in a way that demonstrates they are not a fit and proper person.

2.85 ASIC may also require the applicant to produce further information before making a final decision (including a report by a suitably qualified person). This might cover, for example, a report on a serious or systematic breach of credit legislation by the applicant, and the way in which it has addressed that conduct. Providing for an independent expert view to be obtained in such circumstances will allow ASIC to make a decision whether or not to approve a licence using the best possible information. [Part 2-2, Division 3, subsection 37(4)]

2.86 ASIC can also take into account information from other sources where it is relevant to its consideration of the licence application. This might include, for example:

•

allegations of previous misconduct that ASIC or a State or Territory regulator is aware of, including those received through complaints by consumers;

•

information received by ASIC or a State or Territory regulator in the course of the exercise of their statutory powers and functions;

•

actions taken against the person by a relevant industry body or association; or

•

intelligence received by ASIC from other market participants.

2.87 The transfer of information or documents to ASIC from State and Territory regulators is authorised in Schedule 1 of the Transitional Bill.

2.88 ASIC must provide the applicant with written notice of its decision on the licence application. Where ASIC has decided to refuse the licence this can only be done after giving the applicant an opportunity to be heard. The reasons for refusing the decision must be set out in the written notice. [Part 2-2, Division 3, sections 41 and 42]

2.89 Where ASIC rejects a licence application the applicant has a right to appeal that decision directly to the Administrative Appeals Tribunal, rather than a review by ASIC. [Part 7-1, Division 3, section 327]

2.90 On being licensed, ASIC must notify each licensee of their ACL number. Where the licensee is also the holder of an Australian financial services licence they are to be allocated the same number. [Part 2-2, Division 3, section 43]

2.91 Licensees will be required to cite their licence number on certain documents (as specified in the regulations) after a two-year transitional period. [Part 2-2, Division 5, section 52]

2.92 It will be an offence of strict liability if a licensee fails to include their licence number in documents as required [Part 2-2, Division 5, subsections 52(3) and (4)]. It is a strict liability offence as it is considered important that consumers are made aware, in a straightforward and consistent fashion, that they are dealing with the holder of an ACL, and that they are also able to accurately check the licensee's details on the register maintained by ASIC.

2.93 This offence also has a civil penalty of 2,000 penalty units, so that ASIC may appropriately penalise any contravention of the provision.

Persons who can be streamlined to an Australian credit licence

2.94 A streamlined procedure for applying for an ACL is established for ADIs. Given the level of existing government oversight, it is considered that:

•

there is no reason to believe that these lenders are likely to contravene the obligations that are imposed on a licensee under section 47; and

•

there is no reason to believe that these lenders are not fit and proper persons to engage in credit activities.

2.95 ADIs therefore will not need to independently satisfy ASIC as to these requirements, and, as a result, they will only need to provide a statement, in an approved form, that they will comply with the obligations of a licensee. [Part 2-2, Division 3, section 38]

2.96 There is also provision for other classes of applicants to be streamlined through the regulations [Part 2-2, Division 3, section 39]. It is expected that this power will be used to streamline holders of 'A' or 'B' class licences under the Finance Brokers Control Act 1975 (WA), as they have also been subject to robust oversight.

2.97 It is explicitly provided that a licence can be subject to conditions that, in turn, may be varied or revoked, or subject to cancellation or suspension, and that no compensation is payable in relation to any such action in respect of a licence. [Part 2-2, Division 3, section 44]

Division 4 - Conditions on an Australian credit licence

2.98 ASIC must specify, as a licence condition, the types of credit activities that the licensee is authorised to engage in, as an applicant may only meet the criteria to engage in some, but not all, credit activities. For example, a finance broker may not be able to demonstrate the necessary competence or expertise to be authorised to lend. [Part 2-2, Division 4, subsection 45(6)]

2.99 Once a person is licensed, ASIC may at any time impose, vary or revoke conditions on a licence. ASIC must however first give the licensee an opportunity to make submissions and give evidence at a private hearing. [Part 2-2, Division 4, subsection 45(5)]

2.100 ASIC can use this power flexibly to, for example, address systemic issues by imposing additional conditions on the way in which representatives are trained or supervised.

2.101 ASIC's power to vary or revoke conditions does not extend to any standard conditions prescribed by the regulations. [Part 2-2, Division 4, subsection 45(7)]

2.102 Where the licensee is regulated by Australian Prudential Regulation Authority (APRA), special procedures apply. If the licensee is an ADI and the proposed condition would have the result of significantly limiting or restricting the ADI's ability to carry on all or any of its banking business, then the power to impose, vary or revoke such a condition can only be exercised by the Minister, and not ASIC. [Part 2-2, Division 4, subsection 46(2)]

2.103 The Minister refers to the Minister responsible for administering the Transitional Bill, determined in accordance with section 19A of the Acts Interpretation Act 1901.

2.104 If the licensee is not an ADI but still regulated by APRA, then ASIC must consult with APRA in relation to any new conditions, or varying existing conditions, where they would prevent the licensee from carrying on all or any of its usual activities. This is intended to allow for a consistency in approach by the two regulators. [Part 2-2, Division 4, subsection 46(1)]

Division 5 - Obligations of licensees

General conduct obligations

2.105 Once licensed, the licensee must conduct their business in accordance with a number of specific obligations. The obligations build on and are more rigorous than those for registered persons and, in particular, require the applicant to have in place systems and procedures to meet these obligations. [Part 2-2, Division 5, section 47]

2.106 The obligations are to:

•

do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly [Part 2-2, Division 5, paragraph 47(1)(a)];

•

have in place adequate arrangements to ensure that clients of the licensee are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or by its representatives [Part 2-2, Division 5, paragraph 47(1)(b)];

•

comply with any conditions imposed by ASIC on their licence [Part 2-2, Division 5, paragraph 47(1)(c)];

•

comply with the credit legislation [Part 2-2, Division 5, paragraph 47(1)(d)];

•

take reasonable steps to ensure that its representatives comply with this legislation [Part 2-2, Division 5, paragraph 47(1)(e)];

•

maintain the competence to engage in the credit activities authorised by the licence [Part 2-2, Division 5, paragraph 47(1)(f)];

•

ensure that its representatives are adequately trained and are competent to engage in the credit activities authorised by the licence [Part 2-2, Division 5, paragraph 47(1)(g)];

•

have an internal dispute resolution procedure that complies with standards or requirements made or approved by ASIC and covers disputes in relation to the credit activities engaged in by the licensee or by its representatives [Part 2-2, Division 5, paragraph 47(1)(h)];

•

be a member of an approved EDR Scheme [Part 2-2, Division 5, paragraph 47(1)(i)];

•

have compensation arrangements, for loss or damage, as a result of breaches of their obligations, in accordance with the regulations or as otherwise approved in writing by ASIC [Part 2-2, Division 5, paragraph 47(1)(j) and section 48];

•

have adequate arrangements and systems to ensure compliance with its obligations under this section, and a written plan which documents those arrangements and systems [Part 2-2, Division 5, paragraph 47(1)(k)];

•

except where the licensee is a body regulated by APRA, have adequate resources to engage in the credit activities and have adequate risk management systems [Part 2-2, Division 5, paragraph 47(1)(l)]; and

•

comply with any additional obligations imposed by regulation [Part 2-2, Division 5, paragraph 47(1)(m)].

2.107 These obligations are principle-based and it is intended that licensees can be flexible in adopting practices that suit their organisation. For example, if a licensee distributes credit contracts where there is a significant risk of consumer detriment where they are missold this will need to be reflected in the way in which it meets these obligations (for example, by training or monitoring of its representatives that is consistent with the level of risk).

2.108 These obligations are intended to ensure that licensees demonstrate a necessary commitment to meeting the expected standards of conduct of a licensee, and that persons who cannot do so, irrespective of the reason, are excluded.

2.109 It is expressly provided that compliance with the obligations in paragraphs 47(1), (b), (g), (k) and (l) is to be determined according to the nature, scale and complexity of the credit activities engaged in by the licensee.

2.110 The reference to 'nature, scale and complexity' enables a licensee to tailor the way in which they comply with the obligations, taking into account factors such as:

•

the types of credit activities the licensee engages in;

•

the diversity and structure of the licensee's operations (including the geographical spread of the operations and the extent to which the licensee outsources any of its functions);

•

the volume and size of the transactions the licensee is responsible for; and

•

the number of people in the licensee's organisation.

2.111 The obligations in section 47 continue as long as a person is licensed. It is unlikely that a licensee can meet all the obligations in the same way over time, and there is therefore a need for licensees to monitor and review the way in which they address these requirements, and to alter their practices in the light of experience and changes in the operating environment.

2.112 The first requirement is that a licensee must do all things necessary to ensure that the credit activities authorised by the registration are engaged in efficiently, honestly and fairly [Part 2-2, Division 5, paragraph 47(1)(a)]. This requires the licensee to conduct itself in a way that is consistent with, and reflects an appreciation of, the need to meet community standards of efficiency, honesty and fairness.

2.113 The efficiency criterion cannot be used to justify conduct that is unfair or dishonest. For example, if a person consistently arranges for consumers to sign contract documents without any explanation that may be efficient but in all likelihood it would not meet the required standard of honesty or fairness, both as to the procedures adopted and the outcomes for consumers.

2.114 The licensee must also do all things necessary to meet this requirement. This is a higher requirement than in relation to other obligations, where the licensee must 'take reasonable steps to ensure' it is meeting the obligation.

2.115 It is unlikely that the licensee will be complying with the 'efficiently, honestly and fairly' obligation if it is failing to comply with the other obligations. However, the 'efficiently, honestly and fairly' obligation is also a stand-alone obligation that operates separately from the other obligations.

2.116 A licensee must have in place adequate arrangements to ensure that their clients are not disadvantaged by any conflict of interest that arises wholly or partly in relation to credit activities engaged in by the licensee or by its representatives. [Part 2-2, Division 5, paragraph 47(1)(b)]

2.117 This obligation only applies to conflicts of interests where an interest of the licensee conflicts with a legal obligation or duty that person owes to their client, including where that obligation arises under statute, at common law or under a contract between the licensee and the client. It does not otherwise require a licensee to take action in respect of different interests of parties where they do not constitute a conflict of interest at law.

2.118 The following examples illustrate the intended application of this requirement. These examples do not provide guidance on the other general obligations, including, for example, the obligation to act efficiently, honestly and fairly.

Example 2.1

A lender is selling the borrower's property pursuant to a power of sale under a mortgage. The lender sells the property to a company controlled by a director of the lender. The property is sold for less than its market value, but for an amount sufficient to extinguish the liability of the borrowers to the lender. There is a conflict of interest between the interests of the lender and the borrower, and the borrower has been disadvantaged (Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Company Pty Ltd [1978] HCA 21; 139 CLR 195).

Example 2.2

A finance broker has appointed credit representatives and has entered into agreements under which the level of remuneration increases if the credit representative arranges 30 loans in a month. A credit representative needs to arrange two more loans to achieve this target, and does so by placing borrowers in credit contracts that are unsuitable. By being placed in an unsuitable credit contract, these clients have been disadvantaged by the credit representative's conflict of interest in receiving the higher remuneration.

Example 2.3

A finance broker was aware of the risk of its credit representatives acting in the way described in Example 2.2, and had in place reasonable procedures and levels of supervision to address it. The licensee has adequate arrangements to ensure its clients are not disadvantaged by this possible conflict.

Example 2.4

The lender sets the price of its credit significantly above market rates, but is not under any obligation or duty to its borrowers in respect of the price. As there is no conflict between the interests of the lender and the borrower, the lender does not need to have arrangements to address this practice.

Example 2.5

The lender in Example 2.4 also operates as a finance broker, and in this capacity regularly arranges credit for its clients at above market interest rates. Some of these clients would be eligible for a loan with interest at a market rate. There is a conflict between the interests of the finance broker and its clients and some clients are being disadvantaged as a result.

Example 2.6

A finance broker also sells investment properties on behalf of a third party. The finance broker has a discretion to set the price for the property above a set minimum, and earns higher commissions for larger loans. The broker must ensure they have adequate arrangements to prevent any disadvantage to clients from the incentive they have to set higher property prices so as to maximise loan values and receive higher commissions.

2.119 A licensee must comply with any conditions imposed by ASIC on their licence, including any standard conditions included in the regulations applying to all licensees. [Part 2-2, Division 5, paragraph 47(1)(c)]

2.120 A licensee must comply with the credit legislation [Part 2-2, Division 5, paragraph 47(1)(d)]. This requires the licensee to conduct their business with an appreciation of the credit legislation, and the need to conduct their business with respect for the law. They need to consider their application to all aspects of their operation, but especially in their dealings with consumers as the regulation of this relationship is one of the main areas addressed in the legislation.

2.121 Where the licensee may breach the credit legislation because of the conduct of its representatives, rather than its own conduct, then it will need to adopt procedures which reflect this. For example, where the licensee has a number of credit representatives in a range of different locations it will need to adopt different procedures to ensure it is complying than a licensee with a single retail outlet.

2.122 Where a breach of the legislation has occurred, whether as a result of the conduct of a representative or otherwise, then the licensee would need to consider whether the circumstances of the breach are such that it is likely to reoccur, and, if so, to take action to address this to ensure it complies in the future.

2.123 A licensee must take reasonable steps to ensure that its representatives comply with the credit legislation [Part 2-2, Division 5, paragraph 47(1)(e)]. Representatives refers to the following classes of persons (but only to the extent their activities or duties place them in a position where the licensee must comply with the credit legislation as a consequence of their conduct) [Part 1-2, Division 2, section 5]:

•

any employees and directors of the licensee, or of a related body corporate of the licensee; and

•

any other person acting on behalf of the licensee, including credit representatives.

2.124 A licensee must have and maintain the competence to engage in the credit activities authorised by the licence [Part 2-2, Division 5, paragraph 47(1)(f)]. This primarily requires the applicant to demonstrate that they possess, through appropriate personnel, the skills and experience relevant to all the credit activities authorised by the licence. Where the applicant only engages in a narrow range of credit activities then the requisite competence will be correspondingly limited.

2.125 A licensee must ensure that its representatives are adequately trained and are competent to engage in the credit activities authorised by the licence [Part 2-2, Division 5, paragraph 47(1)(g)]. The licensee must ensure representatives understand and adhere to compliance arrangements and that where they do not display the knowledge or skills to meet this obligation an appropriate response is provided, whether it be further training or disciplinary action. It is expected that ASIC will provide guidance on what it considers are the relevant competency standards. Nevertheless, the obligation must still be met prior to any guidance from ASIC.

2.126 The licensee must have an internal dispute resolution procedure that complies with standards or requirements made or approved by ASIC and covers disputes in relation to the credit activities engaged in by the licensee [Part 2-2, Division 5, paragraph 47(1)(h)]. It is expected that these standards would cover matters such as transparency, that is, the internal dispute resolution procedures are in writing and known to its representatives where it is relevant to their functions or duties. The standards will be particularly relevant to small businesses and to those who do not have previous experience of internal dispute resolution procedures.

2.127 The licensee must be a member of an approved EDR Scheme [Part 2-2, Division 5, paragraph 47(1)(i)]. It is expected that a licensee would use complaints, whether resolved internally or externally, as part of its compliance program and that the licensee would therefore address any structural weaknesses or actual or potential non-compliance with the law identified through the complaints handing process.

2.128 It is also important that, where a complaint cannot be resolved internally, a licensee deals appropriately with the transfer of the complaint to the EDR Scheme. The licensee is required to disclose their membership of the EDR Scheme to consumers if the complaint cannot be resolved internally (as well as in some of the documents to be provided to the consumer by the licensee).

2.129 The licensee must have compensation arrangements, for loss or damage, as a result of breaches of its obligations in accordance with the regulations or as otherwise approved in writing by ASIC [Part 2-2, Division 5, paragraph 47(1)(j) and section 48]. This obligation only arises when compensation arrangements are specified, either in the regulations or formally by ASIC.

2.130 The licensee must have adequate arrangements and systems to ensure compliance with its obligations under this section, and a written plan which documents those arrangements and systems. [Part 2-2, Division 5, paragraph 47(1)(k)]

2.131 This requirement assists licensees to determine the scope of their obligations, and to ensure they are complying with the other general conduct obligations.

2.132 Except where the licensee is a body regulated by APRA, the licensee must have adequate resources to engage in the credit activities and have adequate risk management systems [Part 2-2, Division 5, subparagraph 47(l)(i)]. This will require applicants to demonstrate they have sufficient resources to be able to meet their obligations; it is not sufficient for a person to have a commitment to complying with the law if they fail, for example, to commit sufficient resources to monitor changes to the law, and then fail to implement modifications to their procedures as a result.

2.133 Except where the licensee is a body regulated by APRA, the licensee must have adequate risk management systems [Part 2-2, Division 5, subparagraph 47(l)(ii)]. This will require licensees to be able to identify risks faced by its business, and develop appropriate responses to effectively manage those risks.

Obligations to assist ASIC

2.134 The Credit Bill imposes specific obligations on licensees to assist ASIC in gathering intelligence and information about licensees, in order to assist it in its functions in regulating those engaging in credit activities. [Part 2-2, Division 5, sections 49 to 51]

2.135 First, a licensee must provide ASIC with information about their credit activities, whether in response to a written notice from ASIC or where this is required by the regulations. [Part 2-2, Division 5, sections 49 and 50]

2.136 ASIC may require the licensee to provide a report, prepared by a suitably qualified person, covering matters specified by ASIC in the written notice. [Part 2-2, Division 5, subsection 49(3)]

2.137 It will be an offence of strict liability if a licensee:

•

fails to comply with a notice to provide information to ASIC within the time specified in the notice [Part 2-2, Division 5, subsections 49(7) and (8)]; or

•

fails to provide information as prescribed by the regulations [Part 2-2, Division 5, subsections 49(4) and (5)].

2.138 These are strict liability offences as it crucial that ASIC is able to obtain information about the conduct of a licensee in a timely way, that allows it to effectively perform its regulatory role.

2.139 These offences also all have a criminal penalty, and a civil penalty of 2,000 penalty units, so that ASIC may appropriately penalise any contravention of these provisions.

2.140 A licensee must also give reasonable assistance to ASIC as requested, in relation to whether the licensee and their representatives are complying with credit legislation. [Part 2-2, Division 5, section 51]

2.141 Reasonable assistance is not defined in the Credit Bill, but means conduct such as making and keeping appointments with ASIC staff, and cooperating in a reasonable way with requests by ASIC for assistance.

2.142 If the request for reasonable assistance is in writing it is expressly stated that it is not a legislative instrument. This statement is declaratory of the existing position, consistent with section 5 of the Legislative Instruments Act 2003. [Part 2-2, Division 5, subsection 50(2)]

2.143 The assistance may include the licensee showing ASIC books of the licensee. This requirement is not to be read as requiring the licensee to show books where it would not otherwise be required to do so as a result of the proper exercise of ASIC's powers. [Part 2-2, Division 5, subsection 50(4)]

2.144 A licensee is required to lodge with ASIC, on an annual basis, a compliance certificate. The certificate must:

•

be in the form approved by ASIC - it is anticipated that the form will require a licensee to certify that they are complying with their obligations under the Credit Bill;

•

be signed:

-

by the licensee, where they are a natural person, or by a partner or trustee (if the licensee is a partnership or trust); or

-

where the licensee is a body corporate, by a person of a kind to be defined in the regulations; and

•

be lodged within 45 days of the licensee's licensing anniversary (that is, the anniversary of the day on which the licence took effect).

[Part 2-2, Division 5, subsections 53(2), (3) and (7)]

2.145 It will be an offence of strict liability if a licensee fails to lodge the compliance certificate with ASIC [Part 2-2, Division 5, subsections 53(5) and (6)]. It is a strict liability offence as if there is a reason why the licensee cannot make the necessary certification it is crucial that ASIC is informed of this in accordance with the law.

2.146 The licensee may be required to pay a fee on the lodgment of this certificate in accordance with the requirements of the National Consumer Credit Protection (Fees) Bill 2009.

Division 6 - When a licence can be suspended, cancelled or varied

Subdivision A - Suspensions and cancellations

2.147 ASIC may suspend or cancel a licence without a hearing in limited circumstances only. First, it can do so where it receives a request from the licensee in the approved form, or where the licensee has ceased engaging in credit activities, or have never commenced engaging in credit activities. [Part 2-2, Division 5, paragraphs 54(1)(a) and (b) and subsection 54(3)]

2.148 Secondly, in a limited number of situations, ASIC can suspend or cancel a licence without a hearing where there may be an urgent need to do so. These circumstances are where a specified person is:

•

insolvent (where they are not the trustees of a trust);

•

convicted of serious fraud;

•

they are incapable of managing their affairs because of physical or mental incapacity; or

•

becomes subject to a prescribed State or Territory order.

[Part 2-2, Division 5, subsection 54(2)]

2.149 The persons specified for the purpose of deciding whether ASIC can take action without a hearing are:

•

where the applicant is a natural person - that person;

•

where the applicant is a body corporate - every director, secretary or senior manager who performs duties in relation to the licence; and

•

where the applicant is a partnership or trustee - every partner or trustee who performs duties in relation to the licence.

[Part 2-2, Division 5, paragraph 54(1)(c)]

2.150 ASIC can also suspend or cancel a licence after a hearing, on the following grounds:

•

the licensee has contravened its obligations in section 47, or ASIC has reason to believe that they are likely to do so;

•

the application for the licence contained information that was false or materially misleading (including where it was false or misleading because it failed to include relevant information); or

•

ASIC has reason to believe that the fit and proper person requirement is no longer satisfied, taking into account the same considerations as those relevant to the question of whether an application for a licence should be granted.

[Part 2-2, Division 5, subsections 55(1) and (2)]

2.151 The requirement that the licensee is a fit and proper person is therefore continuing in nature. Where the licensee engages in conduct or otherwise demonstrates that they are no longer a fit and proper person, then ASIC can take action.

2.152 Special procedures apply in relation to possible suspensions or cancellations of a licence held by an APRA regulated body. ASIC is required to consult with APRA as follows:

•

where the licensee is an ADI or a related body corporate of an ADI - where the proposed cancellation or suspension would prevent the ADI from being able to carry on all or any of its banking business, then:

-

the power to cancel or suspend the licence can only be exercised by the Minister;

-

the Minister must not exercise the power until they have considered advice from ASIC; and

-

ASIC cannot give advice given until it has consulted APRA about the proposed action; and

•

in all other cases where the licensee is regulated by APRA - ASIC must consult with APRA where the proposed cancellation or suspension would prevent the body from being able to carry on all or any of its usual activities.

[Part 2-2, Division 5, section 56]

Subdivision B - Variations

2.153 ASIC can vary a person's licence as a result of a change in the name of the licensee. This is to ensure that where a licensee has changed their name, consumers are able to search the register using the new name. [Part 2-2, Division 5, section 57]

Subdivision C - Miscellaneous rules about suspensions, cancellations and variations

2.154 Where ASIC suspends a licence, then the licence has no effect. The person can therefore no longer engage in credit activities except where ASIC specifically provides for this in the suspension.

2.155 Notwithstanding that ASIC has suspended or cancelled a licence, it may specify that the licence continues for the purpose of specified provisions of the Credit Bill in relation to either a specified matter or for a specified period, or both these matters. [Part 2-2, Division 5, sections 58 and 62]

2.156 This allows ASIC to deal flexibly with suspensions or cancellations by requiring the person to comply with some of the obligations that attach to licensees, rather than all these obligations ceasing with the suspension. For example, ASIC could stipulate that obligations in relation to representatives continue for a specified period.

2.157 ASIC can revoke any suspension of a licence at any time. [Part 2-2, Division 5, section 59]

2.158 The date on which any change by ASIC takes effect is the date on which the notice is given to the licensee. [Part 2-2, Division 5, subsection 60(2)]

2.159 ASIC is required to give written notice of any suspension, or its revocation, or the cancellation or variation of a licence to the licensee. Where ASIC suspends or cancels a licence it is required to specify the reasons for taking this action. [Part 2-2, Division 5, sections 60 and 61]

2.160 As soon as practicable after the notice is given to the licensee, ASIC must publish a notice of the cancellation or suspension on its website, specifying when it came into effect. [Part 2-2, Division 5, subsection 60(3)]

Part 2-3 -Credit representatives and other representatives of licensees

Division 2 - Authorisation of credit representatives

2.161 In order to allow flexibility in the market a registered person or licensee may authorise third parties to engage in credit activities on its behalf. These persons are described as credit representatives in the legislation. [Part 2-3, Division 2, section 64]

2.162 In paragraphs 2.165 to 2.193, the registered person or licensee who appoints a credit representative is referred to as the principal.

2.163 This Division of the Credit Bill sets out:

•

the circumstances and restrictions on the appointment of credit representatives;

•

the consequences of an appointment in breach of these requirements; and

•

the rules for determining the liability of the principal for a credit representative.

2.164 For the avoidance of doubt it is expressly stated in this explanatory memorandum that the Credit Bill does not seek to set out prescriptive rules to, for example, the following effect:

•

a broker is always only the agent of the consumer;

•

a broker can be the agent of the lender or the agent of a lenders mortgage insurer;

•

a person cannot be an agent for more than one party involved in a transaction; and

•

a person who holds an ACL can be appointed as an authorised representative by the holder of an Australian financial services licence, and similarly a person who holds an Australian financial services licence can be appointed as a credit representative by the holder of an ACL.

2.165 The principal must formally authorise a credit representative in writing. The principal may authorise the credit representative to either engage in the same activities as the principal, or to only engage in some of those activities. [Part 2-3, Division 2, subsections 64(1) and (3)]

2.166 An authorisation will be of no effect where it purports to authorise:

•

a credit representative to engage in a credit activity beyond that allowed by the registration or licence;

•

a person to engage in a credit activity where the person is currently prevented from engaging in that credit activity by a banning or disqualification order (whether under this Commonwealth law or under a State or Territory law);

•

a person who is not a member of an EDR Scheme in their own right; or

•

a natural person who has been convicted, within the last 10 years, of serious fraud; or

•

a person where a prescribed State or Territory order is in effect against:

-

against the proposed credit representative where they are a natural person;

-

any director, secretary or senior manager who would perform duties in relation to the credit activities specified in the authorisation, where the proposed credit representative is a body corporate; or

-

a partner or trustee who would perform duties in relation to the credit activities specified in the authorisation, where the proposed credit representative is a partnership or the trustees of a trust.

[Part 2-3, Division 2, subsections 64(4) and (5)]

2.167 The intention is to require the principal, as part of their obligations in relation to credit representatives, to make relevant inquiries into their background, both before appointing a person as a credit representative, and while they continue to so act. This is consistent with the general principal that licensees are responsible for their representatives.

2.168 Generally credit representatives cannot in turn authorise other persons to act as either their own credit representatives or as a credit representative of the principal. This is because the principal is responsible for the conduct of its credit representatives and should therefore be able to determine who can act when cloaked in its authority.

2.169 The exception to this principle is where a body corporate is appointed as a credit representative. In this case the credit representative may, but with the consent of the licensee, appoint a natural person or persons to engage in credit activities on behalf of the principal. [Part 2-3, Division 2, section 65]

2.170 A sub-authorisation of a credit representative by a body corporate will be of no effect where that authorisation purports to authorise:

•

an individual to engage in a credit activity where any of the same matters set out in paragraph 2.163 apply to that individual; or

•

an individual to engage in a credit activity where the principal has not given their written consent.

[Part 2-3, Division 2, subsections 64(5) and (6)]

2.171 In order to give effect to these restrictions on credit agents a principal will commit an offence where they either:

•

give an authorisation to a credit agent that is of no effect under either section 64 or 65 [Part 2-3, Division 2, section 69]; or

•

fail to revoke or vary, as soon as practicable, an authorisation that is of no effect under either Section 64 or 65 [Part 2-3, Division 2, section 70].

2.172 Both of these offences have a criminal penalty, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision).

2.173 A credit representative may be authorised to act for more than one principal. However, each principal must consent to the person also being the credit representative of each of the other licensees (except where the person is acting as the credit representative of a number of related bodies corporate). [Part 2-3, Division 2, section 66]

2.174 A licensee is prohibited from acting as the credit representative of another licensee where the second licensee has a licence which authorises it to engage in the same activities as the first licensee. [Part 2-3, Division 2, section 67]

2.175 A principal may vary or revoke an authorisation at any time, by written notice to the credit representative [Part 2-3, Division 2, section 68]. The credit representative must then:

•

in the case of a variation - act in accordance with the written authority as varied; and

•

in the case of a revocation - cease engaging in credit activities.

2.176 A person who has authorised a credit representative, or has purported to do so, is required to:

•

where any such authorisation is or would be, either in part or totally, of no effect - not authorise them [Part 2-3, Division 2, section 69]; and

•

where they become aware of a matter which means the authorisation, either in part or totally, is of no effect - either revoke the authorisation or vary it if possible so that it continues to have effect [Part 2-3, Division 2, section 70].

2.177 Once a licensee or a corporate credit representative has appointed a person as a credit representative they are required to notify ASIC within 15 business days of their appointment. The notice provided to ASIC must include:

•

the name and business address of the credit representative;

•

details of the authorisation, including the date on which it was made and what the credit representative is authorised to do on behalf of the principal;

•

details of any other principal for whom the credit representative is authorised to act; and

•

details of the EDR Scheme the credit representative has joined.

[Part 2-3, Division 2, subsections 71(1) to (3)]

2.178 A licensee or a corporate credit representative must advise ASIC within 10 business days of the following matters:

•

any changes to the information previously provided to ASIC in respect of the credit representative; or

•

the revocation of the authorisation.

[Part 2-3, Division 2, subsection 71(4)]

2.179 A person will commit an offence (and be liable to a criminal penalty, and a civil penalty of 2,000 penalty units, so that ASIC may appropriately penalise any contravention of the provision) where they are subject to a requirement to give a notice to ASIC and they fail to do so. [Part 2-3, Division 2, subsections 71(5) and (6)]

2.180 This is also an offence of strict liability as it is important that ASIC be advised of this information within a relatively short period so that it can update its register, and maintain the integrity of this database. The register will be used regularly by both:

•

consumers, to verify the status of the person they are dealing with; and

•

by other persons engaging in credit activities, to ensure, for example, that they are not dealing with someone who is not authorised, in breach of the law.

2.181 ASIC must allocate a unique credit representative number to each authorised credit representative, and must give written notice of this number to both the credit representative and the person who authorised them. [Part 2-3, Division 2, section 72]

Division 3 - Information about representatives

2.182 ASIC is specifically authorised to give a licensee information about its representatives, where this is relevant to their conduct or continuing appointment. [Part 2-3, Division 3, section 73]

2.183 This enables ASIC, in specified circumstances, to provide a licensee with information it has obtained about a current or potential representative so that the licensee can decide whether to employ them, or to terminate or vary their existing terms of appointment.

2.184 The information provided by ASIC can only be used by the licensee, or to any person who the licensee provides it to (such as its lawyers), for the following purposes:

•

making a decision about whether to take action against the person; and

•

taking any action as a result of that decision.

[Part 2-3, Division 3, subsection 73(2)]

2.185 In relation to information provided by ASIC a person:

•

will commit an offence where they use it for a purpose other than those specified in paragraph 2.181 [Part 2-3, Division 3, subsections 73(4) and (5)]; and

•

will have qualified privilege where they use it for those purposes [Part 2-3, Division 3, subsection 73(7)].

2.186 This offence has a criminal penalty of 50 penalty units, or imprisonment for one year or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision).

2.187 The Credit Bill provides that where a person has qualified privilege then the person:

•

has qualified privilege in proceedings for defamation; or

•

is not liable, in the absence of malice on the person's part, to an action for defamation at the suit of a person.

[Part 1-2, Division 4, section 16]

Division 4 - Liability of licensees for representatives

2.188 This Division deals with the liability of principals for the conduct of their credit representatives, including where the credit representative acts for more than one principal.

2.189 The Division applies to conduct on which a client could reasonably be expected to rely and on which the client did rely in good faith. Where there is reliance it would be unusual for it not to be in good faith. [Part 2-3, Division 4, section 74]

2.190 Where a representative acts for only one principal, that principal is responsible for the conduct of its credit representative, whether or not the conduct is within the authority of the licensee. [Part 2-3, Division 4, section 75]

2.191 Where a credit representative acts for several principals, then the liability of these principals is to be determined in accordance with the following principles:

•

where the conduct relates to a particular class of credit activity and the person is a credit representative of only one of those principals in respect of that type of activity - that principal is solely responsible;

•

if the representative is the representative of more than one of the principals in relation to a class of credit activity then:

-

where the conduct has only been authorised by one of the principals - that principal is solely responsible; and

-

where the conduct has been authorised by two or more of the principals - those principals are jointly and severally responsible to the client; and

•

in all other cases - all of the principals are jointly and severally responsible for the conduct, whether or not the credit representative's conduct is within authority in relation to any of them.

[Part 2-3, Division 4, section 76]

2.192 Where, as a result of the operation of these provisions, a licensee is responsible for the conduct of a representative, the licensee will be liable to a client for any loss or damage they suffered as a result of the conduct of the representative. [Part 2-3, Division 4, section 77]

2.193 While this Division determines the liability of principals for the conduct of representatives it does not:

•

make a principal either civilly or criminally liable as a result of the conduct of a representative, when they would otherwise be liable [Part 2-3, Division 4, subsection 78(3)]; or

•

relieve a representative of liability they have to a client or the licensee [Part 2-3, Division 4, subsection 78(4)].

2.194 The Credit Bill provides that any agreement is void to the extent it attempts to avoid the outcomes in paragraphs 2.190 to 2.191, or change the liability of persons inconsistently with the Credit Bill. However a principal can obtain an indemnity from the credit representative or from another principal for any potential liability arising under this Division. A principal may also indemnify another principal in respect of the conduct of the credit representative. This is to allow these parties to be flexible in determining how to apportion liability amongst themselves. [Part 2-3, Division 4, subsections 78(5) and (6)]

Part 2-4 - Banning or disqualification of persons from engaging in credit activities

Division 2 - Banning orders

2.195 ASIC has the power to make an order banning any person from engaging in credit activities. The power can be exercised against:

•

any natural person, including a licensee, an employee, a representative (including a credit representative), or a registered person; or

•

a corporate credit representative or other person within the meaning of the Credit Bill.

[Part 2-4, Division 2, section 80]

2.196 The intention of a banning order is to protect the public, rather than being an order to punish or impose a penalty (although this will usually be a necessary consequence). However, even where the individual is unlikely to commit an offence again, ASIC may decide to ban them where it is necessary to protect the public, including by deterring others who might otherwise be emboldened where misconduct is perceived to not result in any sanction.

2.197 A person can be banned if:

•

any credit registration or ACL held by the person is suspended or cancelled;

•

the person becomes insolvent (except for the trustees of a trust);

•

the person is convicted of fraud (if they are a natural person);

•

they have breached any credit legislation or are likely to do so;

•

they are involved in a contravention of any credit legislation or are likely to be involved in a contravention of any credit legislation;

•

a prescribed State or Territory order is made against the person; or

•

ASIC has reason to believe that they are not a fit and proper person to engage in credit activities.

[Part 2-4, Division 2, subsection 80(1)]

2.198 A person is 'involved in' a contravention of credit legislation if the person:

•

has aided, abetted, counselled or procured the contravention;

•

has induced the contravention, whether by threats or promises or otherwise;

•

has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or

•

has conspired with others to effect the contravention.

[Part 1-2, Division 2, section 5]

2.199 The extension of grounds to where the person is involved in a contravention of credit legislation enables ASIC to take into account conduct where the person is not under a legal responsibility to comply with the legislation themselves but they contributed to or caused another person to breach the legislation. The Credit Bill primarily places obligations to comply with the law on the holder of an ACL. Where the ACL is, for example, a body corporate then any contravention of the law will necessarily be the result of an act or omission by a natural person, such as a director or employee. The Credit Bill specifically allows ASIC to take into account the conduct of these persons where they have been involved in a contravention of the credit legislation, in deciding whether or not these individuals should be banned.

2.200 While fraud is not defined in the Credit Bill, it should, given the context, be interpreted consistently with the definition of serious fraud.

2.201 ASIC can ban a person where their conduct, while not falling into any of the specific categories, gives ASIC reason to believe that they are not a fit and proper person to engage in credit activities.

2.202 In determining whether a person is not a fit and proper person to engage in credit activities ASIC is authorised to take into account:

•

the matters listed in subsection 37(2) (as set out in paragraph 2.74);

•

any criminal convictions of the person, within 10 years before the cancellation or suspension of the licence; and

•

any other matters ASIC considers relevant.

[Part 2-4, Division 2, subsection 80(2)]

2.203 Given that it can be expected that ASIC will principally use this power to ban individuals, this would enable ASIC to take into account conduct such as where:

•

ASIC believes the individual has committed a fraud, but the individual has not been prosecuted for this or there is a delay or uncertainty in any prosecution;

•

the individual has engaged in conduct causing serious detriment or financial loss to consumers, so that there is a need to protect the public; or

•

the individual has demonstrated a consistent failure to comply with the law, or with directions from any licensee or employer.

2.204 ASIC can ban a person without a hearing where:

•

their licence was cancelled or suspended without a hearing; or

•

the person has been convicted of serious fraud.

[Part 2-4, Division 2, subsections 80(5) and (6)]

2.205 It is considered that an awareness by those engaging in credit activities that misconduct can result in a banning, and potential loss of livelihood, will act as an effective restraint or deterrent.

2.206 A banning order is defined as a written order made by ASIC that prohibits a person from engaging in credit activities. ASIC is given flexibility in making orders so that a person can either be banned from engaging in all activities permanently, or banned in more limited ways (for example, for a specified period only, or in relation to specified credit activities). [Part 2-4, Division 2, section 81]

2.207 ASIC must give a copy of the banning order to the person against whom it was made. [Part 2-4, Division 2, subsection 80(8)]

2.208 If a person engages in conduct in breach of a banning order they will commit an offence. This offence has a criminal penalty of 100 penalty units, or imprisonment for 2 years, or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision). [Part 2-4, Division 2, section 82]

2.209 ASIC can vary or cancel a banning order, including a permanent banning order, either on its own initiative or at the request of the banned person, where the request is made in the approved form. [Part 2-4, Division 2, subsections 83(2) and (3)]

2.210 Where the request is made by the banned person ASIC must consider whether there has been a change in the circumstances on which the banning order was based that makes it appropriate to vary or cancel the banning order. [Part 2-4, Division 2, section 83]

2.211 Where ASIC proposes not to vary or cancel the banning order it must give the banned person an opportunity to present their case, at a private hearing and through written submissions. [Part 2-4, Division 2, subsection 83(4)]

2.212 It is expressly stated that a banning order, or any variation or cancellation of the order, is not a legislative instrument. This statement is declaratory of the existing position, consistent with section 5 of the Legislative Instruments Act 2003. [Part 2-4, Division 2, subsection 81(4)]

2.213 ASIC must give written notice of any banning order, and any subsequent variation or cancellation, to the person. [Part 2-4, Division 2, subsection 83(5)]

2.214 A banning order, or any variation or cancellation of the order, takes effect from the date on which the notice is given to the person [Part 2-4, Division 2, subsections 84(1) and (2)]. ASIC must also publish a notice of the banning order, or any variation or cancellation, on its website [Part 2-4, Division 2, subsection 84(3)].

2.215 ASIC is required to specify in writing the reasons for any banning and any subsequent variation. [Part 2-4, Division 2, section 85]

Division 3 - Disqualification by the Court

2.216 Where ASIC has cancelled a licence or has made a permanent banning order against a person, it can apply to the Court for further orders:

•

an order disqualifying the person from engaging in credit activities (in total or subject to conditions, or in specified circumstances); or

•

any other order the Court thinks appropriate.

[Part 2-4, Division 3, section 86]

Part 2-5 - Financial records, trust accounts and auditors

2.217 This part of the Credit Bill imposes obligations on licensees:

•

to keep financial records that correctly record and explain the credit activities the licensee engages in; and

•

to keep a trust account, where they receive and hold money on behalf of another person.

Division 2 - Financial records of licensees

2.218 Each licensee will be required to keep financial records that correctly record and explain the transactions they enter into and their financial position. A failure to keep records as required by this Division will be an offence with a criminal penalty of 200 penalty units, or imprisonment for 5 years or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision). [Part 2-5, Division 2, section 88]

2.219 The definition of financial records includes the following types of records:

•

invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers;

•

documents of prime entry; and

•

where the licensee provides credit services, any trust account statements or reports that the licensee is required to keep under Division 3.

[Part 2-5, Division 2, subsection 88(2)]

2.220 The licensee must also comply with the following requirements in relation to their financial records:

•

the records must correctly record and explain the credit activities in which the licensee engages [Part 2-5, Division 2, paragraph 88(1)(a)];

•

the records must be kept in a way that:

-

enables accurate profit and loss statements and balance sheets to be prepared; and

-

allows this information to be properly audited [Part 2-5, Division 2, section 89];

•

the records must either be kept in English, or in a manner that enables them to be easily translated into English [Part 2-5, Division 2, section 90];

•

the records must be accessible within this jurisdiction [Part 2-5, Division 2, section 91]; and

•

the records must be sufficiently detailed to show the following information:

-

particulars of money received or paid by the licensee (which will include moneys paid into and out of any trust accounts required to be maintained pursuant to Division 2);

-

the amount and date of all payments made by debtors, lessees or guarantors, and the outstanding balance owing under each credit contract or consumer lease;

-

income received and expenses paid by the licensee; and

-

the assets and liabilities of the licensee [Part 2-5, Division 2, section 92].

2.221 The Credit Bill provides for regulations to be made to impose additional requirements in relation to the financial records of financial services licensees. [Part 2-5, Division 2, paragraph 88(g) and Part 2-5, Division 2, section 93]

2.222 Licensees are required to retain financial records for a period of seven years after the transactions covered by the record have been completed. The requirement applies even where the person has stopped carrying on a business of engaging in credit activities to which the records relate. This offence has a criminal penalty of 25 penalty units, or imprisonment for 6 months year or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision). [Part 2-5, Division 2, section 95]

2.223 It is expressly provided that:

•

a financial record is admissible in Court as prima facie evidence of a matter stated in the record; and

•

a document purporting to be a financial record kept by a licensee is presumed to be such a record, unless the contrary is proved.

[Part 2-5, Division 2, subsections 96(1) and (2)]

Division 3 - Trust accounts of credit service licensees

2.224 This Division imposes requirements on licensees where they are required to keep trust accounts. The obligation only applies to licensees who:

•

provide credit services (that is, they either provide credit assistance or act as an intermediary); and

•

in that capacity they receive money on behalf of another person.

[Part 2-5, Division 3, section 97]

2.225 The statutory obligations in respect of trust accounts only apply once a person is licensed. While a person is registered they are subject to common law obligations where these arise in law.

2.226 The requirements in respect of trust accounts are:

•

to keep trust accounts with an Australian ADI [Part 2-5, Division 3, subsection 98(2)];

•

to designate its title as the licensee's trust account [Part 2-5, Division 3, subsection 98(3)];

•

to pay into the trust account any money received by the licensee on behalf of another person in their capacity as a licensee [Part 2-5, Division 3, subsection 99(1)]; and

•

to only withdraw money from the account to pay a person who is lawfully entitled to that money [Part 2-5, Division 3, subsections 99(2) and (3)]. It is specifically provided that the money cannot be used to pay debts of other creditors of the licensee [Part 2-5, Division 3, subsection 99(5)].

2.227 A failure to comply with either section 98 or section 99 will be an offence with a criminal penalty of 25 penalty units, or imprisonment for 6 months year or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision).

2.228 The licensee is required to lodge a trust account statement; and an auditor's report with ASIC annually [Part 2-5, Division 3, subsections 100(1) and (2)]:

2.229 A breach of this requirement will be an offence with a criminal penalty of 25 penalty units, or imprisonment for 6 months year or both, and a civil penalty of 2,000 penalty units (so that ASIC may appropriately penalise any contravention of the provision).

2.230 The annual statement and the auditor's report must be in the form approved by ASIC and contain information and materials as specified in the regulations [Part 2-5, Division 3, subsection 100(3)].

2.231 The licensee must lodge the report with ASIC [Part 2-5, Division 3, section 101]:

•

where the licensee is a body corporate - within two months of the end of the financial year;

•

where the licensee is not a body corporate in any other case - within three months of the end of the financial year; and

•

where the licensee is granted an extension - within the period of the extension.

2.232 A financial year is defined as meaning [Part 2-5, Division 3, subsection 100(6)]:

•

where the licensee is a body corporate - a financial year of the body corporate within the meaning of section 323D of the Corporations Act; and

•

in any other case - a year ending on 30 June.

2.233 ASIC may grant an extension to the usual time limits where the request is made by the licensee and the auditor before the end of the period they would otherwise be required to provide the report in [Part 2-5, Division 3, subsection 101(3)]. ASIC may impose any conditions as it considers appropriate on the extension, and the licensee must comply with those conditions [Part 2-5, Division 3, subsections 101(4) and (5)].

Division 4 - Matters relating to audit reports

2.234 This Division regulates the relationship between auditors, licensees and ASIC, in relation to the following audit reports:

•

an audit report under subsection 49(3), in response to a notice served by ASIC on an applicant for a licence, or a licensee; and

•

an audit report under subsection 100(2) of a licensee's trust account.

2.235 In relation to these reports, the licensee or, if it is a body corporate, a director, secretary or senior manager of the licensee, is required to:

•

provide the auditor with reasonable access to its records;

•

assist the audit, or explain to them matters relevant to the preparation of the report; and

•

not fail to give assistance or otherwise hinder or delay the auditor in the exercise of their duties.

[Part 2-5, Division 3, subsections 102(1) to (3)]

2.236 The licensee is liable to meet the reasonable fees and expenses of the auditor, and, if necessary, the auditor can recover this amount as a debt owing by the licensee. [Part 2-5, Division 3, section 103]

2.237 An auditor is required to advise ASIC where it becomes aware of any of the following matters:

•

a matter that adversely affects the ability of the licensee to meet their obligations;

•

a matters that contravenes or may contravene Divisions 2 and 3 (that is, the provisions in respect of financial records and trust accounts); or

•

an attempt to unduly influence, coerce, manipulate or mislead the auditor in the preparation of their report.

[Part 2-5, Division 3, subsection 104(2)]

2.238 The auditor is only required to advise ASIC if it forms an opinion that one of these matters has occurred. If it considers the conduct does not satisfy the requirement in the law it is not required to report it to ASIC. [Part 2-5, Division 3, subsection 104(2)]

2.239 An auditor is required, within seven days of becoming aware of such a matter, to provide a written report to both ASIC and the licensee. [Part 2-5, Division 3, subsection 104(1)]

2.240 The Credit Bill provides that qualified privilege will apply to the following conduct by auditors (including a registered company auditor on behalf of an audit company):

•

statements, whether oral or in writing, made by the auditor in the course of their duties relating to an audit report; and

•

giving a report as required under subsection 104(1), either to ASIC or to the potential licensee.

[Part 2-5, Division 3, subsections 105(1) and (2)]

2.241 A person has qualified privilege where they publish:

•

a document prepared by an auditor in the course of their duties in relation to an audit report; and

•

a statement, whether oral or in writing, made by an auditor or a registered company auditor on behalf of an audit company in the course of their duties relating to an audit report.

[Part 2-5, Division 3, subsections 105(3) and (4)]

2.242 The Credit Bill provides that where a person has qualified privilege then the person:

•

has qualified privilege in proceedings for defamation; or

•

is not liable, in the absence of malice on the person's part, to an action for defamation at the suit of a person.

[Part 1-2, Division 4, section 16]

2.243 The Credit Bill includes a power to make regulations in respect of:

•

audit reports required either under subsection 37(4) in response to a notice served by ASIC on an applicant for a licence, or a licensee, or under subsection 100(2) (in respect of a licensee's trust account);

•

auditors that prepare the reports; and

•

the auditing standards that must be complied with in the preparation of the reports.

[Part 2-5, Division 3, section 106]

Part 2-6 - Exemptions and modifications in relation to this Chapter

Division 2 - Exemptions and modifications in relation to this Chapter

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

•

Chapter 2 of the Credit Bill - dealing with licensing of persons who engage in credit activities;

•

the definitions in the Credit Bill, as they apply in Chapter 2 of the Credit Bill; and

•

instruments made for the purposes of Chapter 2 of the Credit Bill.

[Part 2-6, Division 2, section 108]

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

•

by ASIC exempting or modifying their application to:

-

a particular person or that person and all their credit representatives; or

-

a credit activity that is engaged in, in relation to a specified credit contract, mortgage, guarantee or consumer lease [Part 2-6, Division 2, subsection 108(1)];

•

by ASIC exempting or modifying their application to:

-

a class of persons; or

-

a class of credit activities [Part 2-6, Division 2, subsections 108(3) and (4)]; or

•

by an exemption or modification of their application in the regulations to:

-

a class of persons; or

-

a class of credit activities [Part 2-6, Division 2, section 110].

2.246 An exemption by ASIC of a particular person (or that person and all their credit representatives) or a credit activity that is engaged in relation to a specified credit contract, mortgage, guarantee or consumer lease is stated not to be a legislative instrument. This statement is declaratory of the law, consistent with section 5 of the Legislative Instruments Act 2003. [Part 2-6, Division 2, subsection 109(2)]

2.247 An exemption by ASIC of a particular person or a credit activity that is engaged in, 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 2-6, Division 2, subsection 109(5)]

2.248 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 2-6, Division 2, subsection 109(6)]