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)

General outline and financial impact

Outline

The National Consumer Credit Protection Bill 2009 (Credit Bill), the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill) and the National Consumer Credit Protection (Fees) Bill 2009 (Fees Bill), (collectively the Consumer Credit Protection Reform Package) outline a new national consumer credit regime. The new regime:

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gives effect to the Council of Australian Governments' (COAG) agreements of 26 March and 3 July 2008 to transfer responsibility for regulation of consumer credit, and a related cluster of additional financial services, to the Commonwealth; and

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implements the first phase of a two-phase Implementation Plan to transfer credit regulation to the Commonwealth endorsed by COAG on 2 October 2008.

The Consumer Credit Protection Reform Package establishes the key components of the proposed national credit regime which include:

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a comprehensive licensing regime for those engaging in credit activities via an Australian credit licence (ACL) to be administered by the Australian Securities and Investments Commission (ASIC) as the sole regulator;

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industry-wide responsible lending conduct requirements for licensees;

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improved sanctions and enhanced enforcement powers for the regulator; and

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enhanced consumer protection through dispute resolution mechanisms, court arrangements and remedies.

The regime also replicates the Uniform Consumer Credit Code (UCCC), enacted in the Consumer Credit (Queensland) Act 1994 (Qld) and applied in the States and Territories since 1996, into Commonwealth law. It also expands the scope of regulation to cover credit for residential investment properties.

National licensing regime

The proposed reforms introduce a comprehensive national licensing regime, which is to be distinguished from the current regulation of financial services under the Corporations Act 2001 (Corporations Act). This arises 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. The ACL is tailored to meet the issues arising in the credit context.

The key elements of the new licensing regime are that:

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

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

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

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

Responsible lending conduct

In addition to licensing obligations, the Credit Bill includes a collection of conduct obligations applicable to all holders of an ACL, which apply responsible lending conduct requirements. Broadly, the responsible lending conduct obligations set in place expected standards of behaviour of licensees when they enter into consumer credit contracts or leases, where they suggest a credit contract or lease to a consumer, or assist a consumer to apply for a credit contract or lease.

The key obligation on licensees is to ensure they do not provide a credit contract or lease to a consumer or suggest or assist a consumer to enter into a credit contract or lease that is unsuitable for them. This obligation requires licensees to assess that the credit contract or lease is not unsuitable for the consumer's requirements and that the consumer has the capacity to meet the financial obligations under the credit contract or lease.

Sanctions and remedies

The Credit Bill establishes a civil penalty and consumer remedy framework that promotes strong consumer protections, including a civil enforcement regime and broad civil remedies. The key provisions:

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enable ASIC to seek a court declaration of contravention for a civil penalty and to seek a pecuniary penalty;

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set out the administrative provisions in relation to a civil penalty;

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enable the court to grant remedies to consumers for loss or damage suffered as a result of a contravention of the Credit Bill, including through varying the contract as well as monetary redress;

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enable the court to grant relief to consumers for unlicensed conduct; and

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permit infringement notices to be issued by ASIC for strict liability offences and civil penalties as provided by regulations.

Dispute resolution and the courts

A key feature of the Credit Bill is the improved accessibility to dispute resolution in terms of location, procedural simplicity and lower costs.

Consumers will have access to a three-tiered dispute resolution process for credit issues. They will have access to the credit provider's and credit service provider's internal dispute resolution process as a first point of dispute resolution.

More importantly, to obtain a licence to provide credit or credit services, the credit provider and credit service provider will be required to have membership of an ASIC-approved External Dispute Resolution Scheme (EDR Scheme).

Therefore, if consumers are not satisfied with the review outcomes from the internal process, they may access the licensee's EDR Scheme.

In addition, consumers will retain access to the courts to seek redress. Neither internal nor external dispute resolution processes will remove a consumer's right to seek redress directly from a court.

Other key provisions in the Credit Bill to promote accessibility in terms of location, procedural simplicity and costs of dispute resolution include:

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access to all relevant Commonwealth, State and Territory courts;

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delineation of civil and criminal jurisdiction, including transfer and appeal arrangements;

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'opt-in' streamlined court procedures for certain consumer remedies; and

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a presumption that a court may not impose an adverse cost order for a hardship application or a variation of a contract unless vexatious or without reasonable cause.

National Credit Code

Schedule 1 to the Credit Bill contains the National Credit Code (Code) which largely replicates the State and Territory based UCCC. The objectives of the Code remain the same as those when the UCCC was first enacted, namely, to ensure strong consumer protection through 'truth in lending', while recognising that competition and product innovation must be enhanced and encouraged by the development of non-prescriptive flexible laws. The Code regulates many aspects of the provision of certain types of credit, including upfront and ongoing disclosure obligations, changes to the credit contract, advertising and marketing requirements, termination of the credit contract and penalties and remedies.

The Code also governs consumer leases, and extends the scope of credit contracts covered by the Code to contracts where the credit is provided to purchase, renovate or improve a residential investment property.

The approach of the Code is for it to be as similar to the UCCC as is practicable, except where the Commonwealth has specifically decided to amend or extend its operation.

Date of effect: The short title and commencement provisions of the Credit Bill commence on Royal Assent. The remaining provisions commence on a single day to be fixed by Proclamation.

Proposal announced: The proposal to transfer responsibility for regulating consumer credit to the Commonwealth was announced by COAG on 26 March, 3 July and 2 October 2008.

Financial impact: The Government has provided $70.2 million over four years to implement the decision of COAG as part of the 2008-09 Mid-Year Economic and Fiscal Outlook. This Bill includes measures to give effect to that transfer. The funding will support the establishment of a national licensing regime for providers of credit and credit services, with ASIC as the sole national regulator. It will also support the national regulation of mortgages, margin lending, personal loans, credit cards and pay day lending. The funding will be partially offset by revenue raised from fees to be paid by persons regulated by the national framework, payment of which commences during the 2010-11 financial year. The revenue generated from these fees will depend, in part, on the number and type of persons seeking to be licensed.

Compliance cost impact: The main compliance cost impact arises in relation to the licensing regime. This will primarily involve the initial costs associated with applying for an ACL, which include the payment of fees to lodge application documentation with ASIC, annual compliance costs and costs of EDR Scheme membership.

Summary of regulation impact statement

Regulation impact on business: National licensing regime

Impact: The new national licensing regime will affect consumers of credit; industry participants including providers of credit and credit services; the Government and ASIC.

Main points:

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The main group affected is industry participants who will need to become holders of an ACL in order to continue engaging in credit activities.

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The most significant impact will be on those who only conduct business in States or Territories where there is currently no licensing or registration scheme. These businesses may face significant transitional costs.

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Licensing will involve one-off costs associated with applying for a licence, together with ongoing fees for lodging various documents. There will also be costs of complying with the ongoing obligations associated with the licence, including, in particular:

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training and supervision costs; and

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maintaining adequate compensation arrangements (for example, professional indemnity insurance).

Regulation impact on business: Responsible lending conduct

Impact: The groups affected by the responsible lending requirements are consumers of credit; industry participants in particular, providers of credit and credit assistance; the Government and ASIC.

Main points:

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The costs on holders of an ACL associated with complying with the responsible lending conduct requirements primarily relate to the development of adequate systems and resources to undertake and provide compliant suitability assessments that will meet the requirements not to provide or suggest unsuitable credit contracts.

Regulation impact on business: Sanctions, remedies dispute resolution and the courts

Impact: The groups affected by the new regime of consumer remedies and ASIC enforcement powers would be: consumers of credit; industry participants, including providers of credit and credit assistance; and the Government and ASIC.

Main points:

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The costs of both the regulator and the industry from an expanded enforcement framework are expected to be less than using the limited enforcement avenues that currently exist. Cost savings can be expected where administrative actions may be used as an alternative to civil and criminal sanctions. However, this may not necessarily lead to any change in the costs of a defended action.

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While broader enforcement powers carry some potential additional compliance costs for industry participants, this outcome is expected to deliver greater net benefits for consumers particularly over time, through overall improvements to standards of industry behaviour.

Regulation impact on business: National Credit Code

Impact: The groups affected by the Code would be consumers of credit; industry participants (principally credit providers and, indirectly, credit service providers); and the Government and ASIC.

Main points:

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As the Code largely replicates the State-based UCCC, the activities of credit providers are for the most part currently regulated consistent with this aspect of the proposed credit regime. Therefore, regulatory impact for industry is expected to be minimal.

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Industry will now need to comply with the Code where credit for residential investment properties is provided but the impact on industry compliance is expected to be minimal.