Senate

Revised Explanatory Memorandum

Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP

General outline and financial impact

Outline

The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) amends the National Consumer Credit Protection Act 2009 (NCCP Act).

The NCCP Act implemented a national framework for the regulation of credit by the Commonwealth.

The key reforms introduced by the Enhancements Bill are:

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a number of specific changes to the provisions of the NCCP Act, to improve its operation (for example, changes to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship);

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product-specific obligations in respect of reverse mortgages, including a statutory protection against negative equity and improved disclosure requirements, intended to assist consumers to make more informed choices in relation to the use of these products;

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caps on the maximum amount credit providers can charge under both small amount credit contracts, and all other credit contracts, and additional obligations in relation to small amount contracts (including additional responsible lending obligations and new disclosure requirements); and

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changes to provide greater regulatory consistency between consumer leases and credit contracts (to address regulatory arbitrage arising from the current lower level of obligations applying to consumer leases).

The Enhancements Bill also amends the Australian Consumer Law (ACL), to correct a minor error by replacing references to 'consumer goods' with 'goods' or 'goods supplied to a consumer' (as appropriate), in the lay-by and repair notice provisions.

Summary of regulation impact statements

Impact: The Enhancements Bill will affect businesses that engage in credit services, particularly in relation to consumer leases, short-term small amount loans and reverse mortgages. The main beneficiaries of the new laws will primarily be consumers of those types of credit products.

It will also affect ASIC as national regulator for consumer credit.

Main points:

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Enhancements to the NCCP Act:

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consumers will benefit as, first, licensees will be required to meet higher standards of conduct, and, second, the procedures for debtors seeking changes to their contracts on the grounds of financial hardship will be made more accessible;

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there will be a limited financial impact on persons engaging in credit activities as the changes largely target misconduct; and

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Reverse mortgages:

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consumers will be assisted to make more informed choices in respect of the balance between current access to credit and the future restrictions on lifestyle choices from reduced equity;

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consumers will have protections that reduce the risk of them being evicted from their home;

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the changes to procedures and to the content of contract documents will have a low level of compliance costs for reverse mortgage providers (as many already meet similar standards on a voluntary basis);

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third parties will find it easier to provide advice to consumers about reverse mortgages, because there will be consistent statutory requirements in relation to matters such as no negative equity guarantees, default clauses and the position of non-title holding residents (reducing their time and cost in assessing competing products, and making advice more accessible); and

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Small amount credit contracts:

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the creation of presumptions to inform the responsible lending obligations will address the risk of debtors entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments;

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improving disclosure about the availability of alternatives will help consumers to make better and more informed financial decisions and to seek out lower cost alternatives to relatively higher cost short-term credit contracts;

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the introduction of these requirements will have a low level of compliance costs (because of the limited nature of these obligations); and

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Caps on costs:

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specifying the maximum amount that can be charged will reduce the cost to consumers, and particularly assist those on low-incomes (as currently the financial position of many borrowers, together with the level of costs that can be charged by credit providers can result in such a reduction in income that the debtor may, in a very short period, be placed in a position where the debt cannot be repaid);

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the introduction of the cap would generally not require significant compliance costs, given that the cap on small amount credit contracts is straightforward in its application, and that, in relation to other credit contracts, most larger credit providers will already be complying with a similar cap that is in force in the Australian Capital Territory, New South Wales and Queensland; and

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the introduction of the cap may have a significant impact on the revenue generated by individual credit providers, although the extent will vary according to their business model; and

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Consumer leases:

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consumers who enter into consumer leases will have rights similar to those available to consumers in relation to credit contracts (and that have proved effective in that context); and

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the application to lessors of obligations that currently apply to credit contracts will require changes to internal procedures, but the cost would be limited given that these obligations are generally already well understood.

Date of effect: The substantive obligations in Schedule 1, Schedule 2 (other than as noted below) and Schedules 3 and 5 commence on 1 March 2013. The remaining obligations commences as below:

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substantive obligations in respect of the protection against negative equity in Schedule 2 commence the day after the Enhancements Bill receives the Royal Assent;

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application and transitional provisions in Schedule 6 commence on the day after the Enhancements Bill receives the Royal Assent;

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provisions in Schedule 4 in relation to the caps on costs for credit contracts commence on 1 July 2013;

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amendments to the Australian Consumer law commence upon proclamation, or 12 months after Royal Assent if they are not proclaimed by that time.

Proposal announced: The reforms in Schedule 2 in respect to the regulation of reverse mortgages are part of the Government's Delivering for Seniors package, announced on 7 August 2010.

The remaining reforms, in respect to enhancements, consumer leases and short term small amount lending, are implemented as part of Phase Two of the COAG National Credit Reform agenda announced in July and October 2008.