National Consumer Credit Protection Bill 2009

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National Consumer Credit Protection Bill 2009

- C2009B00148

A Bill for an Act relating to credit, and for related purposes

Administered by: Treasury

For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.

Registered	29 Jun 2009
Introduced HR	25 Jun 2009

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2008‑2009

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

National Consumer Credit Protection Bill 2009

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)

Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact................................................................ 3

Chapter 1 Introduction.......................................................................... 11

Chapter 2 Licensing of persons engaging in credit activities.......... 27

Chapter 3 Responsible lending conduct............................................ 79

Chapter 4 Remedies............................................................................ 85

Chapter 5 Administration..................................................................... 85

Chapter 6 Compliance and enforcement........................................... 85

Chapter 7 Miscellaneous..................................................................... 85

Chapter 8 National Credit Code......................................................... 85

Chapter 9 Regulation impact statement............................................. 85

Chapter 10 Attachment A: Regulation impact statement.................. 85

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

*Abbreviation*	*Definition*
AAT	Administrative Appeals Tribunal
ABN	Australian Business Number
ACL	Australian credit licence
AD(JR)	Administrative Decisions (Judicial Review) Act 1977
ADIs	authorised deposit‑taking institutions
Agreement	Uniform Credit Laws Agreement 1993
APRA	Australian Prudential Regulation Authority
ASIC	Australian Securities and Investments Commission
ASIC Act	Australian Securities and Investments Commission Act 2001
ASX	Australian Securities Exchange
COAG	Council of Australian Governments
COAG agreement	Agreement by COAG to the Commonwealth assuming responsibility for regulating mortgage credit (including non‑deposit‑taking institutions) and advice, including persons and corporations engaged in mortgage broking activities. The agreement also extends to the Commonwealth regulating margin loans.
Code	National Credit Code
Consumer Credit Protection Reform Package	National Consumer Credit Protection Bill 2009, National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009, and the National Consumer Credit Protection (Fees) Bill 2009
Corporations Act	Corporations Act 2001
Credit Bill	National Consumer Credit Protection Bill 2009
Crimes Act	Crime Act 1914
EDR Scheme	External Dispute Resolution Scheme
EFT Code	Electronic Funds Transfer Code of Conduct
Fees Bill	National Consumer Credit Protection (Fees) Bill 2009
FSR	Financial Services Reform Act 2001
GST	goods and services tax
IDR	internal dispute resolution
LVR	loan to value ratio
MCCA	Ministerial Council on Consumer Affairs
MCR	mandatory comparison rates
Minister	Minister responsible for administering the Credit Bill determined in accordance with section 19A of the Acts Interpretation Act 1901
PC	Productivity Commission
PC Report	Productivity Commission’s report on the Review of Australia’s Consumer Policy Framework
the Council	Ministerial Council for Uniform Credit Laws
Transitional Bill	National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009
UCCC	Uniform Consumer Credit Code enacted in Queensland by the Consumer Credit (Queensland) Act 1994 (Qld) and applied in States and Territories since 1996
VCAT	Victorian Civil and Administrative Tribunal

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:

• 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

• 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:

• 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;

• industry‑wide responsible lending conduct requirements for licensees;

• improved sanctions and enhanced enforcement powers for the regulator; and

• 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:

• 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

• 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:

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

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

• 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;

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

• 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:

• access to all relevant Commonwealth, State and Territory courts;

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

• ‘opt‑in’ streamlined court procedures for certain consumer remedies; and

• 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 required to be paid by persons regulated by the national framework, payment of which commences during the 2009‑10 financial year. The amount of 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:

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

• 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. It can be anticipated that these businesses will face significant transitional costs.

• 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:

– training and supervision costs; and

– 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:

• 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:

• 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.

• The costs for 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. 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:

• 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.

• 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.

Chapter 1
Introduction

Outline of chapter

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

Context of new law

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

Summary of new law

1.3 Chapter 1 of the Credit Bill covers the following:

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

• Defined Terms and Documents and other definitions for the Credit Bill;

• the constitutional basis and application of this Credit Bill; and

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

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

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

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

Detailed explanation of new law

Part 1‑1 — Preliminary

Division 1 — Preliminary

Commencement

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

1.8 In relation to the new licensing regime, a two‑phase approach is being adopted on commencement of the Credit Bill. Credit providers and credit service providers will be required to be registered with the Australian Securities and Investments Commission (ASIC) by 31 December 2009, and to have applied for a licence by 30 June 2010 in order to engage in credit activities.

1.9 The responsible lending conduct obligations in Chapter 3 of the Credit Bill will commence on 1 January 2011 to provide industry time to put in place the systems and training needed to comply with their new obligations.

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

Part 1‑2 — Definitions

Division 2 — The Dictionary

Explanation of the use of Defined Terms and Documents in the Bill

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

When does a person engage in a credit activity

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

Division 3 — Definitions relating to the meaning of credit activity

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

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

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

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

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

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

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

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

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

• a credit contract;

• a consumer lease;

• a mortgage; and

• a guarantee.

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

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

• the credit is provided wholly or predominantly for:

– personal, domestic or household purposes; or

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

• a charge is made for the credit.

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

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

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

[Credit Bill, Schedule 1, section 170]

1.18 A ‘mortgage’ is defined in section 7 of the Code as a mortgage to which the Code applies, that is, a mortgage:

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

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

[Credit Bill, Schedule 1, section 7]

1.19 A ‘guarantee’ is defined in section 8 of the Code as a guarantee to which the Code applies, that is a guarantee:

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

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

[Credit Bill, Schedule 1, section 8]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• provide credit assistance; or

• act as an intermediary.

[Part 1‑2, Division 3, section 7]

1.23 A person provides ‘credit assistance’ to a consumer where they:

• suggest that the consumer:

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

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

– remain in their current credit contract or lease; or

• assist the consumer to:

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

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

[Part 1‑2, Division 3, section 8]

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

1.25 The definition applies to situations such as:

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

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

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

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

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

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

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

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

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

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

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

Division 4 — Other definitions

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

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

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

• a natural person;

• a body corporate;

• a partnership; or

• a trustee.

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

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

Part 1‑3 — Application of this Act

Division 1 — Introduction

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

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

Constitutional basis for this Bill and the Transitional Bill

Application in a referring State

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

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

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

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

[Part 1‑3, Division 2, section 18]

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

Application in a Territory

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

Application outside Australia

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

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

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

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

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

Application in a non‑referring State

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

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

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

Meaning of Referring State

Reference of matters by State Parliament to Commonwealth Parliament

1.42 A State which has referred powers on this basis is a ‘referring State’:

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

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

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

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

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

Reference covering initial Bills

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

Reference covering amendments of the Bills or the Trade Practices Act

1.46 The second part of the reference of powers covers the referred credit matters to the extent of the making of laws with respect to those matters by making express amendments of the Credit Bills or the Trade Practices Act 1974. [Part 1‑3, Division 2, subsection 19(4)]

Effect of termination of reference

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

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

• the State’s amendment reference terminates; and

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

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

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

Meaning of referred credit matters

Referred credit matters

1.51 ‘Referred credit matters’ is defined in the Credit Bill as follows:

• the matter of the regulation of credit or personal property leases;

• the matter of the regulation of securities (including mortgages), guarantees or insurance insofar as they relate to credit or personal property leases;

• the matter of the regulation of credit activities;

• the matter of the regulation of sales of goods or supplies of services where the sale or supply is financed, or proposed to be financed, wholly or partly by the provision of credit and related matters.

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

1.52 Referred credit matters do not include the making of laws with respect to the following:

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

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

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

• an excluded State statutory right.

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

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

General application of the Bills

Application in this jurisdiction

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

Geographical coverage of “this jurisdiction”

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

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

Application outside Australia

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

Application in non‑referring States

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

Residence, place of formation etc.

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

Bills bind Crown

1.60 The Credit Bill (other than Chapter 3 and the Credit Code) and the Transitional Bill bind the Crown in each of its capacities, but do not make the Crown liable to be prosecuted for an offence or to any pecuniary penalty. [Part 1‑3, Division 2, section 22]

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

Concurrent operation intended

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

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

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

When Commonwealth credit legislation does not apply

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

Avoiding direct inconsistency between Commonwealth and State and Territory laws

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

Regulations to deal with interaction between laws

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

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 31 December 2009, 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 January 2010 to 30 June 2010. A person engaging in credit activities for the first time after 1 January 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

*New law*	*Current law*
Introduces nationally consistent licensing regime for lenders or intermediaries, irrespective of the jurisdiction they operate in.	In the Northern Territory, Queensland, South Australia and Tasmania there is no registration or licensing scheme for either lenders or intermediaries.
Introduces enhanced entry requirements and ongoing conduct obligations for lenders and intermediaries.	In the Australian Capital Territory and Victoria there is a registration scheme for both intermediaries, and lenders, and in New South Wales there is a negative registration scheme for both intermediaries and lenders.
The main differences with the law operating in Western Australia are: • applicants are subject to a number of additional obligations, including a requirement to be a member of an EDR Scheme approved by ASIC; • significant ongoing requirements while licensed (including that the licensee must properly train and supervise people who act on their behalf); and • the capacity to remove the licence if the licensee no longer meets the entry requirements.	In Western Australia there is a licensing scheme for both lenders and intermediaries. The main features of the licensing scheme are: • entry requirements, including that the applicant is a fit and proper person; • some ongoing requirements while licensed; and • the capacity to remove the licence if the licensee no longer meets the entry requirements.

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: