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January 19, 2010

Responsible lending will not affect all credit licensees

Under the National Consumer Credit regime, one of the main obligations of Australian Credit Licence (ACL) holders will be the responsible lending provisions in the National Consumer Credit Protection Act 2009 (Cth) (the ‘National Credit Act’). However, not all licensees will have to comply with them.

You will certainly have to comply with the responsible lending requirements if you are the credit provider. But if you’re not the credit provider, the complete set of responsible lending obligations (credit guide, credit quote, credit proposal, suitability assessment) only apply when you are providing credit assistance.

Licensees that are not credit providers will not necessarily be providing credit assistance.

What types of activity of a licensee will not be credit assistance? To answer this, we need to distinguish 3 different (but confusingly, similar sounding) terms used in the National Credit Act: credit activity, credit service and credit assistance.

Credit activity is the widest of the 3 terms. A credit activity is what triggers the requirement to get an ACL. It includes being a credit provider, mortgagee etc., and also includes a credit service.

A credit service is one of the sub-categories of a credit activity. A credit service can be either of 2 things: credit assistance, or acting as an intermediary.

If you act as an intermediary but do not provide credit assistance, you would still be performing a credit service, and therefore also a credit activity (and so required to get an ACL, unless you are acting as the representative of another licensee) - but you would not have to comply with the responsible lending requirements.

Here is a diagram showing how credit assistance, credit service and credit activity fit together. The green area is where you are acting as an intermediary – performing a credit service (a form of credit activity), but not providing credit assistance.

credit_activity_diagram

So what is credit assistance? And what is acting as an intermediary?

Credit assistance

You provide credit assistance to a consumer if, by dealing directly with the consumer or the consumer’s agent in your business, you:

  • suggest that the consumer apply for a particular credit contract with a particular credit provider; or
  • suggest that the consumer apply for an increase to the credit limit of a particular credit contract with a particular credit provider; or
  • suggest that the consumer remain in a particular credit contract with a particular credit provider; or
  • assist the consumer to apply for a particular credit contract with a particular credit provider; or
  • assist the consumer to apply for an increase to the credit limit of a particular credit contract with a particular credit provider.

There are a couple of things that are important to note about the definition of credit assistance.

First, the definition requires that you are ‘dealing directly’ with a consumer. If you do not have direct contact with the customer, it does not include you. The activities of upstream intermediaries such as aggregators that do not involve dealing directly with customers are therefore outside the definition of credit assistance.

Second, to ‘suggest’ may be something less than a recommendation or advice. ASIC says that to ‘suggest’ here means proposing the idea to a consumer, or introducing into the mind of a consumer, that the consumer apply for a particular credit contract with a particular credit provider: see ASIC RG 203 .

Third, the various ways in the definition to suggest or assist the consumer each refer to a ‘particular credit contract’ with a ‘particular credit provider’. The term ‘particular credit provider’ is straightforward, but what does ‘particular credit contract’ mean? For example, say you suggest to a consumer that she should apply for a home loan with Sand Bank. Is the home loan a ‘particular credit contract’? If you fill in the loan application form for a home loan with Sand Bank, and you help the customer select various product features (e.g. term, fixed rate) on the form, that might be applying for a ‘particular credit contract’, but is a general reference to a Sand Bank home loan a ‘particular credit contract’? A home loan referred to in this way seems more a broad product category than a particular credit contract. It’s not very ‘particular’!

Acting as an intermediary

You act as an intermediary under the National Credit Act if in your business you act as an intermediary (whether directly or indirectly) between a credit provider and a consumer wholly or partly for the purposes of securing a provision of credit for the consumer under a credit contract for the consumer with the credit provider. It does not matter whether you do so on your own behalf or on behalf of another person.

Activities by an intermediary that do not involve suggesting to a consumer that they apply for a particular credit contract with a particular credit provider, or assisting them to do this, or suggesting that they stay in their current contract, will not trigger the responsible lending obligations. If you are an intermediary, think about what kinds of your activities might fall outside credit assistance.

Summing up, it’s important that the legislation recognises that some types of credit activity performed by intermediaries in the credit industry are not credit assistance: it means that not all intermediary activities of licensees are intended to be caught by the responsible lending requirements.

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Posted 19th January 2010 by Patrick Dwyer in National Credit Code