The Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP, has released draft Regulations and explanatory material for the National Consumer Credit Protection Package for public comment.

These regulations support the National Consumer Credit Protection Bill 2009, the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009, and the National Consumer Credit Protection (Fees) Bill 2009 which were introduced into Parliament on 25 June 2009. Regulations to amend the Electronic Transactions Regulations 2000 (ET Regulations) to exempt a number of transactions under the introduced bills from provisions of the ET Regulations are also included.

Key features of these regulations are:

•Exemptions from licensing for a 12 month period for debt collectors, where they hold a licence under a law of a State or Territory.
•Exemptions from licensing for point of sale retailers such as car dealerships, stores or retail outlets, where they engage in credit activities by arranging credit or acting as an intermediary through an arrangement with a lender.
•Situations where the exemption for point of sale retailers may not be applicable (for example, door to door sales) to minimise the risk of abuse by persons who would otherwise not be regulated by the National Consumer Credit Protection Bill 2009.
•The National Credit Code regulations replicate the State based regulations and include exemptions and prescribing disclosure requirements, for example in relation to business purpose declarations, interest rates, information to be included in notices.

Additional regulations include:
◦establishing the arrangements for where legal proceedings must be commenced;
◦supporting the infringement notice scheme to be administered by the Australian Securities and Investments Commission (ASIC);
◦prescribing the details which ASIC must include in the credit registers;
◦prescribing the forms to be used by ASIC when issuing a written notice or summons to a person;
◦specifying to whom ASIC may provide a report of an investigation;
◦evidencing of authority for ASIC staff and ASIC members; and
◦prescribing allowances and expenses that can be paid to a person who appears at an ASIC hearing.

National Consumer Credit Protection (Transitional and Consequential Provisions) Regulations 2009
Key features of these regulations are to:
◦provide for more detailed regulation of persons registered to engage in credit activities (consistently with regulations made in respect of holders of an Australian credit licence);
◦provide that provisions about the sale of land or goods by instalments do not apply to the provision of credit made before 29 May 2009 (to maintain consistency with recent amendments by the States);
◦enable a state or territory “Government Consumer Agency” as a party to an existing court proceeding, to act as an agent of ASIC;
◦enable ASIC to undertake extensive industry consultation, and working closely and cooperatively with stakeholders to develop guidance material; and
◦provide for a transfer agreement (about the transfer of assets or liabilities) may be entered into between ASIC and a State or Territory.

National Consumer Credit Protection (Fees) Regulations 2009
•These regulations prescribe fees for certain matters under the Credit Package. These fees will help offset the cost of implementing the new regime. Items prescribed by these regulations include:
◦licensing and annual compliance fees based on the size of the applicant or Australian credit license holder;
◦no fees for a range of basic matters that assist ASIC to maintain the integrity of their systems; and
◦additional charges for late lodgment and non-electronic lodgment.
•This fee structure has been designed to promote fairness, certainty and simplicity, whilst also supporting compliance with the Credit Bill.

Electronic Transactions Amendment Regulations 2009
These draft regulations will serve to maintain the exemptions from electronic transactions legislation under the credit regulation scheme administered by the States and Territories.

Remaining Regulations

Additional regulations are currently being drafted and it is intended to release them by 31 August 2009 for public consultation.

These regulations will cover the application of the Credit Bill to lenders under credit contracts or consumer leases in force as at the date the Commonwealth law commences and calculation and payment of interest for residential for residential investment properties.

The draft legislation program for the House of Representatives shows that on 13 August the following Bills will be debated:

National Consumer Credit Protection
National Consumer Credit Protection (Transitional and Consequential Provisions)
National Consumer Credit Protection (Fees)
Corporations Legislation Amendment (Financial Services Modernisation)

The new penalties in the National Consumer Credit Protection Bill (discussed here) are in addition to the existing civil penalties in the Uniform Consumer Credit Code for breach of a key requirement.

The existing key requirement regime will be replicated in the National Credit Code including the ability of the credit provider to make their own civil penalty application seeking a declaration as to whether or not their conduct has in fact breached a key requirement (as defined in section 111 of the proposed new Code and section 100 of the UCCC).

Both the UCCC and National Code impose different maximum limits on the amounts that may be ordered as a civil penalty depending on who makes the application.

Where the debtor or guarantor makes the application, the maximum civil penalty is generally the interest payable under the contract, or the interest payable for the relevant billing cycle if the contravention was in respect of a statement of account. The Court may impose a greater civil penalty that is not less than the amount of the loss suffered where it is satisfied that the debtor has suffered loss. The Code enables any order to pay a debtor or guarantor a civil penalty may be set off against any amount that is due or becomes due under the credit contract. The amount of the civil penalty is a debt due by the credit provider to the debtor or guarantor.

Under the National Code, if the credit provider or ASIC makes the application, the Code caps the maximum penalty at $500,000 for all contraventions of the same key requirement in Australia. Payment of a civil penalty, where the credit provider or ASIC makes the application, is to be paid to ASIC.

Notwithstanding an application being made by the credit provider or ASIC, the debtor or guarantor may make a separate application for compensation for loss arising from convention of a key requirement. The amount of compensation cannot exceed the loss suffered.

The Code imposes a time limit of six years (from the date of the breach) in which a person may bring an application relating to a contravention of a key requirement.

An order for a credit provider to pay a civil penalty under the Code does not affect their criminal liability for any other offences against the Code or the regulations.

Section 183 of the UCCC (Section 201 of the National Code).provides for liability of officers of corporations which commit breaches.

ASIC has released its policy proposals on competence and training for credit licensees.

ASIC’s Consultation Paper 113 Competence and training for credit licensees (CP 113) explains how ASIC proposes to interpret the competence requirements as they apply to credit licensees.

There are two parts to the competence and training requirements of the new credit regime – competence at the licensee level (organisational competence) and training standards for representatives, including employees and agents of a licensee (representative training).

As a general rule, ASIC expects key people to have a relevant qualification (either an industry specific course or a more general qualification) and at least two years relevant experience.

ASIC proposes to accept key people without relevant qualifications but with five years relevant experience in the credit industry over the last seven years until December 2013.

Because of the diversity of roles in the credit industry, ASIC proposes not to prescribe particular training for most credit representatives. Licensees will need to document their training regimes.

The exception is for mortgage broking representatives who ASIC expects to have a Certificate IV in Financial Services (Finance/Mortgage Broking). Existing mortgage brokers who do not have this qualification will be given until December 2013 to obtain it.

The Senate Economics Legislation Committee’s report in relation to the committee’s inquiry into the National Consumer Credit Protection Bill 2009 and related bills has been delayed.

The committee requires more time to finalise its report. The committee intends to present the final report by Monday, 7 September 2009.

ASIC has released a consultation paper seeking public comment on proposals designed to ensure that consumers have timely access to dispute resolution if they have a problem with consumer credit or margin lending.

ASIC’s Consultation paper 112 Dispute resolution requirements for consumer credit and margin lending (CP 112) explains how ASIC proposes to apply the dispute resolution requirements for credit providers, brokers and other credit licensees and their representatives, as well as for margin lenders and those who provide advice on margin loans, once the National Consumer Credit Protection Bill (the Bill), and reforms around margin lending, come into effect.

The dispute resolution requirements are similar to those that currently apply to holders of an Australian financial services licence and their representatives.

For consumer credit, the Bill provides for a two-stage transition to full licensing. Initially those engaged in regulated ‘credit activities’ must apply to registered with ASIC, or be a representative of an entity that is registered. Applications for registration must be made between 1 November 2009 and 31 December 2009. Registered persons must have membership of an ASIC-approved external dispute resolution (EDR) scheme.

Credit licensing commences on 1 January 2010 and applications must be made by 30 June 2010. Credit licensees will be required to have dispute resolution arrangements that include:

• an internal dispute resolution (IDR) process that meets ASIC’s approved standards and requirements;

and

• membership with an ASIC-approved EDR scheme.

Those licensed to provide margin loans or advise on margin lending will be required to meet the same two requirements from the time the margin lending reforms come into effect.

Submissions close on Friday 11 September 2009.

The National Consumer Credit Protection Bill penalty framework is an issue that has attracted a lot of discussion.

Civil and criminal penalties
Civil penalty offences attract a maximum penalty of 2,000 penalty units on all civil penalties. This amounts to a maximum of $220,000 for individuals and $1,100,000 for corporations, partnerships or multiple trustees [Part 4-1, Division 2, paragraph 167(3)(b)]. A ‘penalty unit‘ has the meaning given by section 4AA of the Crimes Act 1914, currently $110 (corporations, partnerships or multiple trustees are liable for 5 times the maximum number of penalty units payable by individuals).

ASIC can only seek a declaration and pecuniary penalty order within six years of a person contravening the provision.

Civil penalties are separate from criminal penalties (eg fine or jail) and consumer remedies (eg compensation for loss, variation of the credit contract or damage or injunctions).

For example, section 133 imposes a maximum 2 years imprisonment for breaching the prohibition on entering, or increasing the credit limit of, unsuitable credit contracts in addition to a monetary penalty.

Other criminal offences (eg involving failure to keep financial records, relating to trust accounts or concealing documents or misleading information) have a maximum imprisonment of 5 years.

A criminal offence could lead to a person being disqualified from managing or being a director of a company.

Suspension or cancellation of credit licence
Amongst other reasons, a breach of the licence conduct obligations could lead to suspension or cancellation of the credit licence.(s56)

If the licensee is an ADI, ASIC would need to consult with APRA first.

Other remedies
ASIC may seek an adverse publicity order against a person who has contravened or committed an offence against the Credit Bill. Under a publicity order, a court may require a person to disclose certain information in a specified way and to publish the information at their own expense. [Part 4-2, Division 2, section 182]

Infringement notices
Section 331 allows regulations to be made for infringement notices to be issued to persons alleged to have committed:
• strict liability; or
• civil penalty contraventions as provided in the regulations.

This allows ASIC to deal with suspected minor offenders without the need to summons a person to appear in court.

In relation to strict liability offences, the maximum fine must not exceed one-fifth of the maximum penalty that a court could impose on the person for that offence. In relation to civil penalties, the maximum fine must not exceed one-twentieth of the maximum penalty.

It is expected these will apply to responsible lending offences.

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The National Credit Code (NCC) is contained in Schedule 1 to the National Consumer Credit Protection Bill 2009.

The NCC will replace the Uniform Consumer Credit Code, with modifications.

Here is a list of changes (Note this is different from the changes in the exposure draft bill and does not include the registration and licensing changes):

Scope:

• Code applies as in UCCC but has been extended to cover credit provided for the purchase, renovation or improvement of a residential property for investment purposes. (Note the debtor must still be a natural person or strata corporation)
• Code now applies if the credit provider carries on business within the jurisdiction of the code (Australia). Does not matter where the debtor is usually resident.
• Short term credit: For a short term loan (less than 62 days) to be exempt credit fees and charges must amount to less than 5% of the total amount of credit (credit fees and charges for this calculation now includes any fees or charges that are payable to a person who introduced the debtor to the credit provider). This applies irrespective of whether there is an association between the introducer and the credit provider or not.
• The Code does not apply to credit arising out of a bill facility if the credit provider is an ADI
• The Code does not apply to credit provided by a pawnbroker but only if the pawnbroker’s only recourse, if the debtor defaults, is to the pawned goods
• Code does not apply to a ‘margin loan’.
• Terms sale of real estate: Where a purchaser enters into possession of real estate prior to becoming entitled to a conveyance (a Terms sale of land contract), and the price paid (in instalments or otherwise) is in excess of the ‘cash price’, this section sets out how to determine whether or not the contract is a ‘credit contract’ and hence whether the code applies or not. Does not apply if the payments exceeding the ‘cash price’ is a deposit of 10% or less or rent which does not reduce the amount payable on completion/settlement.
• Terms sale of goods: under a Conditional sale agreement where the purchaser takes possession of the goods prior to obtaining title to the goods (which will occur after the final instalment is paid). When the seller of goods under a sale of goods by instalments contract is the same body or a related body of the credit provider of finance to purchase the said goods, fees and charges under both the sale and the finance contracts are to be combined when determining whether or not the Code applies.
• Credit is presumed not to be for a code purpose if the debtor declares, in the form required by the regulations, that the credit is not to be applied for a code purpose (unless the credit provider knew or had reason to believe that the funds were in fact to be applied for a code purpose or would have known if they made reasonable enquiries). Business purpose declarations will no longer have conclusive evidentiary value, and it will be an offence punishable by up to two years’ imprisonment to procure a false business purpose declaration.
• A business purposes declaration will also be ineffective for a lease of goods if the lessor would have known or had reason to believe the goods were to be used for a code purpose if the lessor or relevant person made reasonable inquiries as to the purpose for which the goods were hired.

Non-permissible securities

• A mortgage cannot be taken over “essential household property” unless the mortgagee sold the property to mortgagor.
• “Essential Household Property” is defined by s116(2)(b)(i) of the Bankruptcy Act 1966 (Cth) which refers to Reg 6.03 of Bankruptcy Regulations 1996 (Cth).
• A mortgage cannot be taken over property used by the mortgagor to generate an income by personal exertion (provided the value of the goods does not exceed a monetary value limit set by s116(2)(c)(i) of the Bankruptcy Act 1966 (Cth). The amount is indexed annually with CPI).

Hardship provisions

• If a debtor makes an application under the hardship provisions of the code, the credit provider must reply within 21 days of receiving the application stating whether or not the credit provider agrees with the changes requested. If the credit provider does not agree to the changes requested by the debtor, the notice must state the name of the credit provider’s External Dispute Resolution (EDR) Scheme and the debtor’s rights under that scheme.
• Hardship provisions of the code under which consumers can request a change to certain terms of their credit contract now apply to loans up to $500,000 or any higher amount prescribed by the regulations.
• ASIC can make an application under the hardship and unjust provisions of the code (Division 3) in respect of any 1 or more credit contracts or all or any classes of contracts if it considers it to be in the public interest to do so.

Direct debit default notice
If a debtor authorises a payment under a credit contract by direct debit, a default occurs and it is the first occasion the default has occurred, the credit provider must give the debtor and any guarantor a direct debit default notice within 10 business days.

Loan default
Default Notice still required as per UCCC however the notice must now contain a prominent heading at its top stating that it is a default notice and the prescribed contents of the default notice has now expanded to also include:
• a warning that repossession of mortgaged goods may not extinguish the debtor’s liability;
• information about the debtors right to make a hardship application (s66) or request that the credit provider postpone
enforcement action (s86) or apply to the court for it to do so (s68 or 88);
• information about the credit provider’s EDR scheme and the debtor’s rights under that scheme; and
• a warning about a report being made to a credit reporting agency’s credit information file about the default.

If a debtor, mortgagor or guarantor makes a request that the credit provider negotiate a postponement of enforcement proceedings, after being given a default notice, the credit provider must give the debtor a notice within 21 days after receiving the request which states whether or not the credit provider agrees to negotiate a postponement and if not the name of the credit provider’s EDR scheme and the debtor’s rights under that scheme.

Enforcement by credit provider

• Postponement of enforcement proceedings: The thresshold under which a debotor can seek postponement of enforcement proceedings has increased to $500,000.00 or a higher amount prescribed by the regulations.
• Repossession relief: A mortgagor may apply to the court to regain possession of mortgaged goods if the credit provider has taken possession of the mortgaged goods without complying with the requirements of Part 5 – Division 2 (Default Notices etc) or Part 5 – Division 4 (Procedures for taking possession of mortgaged goods). A Court may make any ancillary or consequential orders that it considers appropriate including that the credit provider pay the mortgagor compensation.

Comparison rates
Comparison Rate Schedules are removed completely. But Comparison Rates continue.
If a comparison rate is used in a document other than a credit advertisement, the document must comply with Part 9A – Division 2 (information and warnings regarding comparison rates) as if it were a credit advertisement.

Even though the government proposes to postpone the National Credit Act responsible lending provisions to 1 January 2011, ASIC will require lenders to have plans in place as part of the licensing process.

Draft RG104 states:
“RG 104.89 We also expect that you will have measures in place for complying with new requirements as they arise. For example, the responsible lending requirements in Chapter 3 of the National Credit Act will not commence until [date to be advised]; however, we would expect credit licence applicants who apply before this date to have plans to implement adequate supervision once these requirements commence.”