But the states will retain responsibility for the regulation and enforcement of maximum interest rates (the interest rate caps) for regulated consumer credit.

Currently, New South Wales, Victoria, Queensland and the ACT impose an interest rate cap on regulated consumer credit. There are no caps in Western Australia, Tamania and South Australia.

In New South Wales, Queensland, and the ACT, the annual cap of 48% is generally calculated inclusive of interest, fees and charges other than government fees, charges and duties (there are some variations between the states).

In Victoria, a cap of 48% is imposed on unsecured credit regulated by the UCCC, and a cap of 30% imposed on secured credit regulated by the UCCC. The caps are imposed on the interest component alone, and the cap is not inclusive of fees and charges.

Even though the current consumer credit laws will be repealed, the states will re-establish interest cap regulation under new laws (in Queensland, the Credit (Commonwealth Powers) Bill 2009 Queensland).

According to the Queensland Office of Fair Trading, most current breaches result from lack of understanding of the model and not including fees that should be included such as establishment fees and account keeping fees.

The responsible lending conduct obligations will apply to non-ADIs and non-RFCs (and their credit representatives) from 1 July 2010.

They will apply to ADIs and RFCs (and their credit representatives) from 1 January 2011.

Other responsible lending obligations (including disclosure requirements, such as upfront disclosure of broker fees and charges) will apply to all licensees and credit representatives from 1 January 2011.

RG 209 is designed to help credit licensees and credit licence applicants to:

• develop arrangements and systems to meet their responsible lending obligations; and
• understand what ASIC expects when assessing whether licensees are complying with their responsible lending obligations.

The key responsible lending obligation is that credit licensees must not suggest, assist with or provide a credit product that is unsuitable for a consumer.

Before a credit licensee suggests, assists with, or provides a new credit contract or lease to a consumer, the credit licensee must:

• make reasonable inquiries of the consumer about their requirements and objectives in relation to the credit contract;
• take reasonable steps to verify the consumer’s financial situation;
• based upon these inquiries, assess whether the credit product is unsuitable for the consumer and only proceed if the credit product is not unsuitable; and
• give the consumer a copy of the assessment if requested.

A contract will be unsuitable if the consumer would be unable to repay it without substantial hardship or it will not meet the consumer’s requirements or objectives. The requirements also apply where the credit limit on an existing contract is being increased.

UPDATE: Assented to on 3 March 2010. Download here.

Residential investment property

Example
Anthony is planning to buy an apartment as an investment this year. He is going to borrow part of the purchase price, so he can get the benefits of negative gearing.

If the loan contract is made by 30 June 2010, his loan will not be regulated under the Uniform Consumer Credit Code (UCCC). But if he enters into the loan contract after that date, his loan will be regulated under the National Credit Code (NCC), which commences on 1 July.

Unlike the UCCC, the NCC will regulate loans for residential investment properties. This includes the following types of residential investment lending:

• loans to purchase residential property for investment purposes;
• loans to renovate or improve residential property for investment purposes; and
• loans to refinance credit provided to purchase, renovate or improve residential property for investment purposes.

What is ‘residential property’?
There is a definition in the NCC. It includes land on which a dwelling is affixed predominantly for residential purposes. It also includes land on which such a dwelling will be affixed in the future (i.e., vacant land for residential development). Property in this context also includes crown leases and equivalent, company title shares, and a right to occupy a dwelling in an aged care facility or retirement village.

Look at purpose not security type
It is the purpose of the loan and not the security type that determines if a loan will be regulated by the National Credit Code.

Example
In October 2010, Anthony finances the purchase of his apartment as an investment as planned, then heads off to work overseas. When he returns from overseas, he moves into the apartment. He then arranges a line of credit secured against the apartment to finance his new online business. Unlike his loan to buy the apartment, the line of credit will not be regulated, because it is for a business purpose.

Compare this with Beatrice, who has a commercial property in her own name for her business. She buys a holiday house for herself, and borrows the entire purchase price, using the commercial property as security. The loan will be regulated by the National Credit Code, as the credit is for personal, domestic or household purposes.

Corporate borrower exemption

Example
Chris has a business of investing in residential properties. He buys small, run down blocks of flats, renovates them and then sells them. His financing for these purchases will be regulated - unless the borrower is a company.

When the borrower is a company, it doesn’t matter what the purpose of the loan is. Loans to companies are all unregulated (except if the company is a strata corporation). So if Chris operates the business through Chris Pty Ltd, and borrows through that entity, his loans will not be regulated.

Predominant purpose
When there is a combination of purposes, the predominant purpose will determine if the credit is regulated or not.

Example
Diana has an existing home loan, secured by the home. She takes out a second loan of $200,000 with the same lender, using her home as security. Most of the loan ($150,000) is being used to buy into an accounting partnership. She will pay the remainder to her daughter, to help her daughter buy an apartment to live in. Because the predominant purpose is business, the new loan will not be regulated. Diana’s two loans are secured by the same ‘all moneys’ mortgage.

The National Credit Code applies to the mortgage to the extent only that it secures obligations under a regulated credit contract, so it will not apply to her mortgage in relation to the second loan.

Business purpose declaration

A business purpose declaration can put a loan outside the National Credit Code, but only if it is used as the law intends.

Example
Eugene wants to borrow to refinance some of his personal debts. He approaches a lender and tells the lender what he wants to do. The lender insists that he sign a business purpose declaration, so that it can provide an unregulated, high interest loan. The lender has committed an offence under the National Credit Code, punishable by a fine of up to $11,000 or 2 years in jail, or both. What’s more, the business purpose declaration is ineffective, so the loan will be regulated under the Code.

If the lender took a ‘no questions asked’ approach, what would happen?
The declaration will still be ineffective, as the lender would have known (or had reason to believe) that the loan was for a regulated purpose if it had made reasonable inquiries about the purpose. Credit providers will therefore need to make reasonable enquiries about the purpose of each proposed loan before the debtor signs a business purpose declaration.

Margin lending

Margin lending is a type of borrowing for an investment purpose. It has been specifically excluded from the National Credit Code. Margin loans will be treated as financial products under the Corporations Act.

Other types of investments

The National Credit Code states that investment by the debtor is not a “personal, domestic or household purpose” under the National Credit Code. So any type of investment other than residential property is exempt. (Margin lending would have been excluded on this basis, even if it had not been specifically excluded elsewhere in the legislation).

Example
Flavia wants to finance the purchase of a share portfolio, but she doesn’t want to use a margin loan (where the shares are used as security). She has a lot of equity in her home, so she plans to take out a new loan using her home as the security to buy the shares. The loan will not be regulated by the National Credit Code (nor will it be regulated as a margin loan under the Corporations Act).

The ASIC Act is different
Although Flavia’s loan will not be regulated under the National Credit Code, it still may be regulated credit under the ASIC Act (the Australian Securities and Investments Commissions Act 2001 (Cth)).

How does the ASIC Act regulate credit?

The unconscionable conduct provisions in the ASIC Act basically say that you must not act unconscionably in relation to credit. And the consumer protection provisions in the ASIC Act cover a wide range of unacceptable trade practices such as misleading and deceptive conduct, bait advertising etc. (the same consumer protection provisions that apply under the Trade Practices Act for businesses outside the financial sector).

Some of these provisions only apply to the supply of services to consumers. For the consumer protection provisions in the ASIC Act, a person will be a consumer if the price of the services is not more than $40,000, or the consumer is a small business, or the credit is “of a kind ordinarily acquired for personal, domestic or household use.”

The unconscionable conduct provisions in relation to consumers only apply where the credit is of this kind (although there is a separate provision dealing with business-to-business unconscionable conduct).

As well as these two aspects of credit regulated by the ASIC Act, the Act is also being amended to regulate unfair contract terms. As currently proposed, these provisions will only apply to a ‘consumer contract’, which is a contract for the supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of the goods, service or interest is wholly or predominantly for personal, domestic or household use or consumption.

Consumer credit contracts will be covered by this definition, but unlike the National Credit Code, residential property investment is not expressly included. However, while investment is definitely not a “personal, domestic or household” purpose under the National Credit Code, it may be under the ASIC Act.

In a recent case, Goodridge v Macquarie Bank Limited [2010] FCA 67, the judge held that the unconscionable conduct provisions of the ASIC Act applied to a margin loan: he said that the loan was “of a kind ordinarily acquired for personal use.”

So Flavia’s loan in our example may be regulated by the ASIC Act, even if it is not regulated by the National Credit Code.

Small business lending - Phase 2 of the credit reforms The government has indicated that regulation of small business lending is on the agenda for consideration in the next phase of the national credit reforms. Small business lending could therefore become subject to the National Credit Code. Any such changes would not be in place until 2011 at the earliest.

The Bill is in response to state concerns raised in December last year in relation to the terms of the amendment power in the Referral Bills (the Bills to be enacted by the States to refer power to the Commonwealth) to allow certain subject matters (such as State taxation) to be excluded from the scope of the amendment power.

To give effect to that agreement this Bill amends the National Consumer Credit Protection Act 2009 to enable an effective reference of State power to be made either with or without exclusions to that power.

The amendments in this Bill will also allow the States to refer their regulatory powers in relation to consumer credit by ‘adopting’ the Commonwealth’s legislation and referring an amendment power.  This will ensure the constitutional soundness of the referral of consumer credit powers.

Following the Commonwealth’s enactment of this Bill, the States wishing to refer powers excluding certain subject matters or using the adoption approach will be able to do so.

Following enactment of the Referral Bills, the States will be able to repeal their state laws in time for the commencement of the National Credit legislation on 1 July 2010. 

The State powers specifically excluded from referral to the Commonwealth are:

 • the matter of making provision with respect to the imposition or payment of State taxes, duties, charges or other imposts,
however described; or
• the matter of making provision with respect to the general system for the recording of estates or interests in land and
related information; or
• the matter of providing for the priority of interests in real property; or
• the matter of making a law that excludes or limits the operation of a State law, to the extent that the State law makes provision with respect to the creation, holding, transfer, assignment, disposal or forfeiture of a State statutory right.

You can choose:
(a) engage in credit activities other than as a credit provider or lessor;
(b) engage in credit activities as a credit provider or lessor; or
(c) engage in all credit activities.

The choice is an important decision for a number of reasons especially if you are not a credit provider.

As Langes partner Patrick Dwyer explains here, one of the consequences is that a licensee that is not a credit provider and who does not provide credit assistance will not be regulated by the complete set of responsible lending obligations.

If you are an intermediary, read Patrick’s analysis carefully and get advice before you complete your licence application.

If you have any comments on the checklist, please tell us. We welcome your input.

We may update the checklist from time to time. Check back on our website for updates and further information on National Consumer Credit, or subscribe to our free Australian Regulatory Compliance Review blog. You can get daily emails or RSS feeds on National Consumer Credit and other regulatory news.

The checklist is a high level summary. It’s not legal advice and may not cover everything you need to do in your own situation, so always seek legal advice if needed.

We hope you find the checklist useful for your compliance planning.

Applying for a credit licence
RG 204 states:

RG 204.236 You will be asked a group of questions that are designed to obtain your confirmation that you have in place, and will maintain, adequate compliance arrangements and systems, including whether:
(a) you have a written plan that documents your arrangements and systems;
(b) the arrangements specify how often compliance with procedures is monitored and reported on; and
(c) there are people internal to your business responsible for ongoing monitoring and reporting.

RG 204.237 If you indicate that you do not have in place arrangements and systems to ensure compliance with the obligations, you will not be able to continue with the application because you would not meet the minimum requirements to be granted a credit licence.

Ongoing licence conduct obligations
RG205 states:

RG 205.32 We understand that, in some instances, your monitoring and reporting will be built into your business processes. We also acknowledge that your compliance measures might reflect your business’s overall approach to compliance. Whatever the case, you need to be able to show us how you are able to monitor your compliance and appropriately address any compliance breaches.

RG 205.53 The broad compliance obligations are both stand-alone obligations and obligations that encompass the other general conduct obligations. This means that:
(a) if you fail to comply with one or more of the other general conduct obligations, you are also likely to breach the broad compliance obligations; and
(b) even though you may be complying with all of the other general conduct obligations, you may still be in breach of the broad compliance obligations. This is because the broad compliance obligations are also stand-alone obligations…

RG 205.56 However, the ‘efficiently, honestly and fairly’ obligation is also a stand-alone obligation that operates separately from the other general conduct obligations. For example, if you have contractual obligations to clients and breach them, this might not be a breach of the other general conduct obligations, but it could amount to a failure to engage in credit activities efficiently, honestly and fairly…

RG 205.58 You must comply with any licence conditions that we impose: s47(1)(c). In addition, you must also comply with the licence conditions set out in reg 10 of the National Consumer Credit Protection Regulations 2010 (National Credit Regulations). The conditions on your credit licence reinforce some of the general conduct obligations, so breaching a licence condition will sometimes also be a breach of the general conduct obligation to which the condition relates.

Suspension, cancellation or variation of a licence by ASIC
The regulations are still in draft form. Draft regulation 15 states:

When a licence can be suspended, cancelled or varied — grounds to suspend or cancel licence
For paragraph 55 (2) (e) of the Act, the following are matters that ASIC must have regard to:
(a) a licensee failing to lodge an annual compliance certificate under section 53 of the Act;
(b) a licensee lodging an annual compliance certificate that contains information that:
(i) is false or misleading; or
(ii) can not reasonably be believed to be true by the person signing the certificate under subsection 53 (3) of the Act.

Failure to fully disclose compliance breaches in an annual compliance certificate may lead to suspension, cancellation or variation of a credit licence.

Under section 53 of the National Consumer Credit Protection Act, it is a strict liability offence if a licensee fails to lodge a compliance certificate with ASIC within 45 days after the licensee’s licensing anniversary in each year.

If you need assistance with your registration or license application or compliance policies, contact Patrick Dwyer or David Jacobson.

It has been developed to help industry prepare their credit licence applications and also understand ASIC’s expectations in relation to their obligations as credit licensees.

Separate guidance has been developed to specifically assist small business operators make a credit licence application. ASIC has also updated regulatory guides on applications for relief and when it will issue no-action letters under the National Credit Act.

ASIC has released the following new publications:

Regulatory Guide 204 Credit licensing: Applying for and varying a credit licence (RG 204)

Regulatory Guide 205 Credit licensing: General conduct obligations (RG 205)

Regulatory Guide 206 Credit licensing: Competence and training (RG 206)

Regulatory Guide 207 Credit licensing: Financial requirements (RG 207)

Regulatory Guide 208 How ASIC charges fees for credit relief applications (RG 208)

INFO 97 Guidance for small credit businesses (INFO 97)

ASIC has also updated two existing regulatory guides to accommodate the National Consumer Credit regime:

Regulatory Guide 51 Applications for relief (RG 51)

Regulatory Guide 108 No Action letters (RG 108)

The following guides are expected to be issued in early 2010:

Regulatory Guide 209: Responsible lending (RG 209)

Regulatory Guide 139: Approval of external complaints resolution schemes (RG 139)

Regulatory Guide 165: Licensing: Internal and external dispute resolution (RG 165)

Regulatory Guide 210: Compensation and insurance arrangements for credit licensees (RG 210)

ComLaw has published the following Acts as passed:

• National Consumer Credit Protection Act 2009
• National Consumer Credit Protection (Fees) Act 2009
• National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009