Bill home page
Download Word
Download PDF
2019-2020
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Josh Frydenberg MP)
Table of contents
Glossary............................................................................................................. 1
General outline and financial impact........................................................... 3
Chapter 1 ........... Changes to the responsible lending obligations.......... 7
Chapter 2 ........... Regulation impact statement - Changes to the responsible lending obligations............................................................................................. 25
Chapter 3 ........... Small amount credit contract reforms........................... 71
Chapter 4 ........... Consumer lease reforms................................................. 95
Chapter 5 ........... Anti-avoidance measures............................................. 119
Chapter 6 ........... Statement of Compatibility with Human Rights........ 129
The following abbreviations and acronyms are used throughout this explanatory memorandum.
|
Abbreviation |
Definition |
|
Age Discrimination Act |
Age Discrimination Act 2004 |
|
ADI |
Authorised Deposit-taking Institution |
|
AFCA |
Australian Financial Complaints Authority |
|
APRA |
Australian Prudential Regulation Authority |
|
Australian Securities and Investments Commission |
|
|
Bill |
National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 |
|
Code |
National Credit Code at Schedule 1 to the National Consumer Credit Protection Act 2009 |
|
Credit Act |
National Consumer Credit Protection Act 2009 |
|
Credit Regulations |
National Consumer Credit Protection Regulations 2010 |
|
Credit Transitional Act |
National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 |
|
the Guide to Framing Commonwealth Offences |
The Attorney-General’s Department’s A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers , September 2011 edition |
|
Review |
Review of the Small Amount Credit Contract Laws |
Schedule 1 - Changes to the responsible lending obligations
Schedule 1 to the Bill amends the Credit Act so that responsible lending obligations apply only to small amount credit contracts and consumer leases (and small amount credit contract-equivalent loans by ADIs) beginning on the later of 1 March 2021 and the day after Royal Assent. This forms part of the Government’s Consumer Credit Reforms aimed at improving the flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can continue to spend and business can invest and create jobs.
The Bill forms a key part of the Government’s economic recovery plan in response to the current economic circumstances, as the economy recovers from the COVID-19 crisis.
Schedule 1 to the Bill also amends the Credit Act to provide the Minister with a power to determine standards, by legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes in relation to certain non-ADI credit conduct.
Date of effect : The amendments generally commence on the later of 1 March 2021 and the day after Royal Assent. However, the amendments about the best interests obligations commence 6 months after that day.
Proposal announced : This Schedule implements the measure JobMaker Plan - supporting small business and responsible lending from the 2020-21 Budget.
Financial impact : Nil
Human rights implications : This Schedule raises human rights issues. See Statement of Compatibility with Human Rights — Chapter 6, paragraphs 6.1 to 6.47.
Compliance cost impact : The reforms contained in Schedule 1 to the Bill are deregulatory, benefiting lenders, borrowers and credit assistance providers.
Schedule 1 - Summary of regulation impact statement
Regulation impact on business
Impact : The reforms contained in Schedule 1 to the Bill are deregulatory, benefiting both lenders and borrowers.
Main points :
⢠The reforms will reduce the time and cost associated with the provision of credit by removing responsible lending obligations for products other than small amount credit contracts and consumer leases. This will provide greater flexibility to lenders in adhering to principles of ‘prudent’ lending.
⢠Borrowers will benefit from reduced application times and the need to provide information to lenders.
⢠The extension of the best interests obligations to other credit assistance providers will be outweighed by the removal of responsible lending obligations on credit assistance providers.
Schedules 2 to 6 - Small amount credit contract and consumer lease reforms
Schedules 2 to 6 to this Bill amend the Credit Act to enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases, while ensuring these products can continue to fulfil an important role in the economy.
Date of effect : The amendments generally commence on the day after the end of the period of six months beginning on the day this Bill receives Royal Assent. The anti-avoidance measures in Schedule 4 to this Bill commence on the day after this Bill receives Royal Assent.
Proposal announced : This Bill implements the Government’s response to the Review, which was announced on 28 November 2016.
Financial impact : Nil.
Human rights implications : This Bill raises human rights issues. See Statement of Compatibility with Human Rights — Chapter 6, paragraphs 6.48 to 6.85.
Compliance cost impact : The annual compliance cost is estimated to be $15.91 million.
The Review has been certified as being informed by a process and analysis equivalent to a Regulation Impact Statement. [1]
Schedules 2 to 6 - Summary of regulation impact statement
Regulation impact on business
Impact : $ 15.91 million per annum.
Main points :
⢠The reforms will require providers of small amount credit contracts and consumer leases to modify existing systems, processes and procedures to ensure compliance with the new obligations introduced by this Bill.
⢠These providers will also be required to undertake ongoing monitoring and maintenance to ensure continuing compliance with the obligations introduced by this Bill following the initial transition period.
Outline of chapter
1.1 Schedule 1 to the Bill amends the Credit Act so that responsible lending obligations apply only to small amount credit contracts and consumer leases (and small amount credit contract-equivalent loans by ADIs) beginning on the later of 1 March 2021 and the day after Royal Assent. This forms part of the Government’s Consumer Credit Reforms aimed at improving the flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can continue to spend and business can invest and create jobs.
1.2 The Bill forms a key part of the Government’s economic recovery plan in response to the current economic circumstances, as the economy recovers from the COVID-19 crisis.
1.3 Schedule 1 to the Bill also amends the Credit Act to provide the Minister with a power to determine standards, by legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes in relation to certain non-ADI credit conduct.
1.4 Providers are required to ensure that they have systems, polices and processes in place that comply with the standards, and are also required to not repeatedly fail to apply those systems.
1.5 All legislative references in this Chapter are to the Credit Act unless otherwise stated.
Context of amendments
1.6 In September 2020, the Government announced that it would undertake consumer credit reforms aimed at enabling the efficient flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can continue to spend and business can invest and create jobs. This announcement included:
⢠removing responsible lending obligations from the Credit Act, with the exception of small amount credit contracts and consumer leases;
⢠removing the ambiguity regarding the application of consumer lending laws to small business lending; and
⢠implementing a new framework that would appropriately adopt key elements of APRA’s ADI lending prudential standards to non-ADIs (other than for small amount credit contracts and consumer leases), while ensuring ADIs continue to comply with APRA’s prudential standards.
1.7 The Credit Act sets out a comprehensive national licensing regime for persons who engage in credit activities (Chapter 2). This is separate to the licensing of financial services under the Corporations Act 2001 .
Responsible lending obligations under the Credit Act
1.8 The Credit Act includes responsible lending obligations which are imposed on all holders of Australian credit licences in relation to their dealings with consumers. These are contained in Chapter 3 of the Credit Act.
1.9 Responsible lending obligations are designed to prevent the provision of unsuitable credit to consumers. They apply to consumer credit and do not apply to lending for predominantly business purposes. Over time, the ‘one-size-fits-all’ and prescriptive nature of the responsible lending obligations has imposed burdensome and unnecessary processes on both lenders and borrowers.
1.10 Broadly, the responsible lending conduct obligations in Chapter 3 of the Credit Act impose expected standards of behaviour on licensees entering into consumer credit contracts or consumer leases, when they suggest a credit contract or lease to a consumer, or assist a consumer to apply for a credit contract or lease.
1.11 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 requires licensees to assess that the credit contract or lease is not unsuitable for the consumer’s requirements and objectives and that the consumer has the capacity to meet the financial obligations under the credit contract or lease.
1.12 Currently, a credit licensee is required to undertake an assessment of the suitability of the consumer for the credit contract (or credit limit increase) or lease. This assessment requires that reasonable inquiries be made about the consumer’s requirements, objectives and financial situation, and reasonable steps be taken to verify the consumer’s financial situation.
Prudential standards for ADI lending
1.13 While both ADIs and non-ADIs are currently subject to the responsible lending obligations, ADIs must also comply with requirements under APRA’s prudential framework. This has resulted in regulatory duplication for ADIs with little additional benefit to consumers.
1.14 APRA’s prudential standards for ADIs ensure lenders have appropriate settings for managing risk to financial soundness throughout the life of loans. The credit risk management standards that ADIs are expected to meet include expectations of sound lending practices similar to the requirements under the responsible lending obligations. As part of these sound lending practices, APRA imposes serviceability requirements to ensure consumers can meet their obligations without substantial hardship.
Summary of new law
1.15 Schedule 1 to the Bill amends Chapter 3 of the Credit Act so that, from 1 March 2021 (or the day after Royal Assent, if it occurs later), responsible lending obligations apply only to small amount credit contracts and consumer leases (and small amount credit contract-equivalent loans provided by ADIs).
1.16 For all other types of credit contracts, key changes:
⢠remove responsible lending obligations for ADIs, reflecting that ADIs are subject to a prudential regulatory framework under the Banking Act 1959 , including prudential standards which are enforced by APRA; and
⢠impose lending standards for non-ADIs, as part of the new risk-based regulatory framework for consumer credit, based on similar obligations to those imposed on ADIs.
1.17 To ensure appropriate consumer protections remain in place, the best interests obligations already legislated for mortgage brokers are extended to certain other credit assistance providers.
1.18 Related amendments will be made to the Credit Regulations to limit or repeal certain provisions that are affected or made redundant by the removal of responsible lending obligations for credit contracts other than small amount credit contracts and consumer leases.
1.19 Schedule 1 to the Bill amends the Credit Act to allow the Minister to make standards, by way of legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes relating to certain non-ADI credit conduct.
1.20 The requirements imposed by the standards will be system-level obligations rather than focusing on individual loans engaged in by licensees. This reflects the Government’s decision to move away from a prescriptive framework for lenders and borrowers and will support risk-based lending that is attuned to the needs and circumstances of the borrower and credit product.
Comparison of key features of new law and current law
|
New law |
Current law |
|
|
Responsible lending obligations |
||
|
Chapter 3 responsible lending obligations only apply to small amount credit contracts and consumer leases (and small amount credit contract-equivalent loans provided by ADIs) beginning on 1 March 2021 (or the day after Royal Assent, if it occurs later) . This is the case for both credit providers and credit assistance providers. |
Chapter 3 responsible lending obligations apply to all consumer credit contracts (including small amount credit contracts) and consumer leases. This is the case for both credit providers and credit assistance providers. |
|
|
ADIs are not subject to Chapter 3 responsible lending obligations (other than for small amount credit contract-equivalent loans) beginning on 1 March 2021 (or the day after Royal Assent, if it occurs later) . Existing prudential standards continue to apply. |
ADIs are subject to Chapter 3 responsible lending obligations and a prudential standards regime set and enforced by APRA under the Banking Act 1959 . |
|
|
Non-ADI credit conduct is not subject to Chapter 3 responsible lending obligations from 1 March 2021 (or the day after Royal Assent, if it occurs later). This conduct does not include small amount credit contracts and consumer leases. Non-ADI credit conduct is subject to non-ADI credit standards made by legislative instrument . These will be similar to standards imposed on ADIs. |
Non-ADIs are subject to Chapter 3 responsible lending obligations. |
|
|
Best interests obligations |
||
|
A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour apply to certain other credit assistance providers. |
A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour are legislated to apply to mortgage brokers only. |
|
|
New non-ADI credit standard |
||
|
The Minister is able to make non-ADI credit standards , by way of legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes relating to certain non-ADI credit conduct. |
No equivalent. |
|
Detailed explanation of new law
1.21 Schedule 1 to the Bill amends Chapter 3 of the Credit Act (Responsible lending conduct) so that, beginning on 1 March 2021 (or the day after Royal Assent, if it occurs later), responsible lending obligations only apply to small amount credit contracts, small amount credit contract-equivalent loans provided by ADIs and consumer leases.
Licensees that provide credit assistance in relation to credit contracts
1.22 Beginning on 1 March 2021 (or the day after Royal Assent, if it occurs later), the following obligations in Part 3-1 of the Credit Act apply only to licensees that provide credit assistance in relation to small amount credit contracts and small amount credit contract-equivalent loans provided by ADIs:
⢠section 115: Obligations of credit assistance providers before providing credit assistance for credit contracts
⢠section 116: Preliminary assessment of unsuitability of the credit contract
⢠section 117: Reasonable inquiries etc. about the consumer
⢠section 118: When the credit contract must be assessed as unsuitable—entering contract or increasing the credit limit
⢠section 119: When the credit contract must be assessed as unsuitable—remaining in credit contract
⢠section 120: Providing the consumer with the preliminary assessment
⢠section 123: Prohibition on suggesting or assisting consumers to enter, or increase the credit limit under, unsuitable credit contracts
⢠section 124: Prohibition on suggesting to consumers to remain in unsuitable credit contracts.
[Schedule 1, items 5, 7 to 22 and 24 to 31, sections 113(2)(i), 115 (heading), 115(1)(a) and (b), 115(2), 116 (heading), 116(1)(b), 116(2)(b), 117(1)(a), 117(1A), 118 (heading), 118(1), 118(3AA), 118(3A), 119 (heading), 119(1), 119(3A), 123 (heading), 123(1)(a) and (b), 123(3AA), 123(3A), 124 (heading), 124(1) and 124(3A)]
Best interests obligations
1.23 The best interests obligations that apply to mortgage brokers are extended to certain other credit assistance providers, following a six-month transition period from the later of 1 March 2021 and the day after Royal Assent. As a result, these credit assistance providers need to comply with the obligations in relation to credit contracts and consumer leases.
1.24 The extension of the best interests obligations beyond mortgage brokers to certain other licensees and their credit representatives means that those licensees and their credit representatives must:
⢠act in the best interests of consumers when providing credit assistance in relation to credit contracts and consumer leases; and
⢠where there is a conflict of interest, give priority to consumers in providing credit assistance in relation to credit contracts and consumer leases.
[Schedule 1, items 74 and 75, sections 158L and 158LD]
1.25 A maximum civil penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act) applies for a contravention.
1.26 While the specified penalty for the contravention of the civil penalty provision is 5,000 penalty units, the maximum penalty applicable under section 167B of the Credit Act is:
⢠for individuals, the greater of:
- 5,000 penalty units; and
- if the court can determine—the benefit derived or detriment avoided because of the contravention, multiplied by three;
⢠for bodies corporate, the greater of the following:
- 5,000 penalty units multiplied by ten (50,000 penalty units);
- if the court can determine—the benefit derived or detriment avoided by the body corporate because of the contravention, multiplied by three; and
- 10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.
1.27 Additionally, licensees that authorise credit representatives must take reasonable steps to ensure that those persons comply with the obligations listed above.
1.28 The obligations generally do not apply to a licensee (or its credit representative) that provides credit assistance where it is the credit provider. However, if the licensee also provides credit assistance for credit contracts or consumer leases from other providers (and the majority relates to other providers), the obligations apply when the licensee provides credit assistance both in relation to its own and other credit providers as part of its broking business.
1.29 The extension of the best interests obligations is intended to improve outcomes for consumers by legally requiring that credit assistance providers act in the consumer’s best interests and place the consumer’s interests before their own. The extension of the best interests obligations does not affect the arrangements already legislated for mortgage brokers.
1.30 These obligations do not apply to credit assistance provided in relation to credit for predominantly business purposes. A credit assistance provider will need to determine whether the credit is in fact intended to be used predominantly for personal purposes or for business purposes, and, where the predominant use is personal, comply with the new obligations.
1.31 The duty to act in the best interests of the consumer in relation to credit assistance is a principles-based standard of conduct that applies across a range of activities that licensees and representatives engage in. As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract or a consumer lease. The duty does not prescribe conduct that is taken to satisfy the duty in specific circumstances. It is the responsibility of credit assistance providers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circumstances.
1.32 Examples of steps that may need to be taken in order to comply with the duty are:
⢠prior to recommending any credit contract or consumer lease to a consumer based on consideration of that consumer’s particular circumstances, the licensee or representative may need to consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
⢠any recommendations made would be expected to be based on consumer benefits, rather than benefits that may be realised by the broker; that is, a broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer; and
⢠in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.
1.33 In some situations the consumer will not properly understand the implications of different choices and so the broker may have to assist them to understand why a particular loan is or is not in their best interests. In some cases this assistance may inform any recommendations provided by the broker.
1.34 A credit contract (e.g. a loan) may be packaged with one or more other credit contracts (e.g. a credit card) as a single product offering. In recommending a package the credit assistance provider would be expected to ensure that the package, rather than the standalone loan (if available) or an alternative standalone loan or packaged product in the range of options considered by the credit assistance provider, is in the consumer’s best interests. In making this assessment, the credit assistance provider would be expected to weigh up the relative benefits and risks for the consumer, which may depend on a range of factors including what the consumer is attempting to achieve and the relative value and importance of the different components of the package.
1.35 However, in a package consisting of a primary credit contract (e.g. a car loan) and other credit contracts (e.g. a credit card), the primary credit contract is relatively more important for determining whether the package is in the consumer’s best interests. A broker should be able to articulate why the particular loan they recommend is in the consumer’s best interests—including to the consumer. While the duty does not prescribe requirements for record keeping, brokers would need to consider how they document those reasons in order to demonstrate their compliance with the best interests duty.
1.36 In addition to the best interests duty, the law also requires credit assistance providers to resolve conflicts of interest in the consumer’s favour. In particular, if a credit assistance provider knows, or reasonably ought to know, that there is a conflict between the interests of the consumer and the interests of the credit assistance provider or a related party, the provider must give priority to the consumer’s interests.
1.37 The obligation to give priority to the consumer’s interests is not limited to conflicts of interest that the credit assistance provider currently knows about. Credit assistance providers are expected to take active steps to identify conflicts of interest to minimise the risk of a contravention, including obligations that can arise because of its commercial relationships with third parties. For example, if a broker has referral arrangements with a provider of goods or services such that they are an associate, then the broker would need to consider the conflicts that could arise, and ensure that they give priority to the interests of the consumer over their own interests or those of the associate.
1.38 The obligations apply to credit assistance providers that are licensees, or their representatives. For credit representatives:
⢠the obligations only apply when the credit representative is acting within the scope of the credit representative’s actual or apparent authority from the licensee; and
⢠the licensee is required to take reasonable steps to ensure that the representative complies with the obligations.
1.39 What constitutes reasonable steps will vary from case to case according to the content of the obligation. Failure to take reasonable steps would include a failure to respond to or address identified problems that create a risk of a contravention; that is, licensees need to act to prevent contraventions of the law, and not simply respond to contraventions once they have happened.
Licensees that are credit providers under credit contracts
1.40 Beginning on 1 March 2021 (or the day after Royal Assent, if it occurs later), the following obligations in Part 3-2 of the Credit Act apply only to licensees that are credit providers under small amount credit contracts and small amount credit contract-equivalent loans provided by ADIs:
⢠section 128: Obligation to assess unsuitability
⢠section 129: Assessment of unsuitability of the credit contract
⢠section 130: Reasonable inquiries etc. about the consumer
⢠section 131: When credit contract must be assessed as unsuitable
⢠section 132: Giving the consumer the assessment
⢠section 133: Prohibition on entering, or increasing the credit limit of, unsuitable credit contracts.
[Schedule 1, items 36, 38 to 50 and 52 to 56, sections 126(2)(f), 128 (heading), 128(a) to (ba), 129 (heading), 129(b), 130(1)(a), 131 (heading), 131(1), 131(3AA), 131(3A), 132(1), 132(2)(a), 133 (heading), 133(1)(a) and (b), 133(3AA) and 133(3A)]
Small amount credit contract-equivalent loans by ADIs
1.41 The responsible lending obligations are retained for each credit contract provided by an ADI which would be a small amount credit contract if the credit provider was not an ADI. The Bill uses the term ‘low limit credit contract’ to encompass both those types of contracts and small amount credit contracts. [Schedule 1, item 1, definition of ‘low limit credit contract’ in section 5(1)]
1.42 That is, if an ADI provides an unsecured loan of under $2,000 to which the Code applies, that is not a continuing credit contract, and that has a term of between 16 days and one year, the ADI continues to be subject to the responsible lending obligations that have previously applied to credit contracts generally.
1.43 However, the obligations that have previously applied specifically to small amount credit contracts (such as the requirement to give consumer warnings and the requirement to obtain and consider account statements that cover the immediately preceding period of 90 days) do not apply to ADIs in this scenario.
1.44 The effect is that ADIs’ responsible lending obligations are unchanged for this category of contract. This maintains a comparable level of consumer protection whether a small loan is obtained as a small amount credit contract or from an ADI.
1.45 As indicated above, the responsible lending obligations are also retained for credit assistance in relation to a small amount credit contract-equivalent loan by an ADI.
Licensees and reverse mortgages
Equity projections
1.46 The requirement to give equity projections remains in place, but from 1 March 2021 (or the day after Royal Assent, if it occurs later) the obligation is to do so before the licensee provides credit assistance, enters the reverse mortgage, increases the credit limit of a reverse mortgage or makes an unconditional representation about the consumer’s eligibility. [Schedule 1, items 62 and 64, sections 133DB(1) and (1A)]
1.47 In addition to giving equity projections, the licensee must also show the consumer a comparison of the consumer’s stated expected aged care costs with the equity projections. This involves:
⢠asking the consumer about their expected future aged care accommodation needs, including the time (if any) at which the consumer has stated they are likely to incur costs for future aged care accommodation and the likely amount of those costs; and
⢠presenting the consumer’s stated expected future aged care accommodation costs alongside the equity projection, in a manner allowing the consumer to appreciate how the equity expected to be left in the home may impact their ability to afford aged care.
[Schedule 1, item 63, sections 133DB(1)(ba) and (bb)]
1.48 The licensee must show the consumer the comparison in person (unless another method of giving the information is prescribed in regulations) and provide a printed copy. [Schedule 1, items 63 and 65, sections 133DB(1)(ba) and (bb) and 133DB(4B)]
1.49 The licensee need only ask the consumer for their estimate of the future costs. The licensee does not need to form its own view.
1.50 As with the existing equity projections requirement, a maximum civil penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act) applies for a failure to comply. Failure to comply is also an offence punishable by a maximum penalty of 50 penalty units.
1.51 Consequential amendments are made to the defence provisions, including to cover the situation where another person has already given the required comparison. [Schedule 1, item 65, sections 133DB(4A) and (4B)]
Example 1.1
Bob enters a reverse mortgage at 60. His broker asks him how much he expects his future aged care accommodation costs will be. Bob estimates these will amount to approximately $30,000 in 15 years when he expects to exit the reverse mortgage.
The broker provides an equity projection which provides scenarios using different interest rates to calculate the possible equity Bob will have in his home in 15 years’ time.
Bob’s broker provides the information to Bob regarding (i) the estimated equity remaining after 15 years and (ii) Bob’s estimated cost of aged care in a manner that allows Bob to appreciate how the equity expected to be left in his home may impact his ability to afford aged care.
Prohibition on reverse mortgages in certain circumstances
1.52 A new prohibition on licensees from entering into reverse mortgages applies from 1 March 2021 (or the day after Royal Assent, if it occurs later), where the loan to value ratio exceeds a calculation dependent on the borrower’s age. The prohibition operates as follows:
⢠A licensee must not enter into a reverse mortgage with a borrower who is under 56 years of age where the loan to value ratio of the mortgage exceeds 15%.
⢠A licensee must not enter into a reverse mortgage with a borrower who is at least 56 years of age where the loan to value ratio of the mortgage exceeds the sum of 16% and 1% for each year the borrower is more than 56 years of age.
[Schedule 1, item 66, section 133DF]
1.53 The same applies for increasing the credit limit of a reverse mortgage or making an unconditional representation that the licensee considers the consumer is eligible for such a reverse mortgage or credit limit increase.
1.54 For the purposes of these rules, the loan to value ratio is the amount of credit owed, or intended to be owed, under the credit contract for the reverse mortgage, expressed as a percentage of the value of the dwelling or land that is, or may become, reverse mortgaged property. [Schedule 1, items 1 and 66, definition of ‘reverse mortgaged property’ in section 5(1) and section 133DF(5)]
1.55 The maximum civil penalty for contravening these rules is at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act).
1.56 However, there is an exception to this prohibition if the licensee reasonably believes that the reverse mortgage, or the increase to the credit limit of a reverse mortgage, is appropriate because of the applicant’s special circumstances. [Schedule 1, item 66, section 133DF(4)]
Example 1.2
Chiara is 35 years old and is diagnosed with a terminal illness. Medical specialists estimate that Chiara’s life expectancy is approximately two years. Chiara has a home loan and owes 80% of the current value of the home which is valued at $400,000. Chiara applies for a reverse mortgage. Her broker asks her how much she expects her future aged care accommodation costs will be. Chiara advises the broker that she will not have aged care costs because her life expectancy has been significantly reduced by terminal illness and specialist medical advice is that she has two years to live. Chiara has estimated her end of life costs to be $75,000.
The broker provides an equity projection which provides scenarios using different interest rates to calculate the possible equity Chiara will have in her home in two years’ time.
Chiara’s broker provides the information to Chiara regarding (i) the estimated equity remaining after two years and (ii) Chiara’s estimated cost of care in a manner that allows Chiara to appreciate how the equity expected to be left in her home may impact her ability to afford end of life care.
The broker assists Chiara to find a bank that will provide Chiara a reverse mortgage. A bank has regard to the equity projections, specialist medical evidence about Chiara’s life expectancy, medical expenses, and ongoing care needs, and forms the belief that it is appropriate, in all the circumstances, to offer Chiara a reverse mortgage with a loan to value ratio of 17% because although she is 35 her aged care needs are equivalent to someone near to end of life.
1.57 The prohibition is an exempt provision under Schedule 2 to the Age Discrimination Act . [Schedule 1, item 70, table item 8A in Schedule 2 to the Age Discrimination Act]
1.58 Schedule 2 to the Age Discrimination Act sets out provisions of laws for which an exemption is provided by section 39(1A) of that Act. The exemption is for anything done by a person in direct compliance with the exempt provision that would otherwise be unlawful age discrimination.
1.59 The prohibition replaces the presumption of unsuitability in regulation 28LC of the Credit Regulations.
Miscellaneous rules
1.60 Division 5 of Part 3-6A, about the periods for determining unsuitability in respect of credit cards, is repealed. This Division is redundant because unsuitability assessments no longer apply for credit card contracts. [Schedule 1, item 69, Division 5 of Part 3-6A]
Non-ADI credit standards
1.61 The Minister is able to make non-ADI credit standards , by way of legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes which relate to certain non-ADI credit conduct. [Schedule 1, items 1 and 67, definition of ‘non-ADI credit standard’ in section 5(1), and section 133EA(1)]
1.62 These standards will require licensees to implement adequate systems, policies and processes relating to non-ADI credit conduct rather than impose individual conduct-level obligations. This enables credit assessments to move away from a prescriptive framework for lenders and borrowers and will support risk-based lending that is attuned to the needs and circumstances of the borrower and credit product. These standards are appropriately adopted from the APRA standards to maximise alignment between the ADI and non-ADI regimes.
1.63 Non-ADI credit conduct relates to credit contracts where the contract is not a small amount credit contract and the credit provider is not an ADI. In relation to these contracts, non-ADI credit conduct is:
⢠a licensee entering a credit contract with a consumer where the consumer will be the debtor under the contract;
⢠a licensee unconditionally representing to a consumer that they believe the consumer is eligible to enter into a credit contract with the licensee;
⢠where a consumer is a debtor under the credit contract, a licensee increases the credit limit of that contract; or
⢠a licensee unconditionally representing to a consumer under a credit contract that the credit limit can be increased.
[Schedule 1, items 1 and 67, definition of ‘non-ADI credit conduct’ in section 5(1), and sections 133EA(5) and (6)]
1.64 Additionally, the non-ADI credit standards can specify that a licensee is required to provide a consumer a copy of documents at a particular time and in a particular manner. This enables a standard to require a licensee to give a copy of an assessment prescribed by the standard to a consumer. [Schedule 1, item 67, section 133EA(2)]
1.65 The content of the non-ADI credit standards being determined by legislative instrument is intended to enable consistency to be achieved on an ongoing basis between the regulation of the provision of credit by both ADIs and non-ADIs (the former of which will be set out in legislative instruments made by APRA). This allows the law to adapt to changes over time.
1.66 The non-ADI credit standards may apply generally or as limited by the determination, and may make different provision in relation to different situations, activities or classes of licensees or credit providers. These powers may be used, for example, to ensure the non-ADI credit standards do not apply to bodies corporate (other than ADIs) that are regulated by APRA’s prudential standards. [Schedule 1, item 67, sections 133EA(3) and (4)]
Obligations to establish, maintain and comply with the systems, policies and processes required by the non-ADI credit standards
1.67 A licensee is prohibited from engaging in non-ADI credit conduct unless the systems, policies and processes applicable to the conduct, as required by a non-ADI credit standard, are both:
⢠established and maintained to comply with the requirements in the standard; and
⢠documented in a written plan.
1.68 A licensee failing to have met either of these requirements before engaging in an instance of non-ADI credit conduct will contravene a civil penalty provision with a maximum penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act). [Schedule 1, item 67, section 133EB]
1.69 This obligation is intended to ensure that prior to a licensee engaging in any non-ADI credit conduct covered by a standard, the licensee has established, maintained and documented the systems, policies and processes required by the relevant standard.
1.70 The expression ‘systems, policies and processes’, in this context, is intended to be a composite concept. Therefore, a licensee will contravene this provision if the systems, policies and processes established and maintained by the licensee, when considered together, do not meet all of the requirements set out in the standard.
1.71 An example of where a licensee will fail to maintain systems, policies and processes in accordance with the standard is if the licensee fails to make changes to those systems, policies and processes in the case where they are not ensuring the outcomes required by the standard. This may occur where the licensee has identified issues through monitoring and auditing of these systems but has not corrected their systems, policies or processes, or may occur due to a failure to conduct prudent monitoring and auditing.
1.72 Where a licensee fails, on a repeated basis, to comply with the requirements of the systems, policies and processes it has established before engaging in non-ADI credit conduct, the licensee will contravene a civil penalty provision with a maximum penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act). [Schedule 1, item 67, sections 133EC(1) and (2)]
1.73 Each instance of a licensee engaging in non-ADI credit conduct having failed to comply with the requirements of its systems, policies and processes will be considered a single failure to comply for the purposes of the civil penalty provision. For example, if a licensee has a system in place that requires an employee to ensure an assessment has been done before providing credit, but an employee of the licensee does not do so before providing credit, there would be a failure to comply with the requirements of the licensee’s systems, policies and processes each time credit is provided by that employee. Therefore, repeated contraventions of the licensee’s systems, policies and processes can take place over a short period of time, including a single day, or over a longer period of time.
1.74 The failure to comply with the requirements of the licensee’s systems, policies and processes need not be a failure to comply with all of these requirements to be captured by the civil penalty provision. Instead, a failure to comply with a single requirement is considered a contravention for the purposes of this provision. The repeated contraventions need not be repeated contraventions of the same requirement in the same system, policy or process of the licensee.
1.75 Where the licensee is a body corporate, conduct of multiple employees or agents may cumulatively lead to repeated contraventions by the licensee to comply with the requirements of its systems, policies and processes when engaging in non-ADI credit conduct. Conversely, the conduct of a single employee or agent may be sufficient to contravene the provision, where the employee or agent repeatedly fails to comply with the requirements of those systems, policies or processes.
1.76 A single failure only of a licensee to comply with the requirements of the licensee’s systems, policies and processes will not contravene the civil penalty provision, and a single failure only will also not enable ASIC’s licensing enforcement powers to be used. However, the contravention of the Credit Act means consumers retain access to redress through other mechanisms, such as through the AFCA scheme. [Schedule 1, item 67, sections 133EC(1), (3) and (4)]
1.77 This provision ensures consumers have access to redress through the AFCA scheme in similar circumstances whether credit is provided to the consumer by an ADI, as regulated by APRA’s prudential lending standards, or by another credit provider, as regulated by the non-ADI credit standards.
1.78 Further, a licensee is required to retain a record of a written plan for seven years after the time that the written plan ceases to set out the current systems, policies and processes the licensee utilises. A licensee will contravene a civil penalty provision with a maximum penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act) where the licensee does not keep the records of the written plan for seven years after the end of the period the plan applies to. [Schedule 1, item 67, section 133EB(2)]
1.79 The written plan should be sufficient to enable ready understanding of how the systems, policies and processes comply with the standard.
1.80 Maintaining records of these written plans will ensure that AFCA can access the relevant written plan documenting the systems, policies and processes used by a licensee when considering a consumer’s complaint about the licensee or non-ADI credit conduct.
Obligation to provide consumers documents
1.81 A licensee is required to give a consumer a copy of a document at a specified time, if required by a non-ADI credit standard.
1.82 A civil penalty provision with a maximum penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act) applies if a standard requires the licensee to provide a copy of a document to a consumer at a particular time and the licensee does not give the consumer the document within the specified timeframe. [Schedule 1, item 67, section 133ED(1)]
1.83 If a standard requires a copy of a document to be given in a certain manner, the licensee must adhere to those requirements. [Schedule 1, item 67, section 133ED(2)]
1.84 When a licensee is required to provide a consumer a copy of a document, they are prohibited to request or demand payment from the consumer for the document. A civil penalty provision with a maximum penalty of at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act) will apply if a payment is requested or demanded from a consumer. [Schedule 1, item 67, section 133ED(3)]
1.85 A strict liability offence will be committed by a person if they are under a requirement to provide a consumer a copy of a document or to not request payment in providing the document and they engage in conduct which contravenes those requirements. This strict liability offence has a maximum penalty of 50 penalty units. [Schedule 1, item 67, sections 133ED(4) and (5)]
1.86 A strict liability offence is appropriate in this circumstance, as it is necessary to enhance the effectiveness of the enforcement regime and strongly deter misconduct that can have serious and detrimental impacts on consumers engaging in non-ADI credit conduct with non-ADI credit providers. This penalty provision is consistent with the existing penalties in the Credit Act for similar offences (such as section 132(5) of the Credit Act).
1.87 The strict liability offence in Schedule 1 meets all the conditions listed in the Guide to Framing Commonwealth Offences . The fine for the offence is 50 penalty units and does not exceed 60 penalty units for persons other than a body corporate, which is consistent with the Guide.
1.88 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.
Consequential amendments
1.89 Schedule 1 makes amendments that include and update notes and other guidance materials to reflect the substantive changes made by the amendments. [Schedule 1, items 2 to 4, 6, 23, 32 to 35, 37, 51, 57 to 61, 68, 71 to 73 and 76, section 111, Division 4 of Part 3-1 (heading), Division 6 of Part 3-1 (heading), Part 3-2 (heading), section 125, Division 3 of Part 3-2 (heading), Division 4 of Part 3-2 (heading), section 133A, section 133B, section 133C, section 133DA, section 133DB (headings), Part 3-5A (heading), section 158K, Subdivision A of Division 2 of Part 3-5A (heading), Division 4 of Part 3-5A (heading) and section 160A]
Application and transitional provisions
1.90 The amendments apply as follows:
⢠to credit assistance provided and representations made on or after the later of 1 March 2021 and the day after Royal Assent, whether the credit contract in relation to which the assistance is provided is entered before, on or after that day;
⢠to entering a credit contract on or after the later of 1 March 2021 and the day after Royal Assent; and
⢠to increasing the credit limit of a credit contract on or after the later of 1 March 2021 and the day after Royal Assent.
[Schedule 7, item 2 of Schedule 19 to the Credit Transitional Act]
1.91 To avoid doubt, sections 120 and 132 of the Credit Act, as in force immediately before the amendments commenced, continues to apply in relation to assessments and preliminary assessments made before 1 March 2021 (or made before the day after Royal Assent, if it occurs later). [Schedule 7, item 2 of Schedule 19 to the Credit Transitional Act]
1.92 However, there is a six-month transition period for the amendments that introduce best interests obligations for credit assistance providers. These amendments commence on the day after the end of the period of six months beginning on the later of 1 March 2021 and the day after Royal Assent. They apply to credit assistance provided on or after that day (whether or not the assistance was sought, or commenced being provided, before that day). [Clause 2 and Schedule 7, item 3 of Schedule 19 to the Credit Transitional Act]
1.93 The framework for non-ADI credit standards is inserted into the Act commencing on the later of 1 March 2021 and the day after Royal Assent.
Background
2.1 The COVID-19 pandemic and associated containment measures are having profound impacts on the Australian economy. The recession that was induced by COVID-19 in the first half of 2020 was Australia’s first in almost 30 years, with real GDP contracting by a record 7.0 per cent in the June quarter 2020. This followed a fall of 0.3 per cent in the March quarter 2020, as a result of both the devastating bushfires and early stages of the COVID-19 pandemic.
2.2 The effects on the labour market have been severe, with around 10 per cent of the labour force losing their job or being stood down on zero hours during the peak of the restrictions in April. As a result, the effective unemployment rate in Australia peaked at around 15 per cent.
2.3 The first tranches of the Australian Government’s fiscal support were aimed at mitigating the most severe economic effects of the COVID- 19 pandemic. The JobKeeper payment kept a large share of workers connected to their employer, while the significant support to incomes continues to support household and business balance sheets.
2.4 The economic recovery from this downturn is underway with real GDP increasing by 3.3 per cent in the September quarter, and is expected to continue to grow in 2020 and into 2021 as health restrictions continue to ease. Significant challenges remain, however, with expectations that it will be some time before the size of the economy or demand in labour markets recovers to its pre-pandemic level. With interest rates at historic lows and fiscal policy playing a significant role in supporting growth, it is important that Australia’s regulatory settings also facilitate, rather than hinder, the economic recovery. Regulatory settings have a significant impact on the flow of credit, which is integral to the immediate recovery as well as the ongoing health of the Australian economy. The reforms considered in this RIS are aimed at improving the efficient and timely flow of credit by removing duplicative or excessive regulatory barriers that increase the time and cost involved in obtaining credit approval. The objective of the reform is to remove these barriers in a way that retains the requirements of prudent lending and consumer protection while also reducing the time and effort required by households and businesses to access credit, ensuring a level playing field among lenders and promoting competition in the financial services sector.
2.5 The provision of consumer credit in Australia is regulated by the National Consumer Credit Protection Act 2009 (Credit Act). The Credit Act requires the providers of consumer credit to hold an Australian Credit Licence and comply with a range of obligations, including general conduct obligations associated with holding a licence as well as specific obligations on interactions with consumers. Specific obligations include the responsible lending obligations (RLOs) contained in Chapter 3 of the Credit Act, which are applied to each individual credit approval and require all credit providers to (1) make reasonable inquiries about the consumer’s requirements and objectives; (2) make reasonable inquiries about the consumer’s financial situation [and] take reasonable steps to verify the consumer’s financial situation; and (3) assess whether the credit will not be unsuitable for the consumer, prior to making a loan. These obligations apply across all authorised deposit-taking institutions (ADIs) and non-ADIs when providing credit.
2.6 The providers of credit under the RLO framework have been given further guidance in the Regulatory Guide 209 (RG 209), issued by the Australian Securities and Investments Commission (ASIC) as the responsible regulator; this guidance was most recently updated in December 2019. The update was informed by consultation with stakeholders that took place throughout 2019, which was designed to understand how the guidance was operationalised, and how it could be improved. The updated guidance aimed to balance a flexible approach to RLOs with increased clarity on ambiguous regulatory concepts through the use of more case studies and examples. Feedback on RG209 has been mixed; some stakeholders appreciate the greater clarity, but many have noted that the lengthy guidance has also increased the level of prescription attached to the regulation and reduced the flexibility of lenders to make pragmatic decisions dependent on individual circumstances. [2] ASIC’s regulatory guides are not legally binding, nor do they hold any persuasive weight in judicial proceedings. However, industry generally complies with guidance set out by ASIC.
2.7 There have been a number of other changes to the overall framework for providing consumer credit since the Credit Act and RLOs were put in place 10 years ago. Unlike RLOs, which were implemented to apply universally to all types of consumers and all types of credit, other changes have been targeted and aimed at specific types of credit products or firm conduct. They include:
⢠providing ASIC with a product intervention power that allows ASIC to ban, or amend, a credit product where that product has resulted, or is likely to result, in significant consumer detriment;
⢠introducing a design and distribution obligation which will require product issuers to identify and distribute their products to appropriate consumers to reduce the risk of consumers acquiring or being mis-sold products that do not meet their needs;
⢠introducing a best interests duty for mortgage brokers to ensure mortgage brokers act in the best interests of consumers when providing credit assistance;
⢠more than doubling the maximum corporate and financial sector civil and criminal penalties under the Credit Act;
⢠enhancing protections for credit card customers by banning unsolicited offers of credit limit increases, simplifying how interest is calculated and requiring online options be available for consumers to cancel cards or reduce their limits; and
⢠establishing the Australian Financial Complaints Authority (AFCA), increasing access for borrowers to external dispute resolution.
2.8 In addition to the above, ADIs must comply with the Australian Prudential Regulation Authority’s (APRA) prudential standards which impose obligations on lending, including ensuring institutions have appropriate risk management settings to manage prudential risk. These standards apply to all ADI lenders, which collectively provide more than 90 per cent of all new consumer credit generated in Australia. Specifically in the area of loan origination, APRA’s standards impose obligations on lenders to ensure sound credit assessment and approval processes when assessing a borrower’s capacity to repay a loan. [3] This includes expectations on lenders that they are making inquiries and taking reasonable steps to verify information provided by borrowers, as well as ensuring appropriate serviceability buffers when providing home loans. APRA monitors compliance and enforces conduct against the standards and guidance where there has been a systemic breach.
The problem
2.9 A well-functioning credit market supports the economy, including by enabling investment in productive capacity and facilitating household purchases. The cost of obtaining credit therefore flows through to every part of the economy. Treasury estimates that approximately $34 billion in new consumer credit issued each month is subject to RLOs. [4] A range of supply and demand factors impact credit growth and its associated costs, including the Government’s regulatory settings. Given Government regulation can create barriers to the timely and efficient provision of credit, it is important that the regulation of credit delivers its intended outcome without unnecessarily impeding the flow of credit or raising the cost consumers pay to access credit. The objective of regulatory settings cannot be to avoid any single incident of consumer harm, but rather to set rules and expectations around the behaviour of lenders - as well as penalties for breaches and recourse for consumers should those rules be broken - but without imposing undue deadweight losses on the economy through excessive prescription in the practice of regulation.
2.10 The current RLOs are set at the level of an individual loan decision, and impose a regulatory burden that is borne by both lenders and borrowers when an individual consumer applies for credit. The guidance provided to interpret the law requires lenders as part of the application process to make detailed inquiries, and extensively verify information provided by the customer. The extent of the information requested and amount of time needed to verify the information will necessarily influence how long it takes and how much it costs for the credit assessment to be completed. RLOs were originally intended to be a risk-based principles framework that was scalable relative to the individual and product, however, over time the principles as set out in the Credit Act at the level of individual loan obligation have been further defined through increased guidance from regulators. This guidance has led to a ‘one-size-fits-all’ uniform and high touch approach to individual credit assessments, regardless of the specific financial circumstances of the individual borrower or nature of the credit product. If the regulatory guidance that directs the behaviour of a firm on credit assessment is beyond what may be required to establish the credit position of the consumer, this regulatory burden represents an undue cost to the consumer in obtaining that credit.
2.11 The overall objective of RLOs, that a lender should extend credit to a consumer only after ascertaining that the consumer should be able to repay their credit without substantial hardship, is sound. However, the current regulatory settings impose a greater regulatory burden on lenders and borrowers than was originally envisaged, over and above what many customers would seem to require, impacting both the timely access to, and the cost of, available credit, without substantial evidence that the increased cost of the regulatory burden is offset by a commensurate reduction in consumer harms. In recent years, the burden has increased through further regulatory guidance and prescription on what is required to verify the individual circumstances of individual borrowers. This is compounded by the fact that RLOs duplicate the intended regulatory effect of other obligations imposed on ADIs by APRA, and that APRA’s requirements and other consumer protections have been strengthened over time. Since the establishment of the Australian Financial Complaints Authority (AFCA) on 1 November 2018, data indicates that less than 6,000 complaints have been lodged based on a claim related to responsible lending. [5]
2.12 The RLOs as legislated were intended to be a risk-based principles framework that ensures lenders do not provide unsuitable credit to customers. The obligations involve:
⢠making reasonable inquiries about a consumer’s financial situation, and their requirements and objectives;
⢠taking reasonable steps to verify a consumer’s financial situation;
⢠making a preliminary assessment (if they are providing credit assistance) or final assessment (if they are the credit provider) about whether the credit contract is 'not unsuitable' for the consumer; and
⢠if a consumer requests it—being able to provide the consumer with a written copy of the preliminary assessment or final assessment (as relevant).
2.13 While the use of a risk-based principles framework is adaptive to changing circumstances, the reality of the obligation being set at the individual loan level has led to licensees continually seeking greater certainty about how to comply with these obligations. Usually, the interpretation of principles in any legislative framework develops over time through a mixture of court decisions, regulatory guidance and industry practices. This process provides clarity to licensees on the content of their obligations and what is required to comply in any given case. In the case of RLOs, the ASIC v Westpac (Wagyu and Shiraz) case and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) created significant uncertainty among credit providers around how to interpret and comply with RLO legislation and regulation.
2.14 In response to those developments and industry desire for greater clarity, ASIC developed further guidance on RLOs. The guidance, which runs to more than 90 pages, sets out detailed procedures on how licensees should comply with the process assessment requirements for individual loans. The implementation of this guidance has led to an approach for credit assessment by lenders that imposes additional costs on consumers. As such, in the case of RLOs, it would seem that the process of interpretation of principles has now created a regulatory burden that is beyond the scope of what was originally intended in law.
2.15 There are several aspects to ASIC’s 2019 update that have added compliance costs to credit assessments without evidence of improved protections for consumers. One is fairly detailed expectations on lenders as to the manner in which consumer creditworthiness is to be assessed. This included a clarification that the onus is on lenders to verify financial information provided by borrowers, down to a fine level of detail. Under this approach, borrowers bear limited responsibility for providing incomplete or inaccurate information to lenders. [6]
2.16 In response to the ASIC guidance, many lenders have put in place detailed and lengthy credit approval processes aimed solely at meeting the requirements set out in the guidance. Through consultation, lenders have told Treasury that applications can take up to 8 weeks, and that over 50 per cent of the time spent on a credit application can go toward verifying information provided by borrowers. Even so, lenders still risk being held accountable if there is a piece of information they do not uncover, or if some element of process in the guidance is not followed. A number of credit providers have emphasised that these processes do not necessarily improve a lender’s ability to understand if the loan is suitable for the customer. It does however have the effect of shifting the risk of an inaccurate credit assessment onto the lender, even in cases for example where a customer may unintentionally provide incorrect information.
2.17 The recent litigation between ASIC and Westpac, [7] regarding the use of expense benchmarks, did not provide lenders with further clarity on what is required to meet their legal obligations in relation to reasonable inquiries and verifications. Arguably, the case illustrates the fact that the steps lenders are required to go through to verify expenses need not be used to understand a consumer’s capacity to repay as a consumer can typically choose to reduce discretionary expenses if needed. In consultation, lenders have advised Treasury that they consider a consumer’s actual income and debt levels are more important indicators of repayment capacity.
2.18 Consultation undertaken by Treasury has suggested that the continued lack of clarity on treatment of areas like expense verification combined with the increased prescription in regulator guidance and heightened community awareness of specific cases following the Royal Commission has led to a more risk-averse stance among lenders. The Royal Commission was valuable at highlighting the types of misconduct that occurred within Australia’s financial institutions and in bringing about a cultural shift that places a greater focus on consumer outcomes. It can be noted that a number of the cases documented by the Royal Commission occurred when the RLOs were in place, underscoring the reality that no legal or regulatory regime is able to always prevent egregious conduct by lenders or ensure consumers will always choose a product that improves their long term financial interest. At the same time, lenders have stated a greater concern of being publicly held to account for every loan written that goes bad even if the borrower was demonstrated or assessed as able to service the loan at the time it was agreed. This is directly related to the framing of the RLOs as being set in the Credit Act as an individual loan obligation.
2.19 Lenders have expressed a greater sense of caution by ensuring strict adherence to the prescriptive expectations at the individual loan level set out in ASIC’s regulatory guidance rather than tailoring their approach consistent with the original intent of the law. This behaviour is further driven by the Government increasing the level of penalties for breaches of the Credit Act in the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 .
2.20 The problem of growing risk aversion to a single event of default was emphasised by the Governor of the Reserve Bank before a Parliamentary Committee, where he noted:
I think the principles in the legislation are sound, but I think the way we've translated those principles into reality needs looking at again. If we can't do that properly, maybe we need to look at the legislation. We can't have a world in which, if a borrower can't repay the loan, it's always the bank's fault. On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad it means it's not extending enough credit. The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad, because the bank didn't understand the customer; if it had done proper due diligence—this is the mindset of some—the bank would never have made the loan. [8]
2.21 A number of submissions made to ASIC’s 2019 consultation on updating RG 209, including submissions from some industry bodies, were supportive of principles-based guidance, rather than further prescription, particularly on the inquiry and verification steps for the RLOs. [9] There was support for a focus on what needs to be done, rather than how it should be done. ASIC noted that a number of submissions raised concerns about greater prescription leading to significant difficulties and costs including:
⢠identifying relevant core standards for a broad range of credit products and consumer types, with the risk that standards would be unduly onerous in some circumstances;
⢠applying inflexible standards which would increase processing costs which in turn could increase costs for customers, without an improvement in the quality of assessment and decisions; and
⢠stifling of innovation in application processes. [10]
2.22 In commenting on the structures of financial services law generally, the Royal Commission also noted that greater prescription creates a culture of ‘box-ticking’, which doesn’t necessarily lead to better outcomes for consumers. Compliance with obligations has to be about more than ensuring that a particular process has been complied with, and should instead be about substance and whether the intent of the law is met. To this end, the Commission considered that existing legal structures should be simplified wherever possible. [11]
2.23 RLOs were intended to protect the most vulnerable consumers from hardship. However, as discussed above, the way the RLOs are currently applied at the individual loan level across the market means the process that applies to the most vulnerable consumers is also applied to far less vulnerable borrowers whose ability to service debt is high and risk of experiencing hardship is low. Applying the same process for all consumers, irrespective of their situation or the credit product they are accessing, imposes a regulatory burden on both lenders and borrowers which is not commensurate with the policy outcome being sought. Based on broad stakeholder consultation over recent years, this uniform application of RLOs leads to delays in credit approvals and increases compliance costs, the cost of which are passed on to borrowers.
2.24 The RLOs require that all lenders must undertake an assessment. The additional cost of a detailed assessment imposed by the responsible lending framework is difficult to calculate and will vary on a case-by-case basis. However, assuming only a modest cost saving of $100 per loan for each mortgage in the absence of a prescriptive approach, [12] over the course of a year this would represent savings of around $63 million which competitive forces would over time lead lenders to pass through this cost-saving to consumers. There would also be direct benefits to consumers in the time and effort saved making applications.
2.25 Through extensive consultations, stakeholders provided the following examples of the impact of the RLO regulatory burden:
Where borrowers attempt to refinance to get a better deal, which helps consumers take advantage of the current low interest rate environment and supports expenditure in the economy.
⢠Despite the borrower’s income and financial position not changing from one lender to the next, Treasury heard feedback from stakeholders that lenders are applying the same full-length form and verification process for these borrowers who have evidently been able to repay their loan at a higher interest rate. Feedback provided to ASIC on RG 209 also noted that ‘like for like’ loans should require less extensive inquiries and verification steps, and that the regulatory burden should be commensurate with this [13] .
⢠The Australian Competition and Consumer Commission’s Home Loan Price Inquiry 2020 Interim Report described the consumer benefit that could be garnered from refinancing a home loan with a different lender. As at 30 September 2019, customers with new owner-occupier loans were paying, on average, 26 basis points less than customers with existing loans. This disparity is accentuated for older loans, where customers with greater than five year old loans were, on average, paying 40 basis points above what new customers were paying. [1] Price reductions for customers with existing loans are often not as large as discounts for new loans, demonstrating the importance of home loan customers shopping around to capitalise on lower rates.
Situations with high net-worth individuals, who generally have higher financial literacy and face a lower risk of experiencing financial hardship.
⢠These individuals are still required to go through the same verification process as other borrowers with lower financial literacy and a higher risk of hardship when taking out a new loan, including within the same lending institution where they already have a credit history.
Where lending is for a mixed purpose (both small business and personal).
⢠While small business loans are not intended to be covered by the Credit Act, Treasury has consistently heard that small businesses have struggled to get credit where there is not a clear line between home and business, such as primary producers, or storefronts that also include a residence (for example, split use commercial zoned dwellings, such as professional service small business downstairs with residential premises upstairs). [14]
⢠A particular example that is regularly highlighted to Treasury through its Regional Engagement Program is small scale farms where the lending may include funding the home and land for residential purposes as well as funding for plant, equipment and livestock at the property.
2.26 The regulatory burden imposed is illustrated through the ASIC v Westpac case. The result of that case is that lenders are still required to make detailed inquiries about the expenses of an individual loan applicant, even where a lender takes a more-risk averse approach to lending and applies a statistical benchmark in substitution for information provided by the consumer. For example, 80% of the loans in issue in that case had declared expenses from the borrower that were lower than the bank’s own benchmark household expenditure measure. [15] This benchmark measure was based on the level of income for the loan applicants and their state of residence. For a number of reasons, which may include the possible under-reporting of expenses by applicants, Westpac instead used the household expenditure measure in substitution for the declared expenses (that is, took a more conservative approach). The decision in this case was that Westpac was not contravening the law by using statistical measures in its assessment of unsuitability, even as a substitute for declared expenses from the individual applicant. However, the decision did not remove the need for consumers to supply extensive evidence of their expenses to Westpac and for Westpac to verify that information as the RLO regulatory guidance suggests.
2.27 A consequence of this approach is that lenders must devote resources to making a standard set of inquiries for an assessment in all cases, rather than prioritising resources to more high-risk borrowers or credit products. This one-size-fits-all process approach further compounds competition issues, where large lenders have the economies of scale to more easily overcome the costs of investing in systems to meet the process requirements.
2.28 The application of a standard one-size-fits-all process is illustrated by a number of real-life examples. For example, where the circumstances of the borrower change during the application period:
Marc put down a deposit to buy his first home after receiving pre-approval from the bank, following a suitability assessment. Prior to settlement, Marc received a promotion at work that changed his role and increased his salary (he had been with the company for a year). He notified his bank before the loan was finalised. The bank’s response was that the promotion constituted a change in circumstance, and therefore the loan suitability process would need to be run again to determine how much he could borrow. However, this process was delayed because Marc no longer had a past history of income at the level to rely on. Understandably, this caused Marc concern as settlement on the house was imminent, and this was an unnecessary delay in the final approval of funds.
2.29 Another example is when a person is refinancing between lenders:
Ashley has had a mortgage for a few years and has reduced his loan-to-value ratio below 80 per cent. Generally, loans with a low loan-to-value ratio are available to customers at lower interest rates. Because of this, Ashley applied for a refinanced loan with a new lender at a lower interest rate, which would have reduced his level of repayments per fortnight from current levels. Since taking out his original loan, Ashley has gotten married, so now has a dual income household. His wife lives with him and they share expenses. He has also received a promotion at work and is earning more than when he first got the mortgage. He and his wife do not update the title deed on the property, because this would involve paying a solicitor a few thousand dollars to undertake a conveyance.
Despite Ashley having made all repayments for several years, Ashley’s bank is still required to undertake a verification of expenses. Because Ashley has declared he is part of a couple, he must submit expenses on behalf of himself and his wife. However, lenders cannot take into account his wife’s income because she is not listed on the title. It takes Ashley’s bank several weeks of emailing back and forth to verify his expenses. This causes Ashley distress and potentially inhibits his willingness and ability to change lenders and receive a more favourable rate, despite him and his wife being in a stronger financial position than when the property was purchased.
2.30 For ADIs, the current RLOs regime broadly duplicates prudential lending obligations imposed by APRA through their prudential standards, where APRA’s overarching objective is to ensure institutions can fulfil their liabilities to depositors and do not take undue risks that can negatively impact the stability of the financial system. APRA has also taken a number of actions to improve the quality of lending standards, in particular following the Global Financial Crisis. [16] As a consequence of these actions and greater enforcement by ASIC of Credit Act obligations, and independent moves by the banks, the quality of new lending, in particular mortgage lending, has improved significantly over recent years. [17]
2.31 ADIs are now subject to two regulatory regimes from two different regulators that achieve broadly the same objective, increasing the regulatory burden on licensees, without any substantial benefit to consumer protection. This duplication represents an unnecessary burden, particularly when considered in the context of improvements to lending standards which have resulted in extremely low levels of non-performing loans across ADIs. [18]
2.32 Increased regulatory demand on consumers to provide information can also create disincentives to enter into transactions, including transactions that would benefit the consumer. Reports have consistently shown consumers are frequently disengaged with their financial products and often do not switch products even where superior options exist. [19] Given this, regulation - including the regulation of consumer credit - must seek to balance the need for appropriate checks and balances with efforts to minimise complexity so as to avoid discouraging consumers from switching to obtain a better deal. Where RLOs discourage switching due to the time taken for the credit application they impose an undue regulatory burden and additional cost to a borrower who retains a higher interest expense over the life of a loan. To this end, the Government has introduced a number of reforms aimed at improving the availability of information in the system to reduce the implicit cost for consumers to switch financial service providers. Open Banking was recently launched by the Government, which allows consumers to share their data with other banks to make it easier to compare and switch and access the best deals. Legislation is also before the Parliament to establish a mandatory comprehensive credit reporting regime, requiring Australia’s largest banks to report both positive and negative information on all their accounts. However, both of these reforms will take time to be implemented across the system, and for consumers to experience their full benefit.
2.33 The proposed changes to the Credit Act can reduce the regulatory burden of individual loan level RLO compliance while retaining the need for reasonable individual credit assessment and the resulting consumer protection. It will not remove the ability of consumers to dispute transactions or obtain redress from their financial institution. Instead of an individual loan level obligation, lenders will be required to undertake reasonable credit assessments using the appropriate systems, policies and procedures in place to make reasonable inquiries and appropriately evaluate credit applications. They will be required to assess whether the consumer will be able to comply with the financial obligations under the contract without substantial hardship. Lenders will continue to be required to maintain appropriate internal dispute resolution processes. Consumers will also continue to receive free redress from AFCA in the event disputes cannot be resolved directly with the consumer’s financial institution.
2.34 Individual loan level RLOs will remain in place for high cost financial products that carry a greater risk of consumer harm. Two such products are small amount credit contracts (SACCs) and consumer leases. These high-cost products are typically accessed by those without access to mainstream forms of finance. [20] The high-cost nature of these products means that repeat borrowings can quickly lead to individuals devoting significant proportions of their income to repayments.
2.35 The 2016 Independent Review of SACCs laws found that existing laws relating to SACCs and consumer leases are not sufficiently promoting financial inclusion and that additional enhancements to the regulatory regime are required to ensure sufficient consumer protections are in place. [21] The 2018-19 Senate Economics References Committee’s financial hardship inquiry reinforced that SACCs and consumer leases are often used by people on lower incomes, and who may be financially vulnerable or experiencing financial hardship. [22]
2.36 In response to the Independent Review, the Government announced a suite of reforms to introduce additional protections for consumers of these products. The additional protections will enhance the existing RLO framework to limit the amount of income that individuals can devote to these products. Furthermore, the Government’s reforms will limit the overall cost of the products to reduce the risk of ongoing debt cycles and systemic consumer detriment which has been associated with these products. It is for this reason that RLOs will be retained on SACCs and consumer leases.
Case for government action/objective of reform
2.37 The Commonwealth Government is responsible for setting Australia’s national credit laws. Although Australia’s financial system did not exhibit the same issues that triggered the Global Financial Crisis, the existing laws were put in place by the Government in 2010 with the aim of providing adequate protections against consumers receiving unsuitable credit. The Government did so by introducing principles-based laws intended to deliver this outcome. The principles in the law have now been further defined through regulation and guidance to a level of prescription that is impinging on the timely flow of credit. There are no viable alternatives to Government intervention as the RLOs are provided under law as individual loan level obligations on each credit assessment. Confusion as to the standard to apply in each case risks a continuation of layers of guidance from regulators and risk aversion from lenders.
2.38 Without Government action to amend the responsible lending regime and implement a new legislative credit framework, the regulatory burden imposed on lenders and borrowers by RLOs will continue to restrict the timely flow of credit and impose a higher cost of credit on consumers than may be required. In testimony before the House of Representatives Standing Committee on Economics on 14 August, RBA Governor Philip Lowe asserted that, “ while the principles in the current legislation are sound, the translation of RLOs into practice needs re-evaluation, as the onus on lender responsibility appears to have exceeded the guiding principles of the regime ”. [23] Absent further changes in Government regulatory settings, it is possible that credit growth will be constrained in the medium term.
2.39 A timelier and improved flow of credit in the economy - particularly in personal lending - may facilitate more expenditure by consumers and in turn, stimulate business activity which has been negatively impacted by the pandemic. Economic growth has contracted by 7 per cent over the June 2020 quarter - the largest quarterly fall on record - as government and community measures to combat the spread of the virus necessitated the closure of a substantial proportion of the economy. Reducing the regulatory burden for the majority of consumers who can service debt without falling into hardship, while enhancing protections for the most vulnerable of consumers, can support the economic recovery.
2.40 Regulatory ambiguity regarding the application of RLOs where lending is in part for a small business purpose has hampered, and in some cases, prevented the flow of credit. At the commencement of the pandemic, the Government took action to ensure the continued flow of credit to small business, recognising the important role small businesses play in the economy - employing 44 per cent of Australia’s workforce. [24] This included a temporary exemption from RLOs for credit licensees providing credit which includes a small business purpose - the exemption was extended for a further 6 months on 2 October.
2.41 Feedback from lenders has noted that the Government’s temporary changes to RLOs have clarified obligations on small business lending, and allowed for increased approvals to small business. [25] Government action to permanently address this uncertainty, particular as the economy recovers, will ensure there is not an unintended barrier to the flow of credit to small business.
2.42 The objective of the reform is to retain consumer protections while reducing the regulatory burden currently imposed by RLOs set at the individual loan level through an alternative approach. The suggested new regulatory approach builds upon a lender’s incentive to write loans to customers who can demonstrate an ability to repay the loan and avoid default. A lender that provides risky credit to a borrower who appears at risk of not having the capacity to service the loan may suffer financial and reputational damage. Loans that cannot be serviced and become non-performing will become liabilities on the balance sheet, and may eventually become written-off as losses. The Productivity Commission noted in 2008 that “ in the vast majority of cases, it is in the lender’s commercial interests to ensure that a loan can be repaid ”.
2.43 The proposed approach to the reform is to remove individual loan level obligations as described in the Credit Act - except for high cost SACCs and consumer leases - and replace these with a system-based obligation that requires the licence holder to undertake individual credit assessments using the systems, policies and processes in place to assess whether it is likely that the customer will be able to comply with the consumer’s financial obligations under the contract without substantial hardship if the credit contract is entered, or the credit limit increased. ‘Substantial hardship’ in the proposed legislation is defined to exist if the consumer could only comply with the obligation by selling their principle place of residence (and does not intend to at the time of the contract) or would fail to make rental payments on the principal place of residence. The proposed reform defines ‘substantial hardship’ in the Credit Act.
2.44 Licencees will comply with the new obligations under the Credit Act where they:
⢠Obtain adequate information to undertake the assessment; and
⢠Make reasonable inquiries, and takes reasonable steps, to verify the consumer’s sources of repayment; and
⢠Make reasonable inquiries, and takes reasonable steps, to verify the consumer’s current risk profile; and
⢠Rely on information provided by the consumer, unless there are reasonable grounds to believe it is unreliable; and
⢠Make reasonable inquiries about the consumer’s expenses; and
⢠Take reasonable steps to verify the accuracy and completeness of information provided about a consumer by a third party.
2.45 Replacing an individual-level loan obligation with a requirement for individual assessments to take place within the lender’s systems, policies and processes to result in a reasonable assessment of a credit application reduces the regulatory impost of lending obligations by allowing lenders more scope to scale and customise their systems and practices, while retaining consumer protection.
2.46 A system-level approach to responsible lending will support greater competition in credit markets. This is because larger lenders are better able to absorb the current higher costs of the prescriptive responsible lending obligations when compared to smaller lenders. The per loan cost of complying with the responsible lending obligations is higher for smaller lenders because they write fewer loans, but require similar systems and checks to ensure compliance with the prescriptive obligations. The cost savings for smaller lenders of reduced regulation will therefore be greater, which will put more competitive pressure on loans offered by all lenders. It will also mean that smaller lenders are better able to compete with larger lenders, other than through innovation in technology and service provision; which has been a large source of competition provided by smaller lenders in recent years. In this sense, removing RLOs will also promoter greater competition between smaller and larger lenders.
Policy options
Option 1 - Maintain the status quo
2.47 Under Option 1, no changes would be made to the RLOs. ADI and non-ADI lenders would still be subject to the obligations contained in Chapter 3 of the Credit Act, and have regard to the regulatory guidance provided by ASIC in RG 209. Lenders would remain subject to the confusing legal landscape where the ASIC v Westpac case has indicated it is within the law for lenders to use expense benchmarks in assessments, but ASIC regulatory guidance requires an individualised and verified approach. ADIs would remain subject to APRA Prudential Standard APS 220 (Credit Risk Management) and Prudential Practice Guide APG 223 (Residential Mortgage Lending), whilst a range of new obligations - including DDOs, the mortgage brokers’ best interests obligations, and small amount credit contracts (SACCs) obligations - will also govern industry participants.
Effect of option on examples provided
2.48 Under this option, the typical real-life examples of Marc and Ashley mentioned in ‘the problem’ section would continue to occur, and there would be no change in application times.
Option 2 - Implement a recalibrated systems-based approach to ‘prudent’ lending
2.49 Under Option 2, the Government would implement changes to the consumer credit framework contained in the Credit Act that would require lenders to establish appropriate systems, policies and processes for assessing borrowers’ capacity to repay without substantial hardship based on the type of product and the risk profile of the consumer, while ensuring those consumers who access high-cost products are afforded the greatest protections.
2.50 This would be achieved by removing RLOs, other than for SACCs and consumer leases, and:
⢠for ADIs, not introducing a replacement regime reflecting that ADIs are already subject to a similar regime that is set and enforced by APRA;
⢠for non-ADIs, introducing a replacement system-based regime for responsible lending, informed by the equivalent capacity to repay principles applied to ADIs under APRA’s prudential standards;
⢠for credit assistance providers, extending the best interests obligations currently applying to mortgage brokers to other credit assistance providers (CAPs), e.g. finance brokers, when providing credit assistance in relation to consumer credit contracts and consumer leases.
2.51 The new requirements on non-ADIs will incorporate the relevant provisions from APS 220 [26] (credit risk management) as they relate to having a sound credit assessment and approval process. In practice, this means that non-ADI lenders will need to establish and maintain systems, policies and processes to ensure they assess that a borrower will have the capacity to repay a loan without substantial hardship. Non-ADIs will also be required to consider a range of criteria that should be applied when undertaking an assessment of a borrower’s capacity to repay.
2.52 These obligations will pick up the same scalability that is provided for in APS 220, and allow for the assessment to be proportionate to the nature, type and amount of the credit. APRA will also soon commence consultation on taking the concept of “substantial hardship” which is currently found in its guidance material APG223 covering mortgage lending, and applying this in APS 220.
2.53 Non-ADIs will comply with the law where they put in place complying systems, policies and processes, undertake assessments which consider the relevant criteria in the standard, and then make decisions consistent with that assessment. These requirements represent a transition away from prescriptive obligations which are required under the RLOs, and instead support a risk-based lending model.
2.54 The new obligations on non-ADIs will rebalance responsibility through the application process, where appropriate, reducing the current onus on lenders to uncover and verify all information available about the consumer. This recognises that there is still a role for non-ADIs to verify information provided by the borrower, where it is integral to the quantum of credit extended, such as information on income and debt, but that a lender should be able to rely on the borrower’s assessment of their own living expenses. [27]
2.55 The new obligations would not apply to lending which is in part for a small business purpose; in essence, this will make permanent the temporary relief that was extend following the start of the pandemic. [28] However, remaining obligations in the Credit Act, including licensing requirements and disclosure obligations, would continue to apply to all lending (by both ADI’s and non-ADIs) where the lending is predominantly for a consumer purpose. In practice, this means once a lender identifies that part of the credit is for a small business purpose, it will switch off the obligations contained in the new non-ADI standard. However, a safeguard will be included to ensure that the small business purpose is not minor or incidental to the overall purpose of the credit. This will address the risk of consumers inappropriately nominating a small business purpose to avoid the lending obligations.
2.56 Under this approach, APRA would continue to independently set its prudential standards and guidance for ADIs to ensure prudent management of credit risk, including in the case of loan origination. The prudential standards operate at the whole of portfolio level, and require ADIs to originate loans in accordance with APS 220. That standard does not mandate prescriptive processes that must be followed on origination of each loan in the same way as the RLOs do, so they are more facilitative of risk-based lending and banks making inquiries which are proportionate to the risks of any given loan. However, the standards do still require that lending to be in accordance with minimum standards, so it will continue to prevent ADIs from issuing loans that could only be repaid with substantial hardship. APRA’s pending consultation on inclusion of a concept of ‘substantial hardship’ in APS 220 will further articulate the standard. Because ADIs will not have to ensure compliance with two different sets of lending standards simultaneously, one administered by ASIC and one by APRA, their compliance and regulatory affairs will be simplified.
2.57 Treasury will work closely with APRA in the future to ensure changes to APS 220 relevant to the provisions that have been adopted for the non-ADI framework will be reflected, as appropriate, in the non-ADI framework to ensure a level playing field across the industry going forward. Containing the new non-ADI obligations in a Ministerial Instrument will allow for flexible and timely updating to the requirements to minimise the risk of implementation delays, and ensure the framework remains fit for purpose over time. [29]
2.58 Consumers will continue to be able to access AFCA in relation to their loan. Significantly, AFCA can award damages for any ‘direct financial loss’ which consumers suffer as a result of lender conduct, which would continue to act as a deterrent to lenders, similar to how it does now. [30] This would ensure that any consumer harm which is caused by lenders continues to have a remedy. As all credit licensees consent to be bound by decisions of AFCA it has wide powers to make awards, which can include damages, or other relief that it thinks appropriate, such as unwinding or varying loans which were issued. [31] The best interests obligations for mortgage brokers (and their credit representatives) were legislated in 2019 as one of the commitments made by the Government in response to the Royal Commission. The best interests obligations for mortgage brokers will commence from 1 January 2021. The best interests obligations comprise two components: the best interests duty; and the conflict priority rule. Failure to comply with either of the components will be subject to civil penalties.
2.59 The duty to act in the best interests of consumers in relation to credit assistance is a principle-based standard of conduct. This means that the conduct that satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer. The second component of the best interests obligations is the conflict priority rule, which requires mortgage brokers to resolve conflicts of interests in consumers’ favour. This means if a mortgage broker knows or reasonably ought to know that there is a conflict between the interests of a consumer and the interests of the mortgage broker or a related party, the mortgage broker must give priority to the consumer’s interests.
2.60 The proposal is for both components of the best interests obligations that apply to mortgage brokers to be extended to other licensed credit assistance providers, such as finance brokers, and their credit representatives when providing credit assistance in relation to consumer credit contracts and consumer leases.
2.61 While extending the best interest obligations imposes some regulatory costs for those credit assistance providers not already subject to these obligations, these providers will no longer be required to comply with RLOs, except when providing assistance in relation to a SACC or consumer lease.
2.62 The combination of system-level regulation of credit assessment and the retention a requirement to ensure loans will not place consumers into substantial harm will reduce the regulatory burden and cost of providing credit to consumers while retaining consumer protections. Meanwhile, the retention of RLOs for SACCs and consumer leases, retention of reverse mortgage provisions and extension of best interests obligations to all credit assistance providers will allow for the removal of a generic individual loan level RLO from the Credit Act while maintaining consumer protection, the ability to penalise contravention of the law and access for consumers to dispute contracts and receive redress.
Effect of option on examples provided
2.63 Under this option, the typical real-life examples of Marc and Ashley mentioned in ‘the problem’ section may be treated differently by their lenders. Instead, the lenders would apply sound assessment and approval processes that they consider necessary based on the information the borrower has provided, which would include the borrower’s income, debt and ongoing expenses. This would reduce the time required to undertake an assessment. If the lender was to extend credit without undertaking a sound assessment, Marc and Ashley could access free dispute resolution from AFCA.
Option 3 - Implementing a prescriptive framework that provides a tiered lending approach for borrowers of varying creditworthiness
2.64 Under Option 3, the Government would implement changes to the consumer credit framework contained in the Credit Act which would prescribe a tiered approach to RLOs, based on the risk profile of both the credit product and the borrower. Broadly speaking, there would be at least three tiers of obligations:
⢠Tier 1: RLOs will continue to apply to high-cost products - SACCs and consumer leases.
⢠Tier 2: A lighter-touch regime would be established for the majority of credit, requiring less inquiries and verifications. Credit providers would be enabled to assess or streamline certain inputs as they see fit, for instance, they could forego repeated verification for minor contract changes.
⢠Tier 3: RLOs will be removed on specified borrowers, such as high-net worth individuals, and low-risk products, such as specified mortgages; for example, refinancing on similar terms, or mortgages with low debt-to-income ratios and low loan-to-value ratios.
2.65 For tier 2, the existing RLO framework would be amended to introduce concepts of scalability into the Credit Act, where the level of inquiries and verifications are based on the scale and complexity of the credit being extended. The RLO framework would also allow lenders to rely on information provided by the borrower when under taking their verification processes.
2.66 For tier 3, RLOs will be removed when borrowers are considered low-risk or are accessing a low-risk product. For example, a loan would be exempt from RLOs if it fell into one of the following categories:
⢠High-net income/asset borrowers - annual income of $250,000 for the last two years and $2.5 million in net assets. [32]
⢠Refinancing on similar terms - where a borrower is up-to-date on their mortgage (and has not missed a payment in the last year); they would be making smaller payments following the refinancing (due to a lower interest rate on the loan); and there have been no adverse changes to the consumer’s circumstances.
2.67 The framework would include a new regulation-making power that could allow products to be allocated into one of the tiers in the future should there be evidence of a change in the risk-profile of consumers accessing a particular product.
2.68 Similar to Option 2, the temporary exemption from RLOs which currently applies to lending which is in part for a small business purpose would be made permanent.
2.69 In this scenario, APRA would continue to independently set its prudential standards and guidance for ADIs to ensure prudent management of credit risk, including in the case of loan origination.
2.70 Consumers will continue to have access to AFCA.
Effect of option on examples provided
2.71 Under this option, the typical real-life examples of Marc and Ashley mentioned in ‘the problem’ section would be treated differently by their lenders. Ashley’s lender would have to make fewer inquiries, as he is refinancing on more favourable terms and has no history of hardship under his mortgage (Tier 3), so the outcome for Ashley is likely similar to under option 2. Marc’s example may still occur (Tier 2), as lenders would be required to follow processes in assessment based on the risk of the borrower if the change in circumstances is more than a minor change. As the change in circumstance goes to Marc’s source of income, it will likely not be considered a minor change (even though Marc now earns more income) and some level of reassessment will still be required. Marc’s settlement is still at risk of delay as a result.
2.72 However, establishing the appropriate tier and therefore the credit assessment approach in these examples would be more complex and therefore represents a higher regulatory burden than Option 2.
Cost benefit analysis of each option/Impact analysis
Option 1 - Maintain the status quo
2.73 No changes would be made to the RLOs. ADI and non-ADI lenders would still be subject to the obligations contained in Chapter 3 of the Credit Act, in line with regulatory guidance provided by ASIC in RG 209.
Advantages
Maintains existing universal individual loan obligations:
⢠This option would ensure that it would continue to be against the law to provide consumers with ‘unsuitable’ credit and preserve the uniformity in the current regulation of all parts of the credit chain, including ADI and non-ADI lenders as well as brokers. Retaining the current RLO provisions would require lenders to continue to gather a wide range of information relating to a consumer’s financial situation and loan serviceability and conduct an extensive assessment, and that this would be used to make individual assessments irrespective of the risk.
Minimises changes:
⢠This option would mean lenders would not have to change their systems or processes in order to continue to provide credit in a compliant manner.
Disadvantages
Higher compliance costs:
⢠Maintains the existing ‘one-size-fits-all’ regime, where the burden of obligations are high because they are aligned with vulnerable, high-risk consumers who represent a small proportion of the overall consumers seeking to access credit. Lenders would still undertake extensive inquiry and verification processes to satisfy the current RLOs, irrespective of whether they consider this information is necessary to inform the lending application before them. This provides a competitive advantage for larger lenders that are more able to absorb the costs of regulation on a per loan basis. Negative effects on competition are demonstrated to result in poor outcomes for consumers with respect to the quality and cost of products and services.
⢠These processes may also translate into higher compliance costs for consumers in extra time spent on applications. Anecdotal evidence from lenders suggests that some consumers do not proceed with finalising applications due to the time required to meet the information requests. This is the case particularly for smaller scale credit, particularly credit cards, where there has been a significant shift in consumers to unregulated credit products which can be obtained in a more timely manner. In turn, this can lead to poorer outcomes for some consumers that turn to these unregulated products.
Continued delays in credit assessments:
⢠Slow credit processes are expected to continue as lenders seek to satisfy themselves that they have taken all steps necessary to inquire and verify information provided by the consumer. Anecdotal evidence from lenders and intermediaries suggests that some lenders’ are taking up to 8 weeks to process loan applications [33] , with the majority of the application process made up of the inquiry and verification steps, particularly on expenses.
Difficulty in accessing credit:
⢠Some consumers, particularly those with non-standard applications, such as irregular income or expenses, could potentially face further difficulty in accessing credit as lenders apply a ‘one-size-fits-all’ application and credit approval process.
⢠This is also the case for mixed-use borrowers, those that seek credit for both a consumer and a small business purpose, where ambiguity in the application of the law is preventing the provision of credit. This has been particularly evident for primary producers where it is difficult to distinguish between home and business. This ambiguity will continue at a time where the economy, including small business, is recovering following the pandemic.
Constrained credit supply and economic recovery:
⢠Obligations would continue to have an impact on credit supply and its timing. The contribution of credit supply to Australia’s economic recovery will continue along its current path.
Regulatory costs
2.74 As this option would maintain the status quo, and therefore require no regulatory or legislative changes; there are no new regulatory costs associated with this option.
Option 2 - Implement a recalibrated system-based approach to ‘prudent’ lending
2.75 The Government would retain RLOs for high-cost products, SACCs and consumer leases, which would be subject to heightened consumer protections due to complementary Government reforms (implementing the Government’s response to the Independent Review of these products). For all other products, the Government will remove RLOs from ADIs as these lenders are already subject to the existing APRA prudential regime that sets out to achieve a similar regulatory outcome; non-ADIs would be subject to a new principles-based regime, informed by the equivalent obligations for ADIs under APRA’s prudential standards. This change keeps the overall objective the same, to assess a borrower’s capacity to repay credit without substantial hardship, but removes the prescriptive process that lenders are required to follow under the RLOs. This provides more flexibility on how lenders meet their existing obligations as well as removing a layer of duplicative regulation (in the case of ADIs) or new obligations (in the case of non-ADIs).
2.76 The Government would also extend the best interests obligations that apply to mortgage brokers to other credit assistance providers, e.g. finance brokers, to ensure licensees act in a consumer’s best interests when providing credit assistance in relation to credit contracts and consumer leases.
Advantages
Reduced compliance costs:
⢠Under option 2, there will be a greater ability to scale the credit assessment process, requiring less time required to meet compliance requirements and therefore reduced costs for lenders and the majority of borrowers.
⢠All lenders will be subject to a system-based approach to ‘prudent’ lending, which provides the lender with greater flexibility to determine the appropriate credit assessment and approval process to undertake that will be commensurate with the credit being sought and the risk profile of the borrower. ADIs will continue to be subject to APRA’s prudential standards, whereas non-ADIs will need to have the sound systems, policies and processes, but can chose to implement them in a scalable manner. This removes the existing ‘one-size-fits-all’ framework and reduces the compliance cost on lenders. For ADIs, it will also reduce regulatory duplication in this area by removing the oversight of a regulator.
⢠For consumers, there will be reduced compliance costs as lenders streamline their processes and better target them to the financial situation of the borrower and type of product being sought.
⢠For small businesses, this option will remove the current ambiguity that exists for mixed-use loans, by clarifying that where lending is in part for a small business purpose it will not be subject to the new obligations. This will mean that fewer inquiries will have to be made as to loan purpose, speeding up the application process. This will in turn help ensure that small businesses can get access to credit faster as part of the economic recovery.
Credit can be supplied more efficiently and flexibly:
⢠As lenders are afforded more flexibility in adhering to principles of ‘prudent’ lending, lenders could adapt and target their processes more according to the type of borrower and their requirements. This may lead to a reduction in the time and costs associated with extending credit.
Consumer protection is retained:
⢠Banks regulated by APRA will be subject to APS220; a failure to comply with a prudential standard is a breach of the Banking Act. Non-ADI lenders will be subject to a similar regulatory structure under the Credit Act. High cost credit products will retain individual-loan assessments under RLOs and the best interests obligations will be extended to all credit assistance providers ensure a uniform approach across all consumer credit products facilitated by credit assistance providers. Consumers will retain access to AFCA for disputes and redress.
Boosts competition:
⢠Where consumers remain in products over time, it can often lead to higher costs compared to those consumers accessing new credit. This was highlighted in the Australian Competition and Consumer Commission’s mortgage pricing inquiry which found that there was a 26 basis point difference between new and existing customers. [34] As this option may reduce the administrative burden faced by consumers, it may reduce barriers to switching between credit providers, encouraging consumers to seek out better terms or a lower interest rate. This would facilitate greater competition, ultimately lowering the cost of credit for consumers.
⢠It also boosts competition by removing regulation, which disproportionately impacts smaller lenders who face a higher per loan cost of complying with responsible lending obligations than larger lenders. This is because of the high costs of building and maintaining systems to ensure compliance.
Strong consumer protections retained for high risk borrowers:
⢠The most at-risk consumers accessing SACCs and consumer leases will continue to be afforded the highest level of protections by the existing RLOs. These high-cost products are demonstrated to lead to poor outcomes for some consumers, particularly with vulnerable consumers devoting increasing amounts of their income to paying off these products [35] . Maintaining RLOs, combined with complementary Government reforms to these products, will ensure lower instances of consumer harm in these areas. The role of AFCA will also be retained for the event of lender misconduct in all cases, which will ensure that any consumer harm caused by lender conduct can be remedied.
Maintains prudential standards:
⢠Adopting key tenets of APRA’s prudential standards and guidance will ensure that banks are still compelled to consider systemic risk and lend sensibly across their portfolios. As part of considering systemic risk, APRA’s prudential framework ensures that ADIs do not take excessive risks by lending inappropriately. This measure will retain the most essential aspect of the current framework.
Greater emphasis on market discipline:
⢠Removing unnecessary regulation will mean that market mechanisms will have a greater role in determining whether credit should be extended than under option 1. This will likely lead to more credit overall being extended, as prescriptive regulation may prevent some loans from being made which are in the interests of the lender and consumer. Additionally, a recalibrated principles-based system will facilitate the efficient flow of capital in the economy contributing to an increase in the economy’s productive capacity. However, because it is not in the lenders’ commercial interests to write loans that cannot be serviced or are likely to become non-performing, it is unlikely that a greater reliance on market mechanisms will lead to an increase in consumer harm; and lenders will continue to undertake assessment processes in line with those commercial interests.
Maintains consumer protections for credit assistance provided by CAPs:
⢠Once the RLOs are removed for credit assistance providers, consumers may be exposed to potential harms caused by CAPs’ misconduct as they would no longer need to undertake a preliminary assessment of the credit’s ‘suitability’ for potential borrowers. The extension of the best interests obligations would mitigate the risk by requiring CAPs, e.g. finance brokers, to act in the best interests of their customers when providing credit assistance in relation to credit contracts and consumer leases. While the best interests obligations are principle-based, CAPs are expected to have systems, procedures and documentation in place to facilitate compliance and prevent contravention of the requirements and to prove that they acted in the best interests of their clients when provided broking services to them. In addition, licensees are expected to take reasonable steps to ensure that their credit representatives comply with the best interests obligations.
Creates a level playing field among CAPs:
⢠The majority of CAPs are mortgage brokers with the remaining small proportion of CAPs largely being finance brokers. The difference between mortgage brokers and finance brokers is that they provide credit assistance in relation to different credit products: mortgage brokers specialise in home loans; and finance brokers offer personal loans, car loans and other loan products. While customers of both types of brokers are exposed to similar misconduct risks and potential harms, mortgage brokers will need to comply with the best interests obligations from 1 January 2021 in order to mitigate those risks and harms. The extension of the best interests obligations to other credit assistance providers would create a level playing field for all brokers who provide credit assistance in relation to credit contracts and consumer leases.
Disadvantages
Increased flexibility may increase the risk of consumer harm:
⢠Compared to option 1, lenders will have the flexibility to put in place appropriate credit assessment and approval processes. For the average borrower, this is unlikely to impact on the credit they receive or lead to an increase in consumer harm. However, without every application subjected to the current intense inquiry and verification process, there is the potential for some consumers to get extended credit they previously would not have received. However, all lenders are still required to carry out an assessment of a borrower’s capacity to repay without financial hardship. Additionally, consumers will continue to have access to remediation and redress through the Australian Financial Complaints Authority (AFCA).
Increased onus on borrowers:
⢠This option will shift accountability for information that is used by lenders to inform their decisions on applications from the lenders towards borrowers. Currently lenders have been held responsible when consumers have not identified information relating to their financial circumstances. Under this option, consumers will need to take greater responsibility, in particular noting the potential risk they could face through receiving unsuitable credit, if they provide incorrect or incomplete information to a lender.
⢠Consumers may underestimate or misunderstand their repayment capacity, leading to them obtaining credit they may otherwise not have obtained.
Lenders approaching lending at the portfolio level rather than the loan level:
⢠This option will require lenders to have the appropriate systems, policies and processes in place to make sound credit assessments and approvals, as opposed to the current operation of RLOs which imposes obligations on each individual transaction. The imposition of obligations at the portfolio-level may lead to lenders taking on more risks (at the margin) in lending, which can lead to more instances of consumer harm. However, it is anticipated that current industry codes such as those by the Australian Banking Association and the Customer-Owned Banking Association, along with AFCA’s ongoing role, will continue to inform best practices and prudent lending in the sector.
Some CAPS may be unsure how to comply with the best interests obligations:
⢠In general, the mortgage broking sector is larger than the finance broking sector. Mortgage brokers, for example, normally have a panel of mortgage products to consider and compare to assist potential borrowers, which are provided by mortgage aggregators. Finance brokers, however, vary considerably in their size and sophistication, and fewer finance brokers make use of aggregators. There may be fewer loan products available for finance brokers to consider for a customer than a mortgage broker, and finance brokers may be concerned that this would affect their ability to comply with the best interests obligations.
⢠However, as noted previously, the best interests obligations are principle-based and do not prescribe steps that CAPs must follow in order to comply. Extending the best interests obligations to all CAPs also removes exceptions from the law, and ensures that there is a more consistent regulatory structure, one of the general recommendations of the Royal Commission. [36] Removing these exceptions helps to make the law’s application clearer.
Regulatory costs
2.77 Should the Government implement option 2, regulatory costs would be permanently reduced for lenders, consumers and small businesses. The savings arise from:
⢠lenders being subject to a system-based approach to credit evaluation that enables greater scale and speed to be achieved for the majority of credit applications;
⢠ADIs only being subject to one regulatory framework with respect to loan origination requirements, removing the existing regulatory duplication and prescriptive processes;
⢠non-ADIs being subject to a new principles-based regime which allows the lender to set and apply appropriate credit assessment and approval processes commensurate with the credit product and the risk profile of the borrower;
⢠all lenders applying more streamlined application processes, which requires them to make fewer inquiries and verifications of information provided by borrowers, particularly around borrower expenses;
⢠borrowers facing streamlined application processes and timelier approvals; and
⢠small businesses not inadvertently being subject to consumer credit laws due to clarification about when the law is to apply.
2.78 There will be a reduction in administrative burden on lenders compared to the status quo, because the APRA standards require less prescriptive processes to be followed, and the new non-ADI lending standards will similarly require a less prescriptive process. The reduction would be due to reduced time taken to assess loans as a result of removing information gathering and verification obligations on new loans - even a one hour time saving on every loan written in a year would reduce regulatory costs by $62.9 million. [37]
2.79 There may be an increase in consumers experiencing financial hardship as a result of banks’ inaccurate assessment of their capacity to repay at the time of entering the loan compared to the status quo. [38] Any increase would be difficult to estimate and is dependent on the behaviour of credit providers. If consumers are inappropriately extended a loan they are unable to repay they will continue to have access to free dispute resolution through AFCA in the event they experience financial loss.
2.80 Other credit assistance providers, e.g. finance brokers, would likely incur compliance costs from the extension of the best interests obligations. While some mortgage brokers that also offer non-mortgage credit products could tailor their systems, procedures and practices for the best interests obligations from mortgages to the other credit products, finance brokers (i.e. those that offer only non-mortgage credit products) would likely need to set up systems and procedures, as well as train their brokers and credit representatives, in order to comply with the new obligations. However, the reduction in regulatory burden from the removal of RLOs on CAPs is expected to outweigh this increase in regulatory burden.
Option 3 - Implement a prescriptive framework that provides a tiered lending approach for borrowers of varying creditworthiness
2.81 This option is designed to introduce a tiered, tailored framework that matches the creditworthiness of a borrower with the bespoke tier of regulatory obligations at the individual loan level. A tier system that assesses the capacity of consumers to service debt - without falling into financial hardship - would be designed, and then paired with corresponding lending obligations.
2.82 The Government would design parameters, based on a number of metrics, which characterise products and borrowers into tranches of risk and loan serviceability. Products which are high-cost and represent high risk to consumers, such as SACCs, would still require adherence to RLOs, whilst low risk products, such as a low-limit credit card, would not be subject to the RLO framework. Borrower indicators that convey creditworthiness, such as loan to valuation ratio, income and asset thresholds, and existing debt, could be utilised to model appropriate groupings of risk.
Advantages
Reduced compliance costs:
⢠Under option 3 there would be reduced compliance costs compared to the status quo (option 1), although less than that of option 2.
⢠All lenders would be subject to a tiered approach to lending obligations - the tiered approach will reduce the regulatory obligations applied to the majority of credit.
⢠For consumers, there will also be reduced compliance costs as lenders streamline their processes for some products and better target them to the requirements and financial situation of the borrower.
⢠For small businesses, this option will remove the current ambiguity that exists for mixed-use loans, by clarifying that where lending is in part for a small business purpose it will not be subject to the new obligations.
Improves efficiency of credit supply for low-risk borrowers:
⢠Individuals with a high capacity to service debt, such as high net worth individuals, will have more streamlined and timely access to credit.
Retains protection for vulnerable borrowers:
⢠Similar to option 2, the most at-risk consumers accessing SACCs and consumer leases will continue to be afforded the highest level of protections by the existing RLOs. These high-cost products are demonstrated to lead to poor outcomes for some consumers, particularly with vulnerable consumers devoting increasing amounts of their income to paying off these products [39] . Maintaining RLOs, combined with complementary Government reforms to these products, will ensure lower instances of consumer harm in these areas. The role of AFCA will also be retained for the event of lender misconduct in all cases, which will ensure that any consumer harm caused by lender conduct can be remedied.
Disadvantages
Reduced scrutiny on some credit applications increasing the risk of consumer harm:
⢠Compared to option 1, lenders would have the flexibility to put in place bespoke credit assessment and approval processes for borrowers of varying creditworthiness. For borrowers deemed to be of higher creditworthiness, this is unlikely to impact on the credit they receive, whilst borrowers of lower creditworthiness will still be subject to RLOs. In a tiered system, there may be borrowers that fall between the tiers and are incorrectly assessed to be worthy of credit, which may actually be inappropriate and not serviceable.
Retains regulatory burden:
⢠Maintaining some degree of RLOs - even if only for a smaller proportion of borrowers (those in tiers 1 & 2) - retains the regulatory burden that may dampen credit growth and economic recovery. Lenders would first need to make an assessment of which tier the consumer fell into to determine the relevant regulatory settings - in some instances there may be ambiguity leading lenders to make a conservative classification so as to not breach the law. The lenders would also still be subject to prescriptive obligations, although more relaxed compared to the status quo, meaning the lenders cannot apply flexible practices to determine appropriate credit assessment and approval process compared to option 2.
Increases complexity and uncertainty:
⢠A requirement to apply RLOs differently across varying cohorts is likely to increase complexity and confusion to an already ambiguous system. The arbitrary cut offs and qualifications that are inherent in a tiered system may cause lenders to encourage borrowers to self-identify in a different cohort to reduce regulatory burden. The tiered system may also dissuade innovation in products where regulatory ambiguity does not provide the lender sufficient clarity regarding their legal obligations.
May restrict credit supply to higher risk borrowers:
⢠There is also a risk that lenders are dissuaded by ongoing compliance costs, and will therefore reduce credit supply to marginal borrowers in the RLO-applicable tiers. Such a result would be a poor outcome for individuals who require credit and would still be able to service debts once their more deeply scrutinised loans are granted.
Regulatory costs
2.83 Should the Government introduce option 3, lenders will incur upfront regulatory costs as they adjust their practices to comply with the new regime. However, regulatory costs would be expected to be permanently reduced for lenders and consumers, at the cohort-level, and small businesses, albeit significantly less compared to option 2. This is because lenders will be required to undertake a new initial assessment of the borrower’s credit worthiness to assess which tier they fall into before they can make the decision to extend a credit product. Therefore, the total regulatory burden is only moderately offset by not having to apply RLOs across all cohorts.
2.84 Similarly to Option 2, the impact of removing RLOs for consumers - even after an initial assessment and placing into a creditworthiness tier - is difficult to estimate. If consumers are inappropriately extended a loan they are unable to repay, they will continue to have access to free dispute resolution through AFCA in the event they experience financial loss.
Consultation
⢠discussions in the Council of Financial Regulators since 2015 on bank lending standards and macro-prudential policy settings;
⢠the first round of hearings in the Royal Commission on consumer lending issues in early 2018, and related documents, subsequent submissions to the Commission, and its Interim and Final Reports;
⢠updating of RG 209, public hearings and submissions processes; and
⢠the Westpac case, including the initial judgment and subsequent Court of Appeal judgment.
2.86 The consistent feedback from industry stakeholders is that RLOs are imposing a level of regulatory burden not commensurate with the policy outcomes. This feedback increased as part of the industry response to the Royal Commission hearings, consistent with widespread media reporting at the time regarding the flow of credit, and subsequently strengthened further following the issuing of ASIC’s updated regulatory guidance. The Royal Commission and feedback also highlighted the material strengthening of APRA’s lending standards in recent years.
2.87 In late 2019 and early 2020 Treasury undertook targeted consultation with a range of stakeholders to canvas views on Australia’s responsible lending laws and possible changes to the regime.
2.88 Following the start of the pandemic, Treasury commenced targeted consultation with stakeholders to consider options to provide relief to small business, given the particular concerns they were facing in accessing credit at the time. That, along with the earlier consultations, helped inform the temporary exemption from RLOs that was put in place in March 2020.
2.89 Building on insights already obtained and previous consultations noted above, additional targeted consultations were undertaken on specific issues as part of consideration of policy options for the 2020-21 Budget in October. Further targeted consultations with stakeholders were then undertaken.
2.90 In the lead up to the measure’s consideration at Cabinet ahead of the 25 September announcement, an interim RIS was developed which informed a decision to include the measure in the 2020-21 Budget.
2.91 Following the Government’s announcement of 25 September, Treasury undertook public consultations to inform the development of draft legislative materials that were then subject to public consultation from 4 November to 20 November 2020 - 58 formal submissions were received.
2.92 At a high-level, industry stakeholders were strongly supportive of recalibrating the approach to responsible lending and replacing the current RLO framework with a flexible, principles-based regime. In doing so, industry noted the importance of maintaining a level playing field between different lenders. Conversely, consumer advocacy groups and academics strongly opposed changes to the existing regime.
2.93 The views of stakeholders were informative in considering which option to pursue, how to calibrate the reform, and identifying gaps that needed to be addressed. In particular, Treasury has consulted closely with ASIC and APRA, and with AFCA who will continue to provide dispute resolution. The views of stakeholders are broadly summarised below.
2.94 The consultation following the 25 September announcement was used in the development of the RIS in its final form, before final decision.
Lending peak bodies
2.95 Based on feedback across the consultations, banking associations and other peak bodies associated with credit providers support the reforms, as they will provide support for the economy at a critical time if they strike the right balance between boosting credit supply and maintaining strong consumer protections. In particular, banking associations were supportive of simplifying the regulatory landscape and removing duplication and moving to a more risk-based framework, but stressed the importance of delivering a consistent credit regime for all credit providers. Banking associations noted support for maintaining heightened protections for high-risk products including SACCs, consumer leases, reverse mortgages, and credit cards. It was noted that any changes made to the regulatory framework for credit assistance providers should seek to maintain consistent regulatory obligations for when customers seek a loan through a broker or directly through a bank.
2.96 Peak bodies flagged that moving away from a ‘one-size-fits-all’ approach would deliver better consumer outcomes. Reasonable inquiry and verification requirements that are dependent on the circumstances and risks faced by each individual borrower would enable application streamlining when appropriate, without diluting protections for vulnerable borrowers. For instance, a lower level of inquiries and verification would be suitable for borrowers with a financial position showing positive repayment history, or those that are not ‘on the margins’ in regard to their ability to service new debt.
2.97 Peak bodies also indicated that there would be competition benefits from moving away from having a ‘one-size-fits-all’ approach, and that smaller lenders would be able to better compete with larger lenders on price.
2.98 Banking associations stressed the importance of consumers continuing to have available consumer protections, and that their industry codes provide a commitment to customers of their members. [40] It was noted that AFCA will play a critical role, where their determinations, precedent, and approach documents may influence member conduct, and a continuation of current decisions may cause lenders to remain apprehensive in extending credit despite the legislative changes.
2.99 Banking associations also emphasised the benefits of having a single regulator to ensure that there is no duplication of regulatory efforts, and possible inconsistencies between standards applied under a multi-regulator model.
2.100 Non-ADIs also welcomed the reforms and noted that removing onerous obligations would support timely credit provision, but cautioned that proper implementation is imperative to achieving the Government’s policy goals. It was noted that the existing regime, in particular the regulatory guidance, had resulted in a risk averse culture for all lenders and had contributed to constrained credit growth. An alternate framework underpinned by the application of APS 220 was endorsed, but a high-level approach based on outcomes and has a portfolio-based view would be preferred, where AFCA’s role is also retained to address individual cases of misconduct.
Credit providers
2.101 Treasury consulted with a range of banks covering the majors and mid-tiers, who welcomed the intention to remove redundant barriers to credit and enable the economic recovery, whilst maintaining integral consumer protections for individuals who are most vulnerable. This feedback has also come through in their submissions to the consultation on draft legislation.
2.102 The banks have noted a range of other consequences of adhering to the RLOs. The current expense verification process is time consuming, imprecise and ambiguous, and inefficient given that borrowers have a level of expenses which is similar to the Household Expenditure Measure (HEM). [41] The use of ‘greater of declared expenses or HEM’ can also be counterproductive. When considering two customers with identical financial circumstances, the customer with a lesser understanding of their finances who underestimates their expenses would be viewed more favourably than the customer with a thorough understanding that accurately declares all expenses, even though they are likely to be lower risk.
2.103 Another issue raised was the requirement to reassess income, expenses and other liabilities for minor changes to a credit contract. For instance, a customer who has paid down a significant portion of their mortgage but requests a $1,000 limit increase to their credit card would need to re-verify all the documentation that was provided at the initial application despite the bank seeing a clear demonstrated history of serviceability and meeting of obligations. This is because the process of assessment must be complied with each time.
2.104 One lender noted that credit card applications have dropout rates of 30 per cent, in part because a significant proportion of consumers are discouraged by the overly onerous process. It was noted that APRA’s standards should allow lenders to reduce administrative friction, particularly given the standards are flexible and scalable.
2.105 Lenders expressed the importance of a high degree of certainty - particularly in an environment with numerous oversight bodies - where inadequate reforms may only cause confusion and superficial change. Moreover, ensuring certainty is closely linked with AFCA’s determination approach, as lenders’ adoption of the new framework will be in-part determined by AFCA’s interpretation of credit assessment in the new regime.
2.106 A number of lenders suggested that the level of inquiry should be proportionate to the potential customer detriment, which could be assessed by factors such as loan size, probability of default, and customer history in repaying debts of a similar type and size. The concept of scalability is also relevant for this tailored approach, where lenders would prefer to be able to innovate and adjust their systems to achieve appropriate, customer orientated outcomes.
2.107 Lenders noted it was important to ensure a consistent regime between ADIs and non-ADIs so as not to cause anti-competitive outcomes.
Consumer groups
2.108 Treasury consulted with a range of consumer groups, including Consumer Action Law Centre, Financial Counselling Australia, Financial Rights Legal Centre, iCAN and CHOICE. In addition, Treasury received written submissions from a range of consumer groups on the recent consultation on the draft legislative package. Consumer advocates have been critical of the reforms, suggesting that borrowers will have fewer rights. They note that the peddling of unsuitable loans would have the potential to most adversely impact vulnerable consumers, and that the long-term implications of wider and deeper financial hardship are of grave concern.
2.109 Consumer groups argued that the APRA prudential standards and guidance do not themselves contain consumer protections, since those standards are about credit risk. They also noted that the application of the new framework across ADIs and non-ADIs may also give rise to uneven regulatory action.
2.110 The risks associated with having limited oversight over information provided by intermediaries was noted, and the consumer groups strongly advocated for additional protections in these channels. Moreover, consumer groups noted that the removal of the unsuitability assessment negates consumer protections for credit cards and reverse mortgages, and that these deficiencies must be addressed to avoid severe cases of consumer detriment.
2.111 Ongoing access to AFCA and ability to access redress via the courts were also raised as key concerns. An overreliance on borrower responsibility and consumer understanding was cautioned against. Consumer groups noted that the borrower responsibility onus in other jurisdictions was implemented in conjunction with an education scheme to improve financial literacy, and such a scheme should be considered in Australia.
2.112 Consumer groups also flagged that any intention to remove the predominant purpose test, which triggers the operation of the Credit Act on loans that are of a mixed use, would give rise to sham lending, where the likelihood of regulatory avoidance and inappropriate credit provision would rise inordinately.
2.113 Consumer groups did not put forward specific alternative suggestions on how to improve the responsible lending obligations, reduce application times or otherwise improve regulation to improve the flow of credit. These groups advocated for the option of maintaining the status quo.
Intermediaries
2.114 Intermediaries are businesses that sit (directly or indirectly) between a credit provider (lender) and a consumer, wholly or partly for the purpose of securing the provision of credit for the consumer. Credit assistance providers (including mortgage and finance brokers) are a type of intermediary that assist consumers to apply for credit.
2.115 Intermediaries, including credit assistance providers, through consultation and written submissions have expressed support for reforming the RLOs, noting the existing regime has become overly prescriptive. Industry representatives, e.g. the Mortgage & Finance Association of Australia (MFAA) and the Finance Brokers Association of Australia (FBAA), noted that in practice the actions of mortgage brokers were unlikely to change following the extension of the best interests obligations to credit assistance providers more broadly, given the service they already provide to their customers, the commencement of the best interest obligations for mortgage brokers from 1 January 2021, and the requirements placed on them by lenders. However, they noted this could impose further compliance costs which could detract from achieving the goal of providing better access to finance. The MFAA and FBAA were supportive of the extension of the best interests obligations to other credit assistance providers because it would provide a more level playing field across the sector and likely enhance the professionalism and the reputation of the credit broking industry. However, they requested a longer implementation period between 6 to 12 months.
2.116 Intermediaries also noted the important role AFCA will play in these reforms being effectively implemented by lenders.
Option selection/Conclusion
2.117 The problem to be addressed is ensuring that unnecessary barriers to the provision of credit are removed, and the regulatory burden imposed on lenders is appropriately calibrated to the objective of the regulation: reducing the risk of consumers getting credit that they will not have the capacity to repay without substantial hardship. Evidence to date has demonstrated that the regulatory regime is imposing a regulatory cost on both lenders and borrowers and is impacting the flow of credit. To improve the timely flow of credit and reduce the overall cost of credit a re-calibrated principles-based approach to ‘prudent’ lending (Option 2) is preferred.
2.118 This option will retain the overall objective of the existing regulation, to assess a borrower’s capacity to repay without substantial hardship, while providing lenders greater flexibility to determine the sound assessment and credit approval process which is required to deliver on this objective. This option also removes the ‘one-size-fits-all’ process requirements associated with RLOs.
2.119 Lenders will have greater capacity to take advantage of new technology to streamline processes, where appropriate, benefiting both the lender and consumers.
2.120 For borrowers, there will be more timely access to credit, there will be more streamlined approval processes (should their risk profile allow it) and there will be potential reductions in the cost of credit - both from lenders being able to reduce the cost of their offers as a result of a lower regulatory burden, but also from taking advantage of lower barriers to switching.
2.121 Where a borrower suffers direct losses as a result of lender conduct, consumers will continue to have access to free redress through AFCA.
2.122 This option also will rebalance responsibility which has fallen heavily on the lender over recent years, to make borrowers more accountable for the credit they are seeking and the information they are providing. This will increase the willingness of lenders to lend and address the risk-aversion that has crept into the system.
2.123 While these changes combined may increase the harm experienced by a number of marginal borrowers - those seeking to borrow at their limit - they are outweighed by the overall benefits from reducing the regulatory burden on lenders and borrowers, improving the timely flow of credit, and reducing the overall cost of credit.
|
Table 1: Cost-Benefit Summary of Options |
||
|
Option |
Benefit |
Cost |
|
1. Maintain the status quo |
Maintains existing consumer protections for all types of borrowers and lenders. Minimises changes required to be implemented by credit providers in order to continue to provide consumer credit in a compliant manner. |
Constrained credit supply will persist, where consumers who can service a loan without falling into hardship will continue to face delays and even denied credit. The compliance costs incurred in extensive information gathering and verification will continue to burden lenders. Dampened credit supply will slow economic recovery. Competitive advantage for larger credit providers will persist stifling competition amongst providers. |
|
2. Implementing a New Credit Framework and a risk-based approach to lending responsibly |
Supports credit supply as lenders are afforded more flexibility in adhering to reasonable lending principles, rather than prescriptive RLOs. Reduction in time delay and costs will improve credit supply efficiency. Consumer protections will be retained for high-risk borrowers. Competition will be augmented as barriers to switching between credit providers will reduced. Encouraging credit supply will assist economic recovery. Greater emphasis on market discipline will result in more efficient flow of capital in the economy. Creates a level playing field amongst credit assistance providers.
|
Increased flexibility may increase the risk of consumer harm. Increases onus on borrowers to take responsibility for their part in the lending process. Lenders may approach lending at the portfolio level rather than the loan level. Some credit assistance providers may be unsure how to comply with the newly imposed best interests obligations. |
|
3. Implementing a Bespoke Credit Framework that prescribes a tiered lending approach to borrowers of varying creditworthiness |
Improves efficiency of credit supply for low-risk borrowers, where compliance costs and regulatory burdens are reduced. Retains protections for the most high-risk borrowers, where lenders will still have to consider the probity of their credit extension. Encouraging credit supply will assist economic recovery.
|
Retains regulatory burden for a segment of the lender population, as credit providers lending to higher-risk tiers of borrowers will still be subject to RLOs. Increases complexity and certainty, as a tier system where borrower groups of varying creditworthiness are treated differently will add confusion to an already ambiguous framework. May cause lenders to withdraw credit supply to higher-risk borrowers, as retaining compliance costs for servicing these customers may be a significant deterrence. |
2.124
How will you implement and evaluate your chosen option?
2.125 The reforms will have a commencement date of 1 March 2021. Treasury notes that credit providers, in both the ADI and non-ADI space, should already be compliant with the bulk of the obligations as they are currently subject to APRA standards or RLOs. The transitional period is expected to be used to reduce onerous compliance costs and practices that will no longer be required in the new regime. Credit assistance providers will be provided with a 6-month transition period from the later of 1 March 2021 and the day after the Royal Assent.
2.126 The new standards will be applied across an extended timeframe, so their success will need to be evaluated across a similar timeframe. Measuring their success should also be considered in the context of the broader economic recovery, where a large number of existing loans have been put under pressure because of the unforeseen significant economic shock caused by COVID. The fact that some loans have recently become distressed, or would have become distressed if not for repayment deferrals offered by banks, may not indicate poor lending practices on the part of a lender where that distress arises as a result of unforeseen circumstances. Similarly, consumers may enter in and out of hardship as a result of changes in their circumstances, such as the loss of a job or illness, and this similarly is not necessarily causally linked to lending practices.
2.127 The new standards will apply in a situation where there is an economic recovery underway, so success of the measure should be measured accordingly. Increases in the rate of non-performing loans does not necessarily indicate that lending standards have not been adhered to, or that there is fault on the part of the lender, particularly where there is significant economic volatility. Australia has historically had very low levels of non-performing or impaired loans when compared to other similar countries. [42] Any increase in these levels would therefore need to be carefully considered in light of the current economic circumstances.
2.128 Consideration of the effectiveness of the reforms in supporting the flow of credit to the economy will be informed by data collected by the Reserve Bank of Australia and APRA.
Chapter 3
Small amount credit contract
reforms
Outline of chapter
3.1 Schedules 2 and 6 to this Bill amend the Credit Act to enhance the consumer protection framework for consumers of small amount credit contracts. In particular, the amendments reduce the risk that consumers of these credit contracts—many of whom are financially vulnerable—are unable to meet their basic needs or default on other necessary commitments as a result of entering into the contract.
3.2 The amendments implement the Government’s response to the recommendations of the Review relating to small amount credit contracts.
3.3 All legislative references in this Chapter are to the Credit Act, unless otherwise specified. General references to the Credit Act include the Code (which is Schedule 1 to the Credit Act). However, specific legislative references to the Code are identified as such.
Context of amendments
3.4 The Review was established by the Government to consider and report on the effectiveness of the laws relating to small amount credit contracts, in accordance with a statutory requirement under the Credit Act.
3.5 Small amount credit contracts are loans of up to $2,000, where the term of the contract is between 16 days and 12 months.
3.6 As credit contracts, small amount credit contracts are subject to the general consumer protections that apply under the Credit Act. In particular, providers of small amount credit contracts must comply with the responsible lending obligations that require lenders to determine that the credit is not unsuitable for the consumer before providing the loan.
3.7 However, providers of small amount credit contracts are not subject to the 48 per cent annual percentage rate cap that applies more broadly to credit provided by lenders that are not ADIs. Reflecting the short-term nature of these loans, providers of small amount credit contracts can instead charge a maximum establishment fee of 20 per cent and a maximum monthly fee of 4 per cent, of the value of the loan.
3.8 Small amount credit contracts are generally used by consumers with lower incomes or those who are unable to access cheaper mainstream sources of credit. Given the vulnerable consumer base of these credit contracts, there are currently a range of additional consumer protections that apply specifically to small amount credit contracts. In particular:
⢠there is a rebuttable presumption that a small amount credit contract is unsuitable if:
- the consumer is already in default under another small amount credit contract; or
- the consumer has been a party to two or more small amount credit contracts in the past 90 days; and
⢠on default, a consumer cannot be charged more than twice the adjusted credit amount (defined in subsection 204(1) of the Code), including the amount already repaid (excluding any reasonable enforcement expenses).
3.9 The Review identified that the existing consumer protections for small amount credit contracts are insufficient and that enhancements to the regulatory regime are required to ensure it is fit for purpose.
3.10 In its response to the Review, the Government supported the majority of the Review’s recommendations.
Summary of new law
3.11 Key amendments in Schedules 2 and 6 to this Bill include:
⢠updating the mechanism for restricting the repayments that are allowed under a small amount credit contract (also referred to as the protected earnings amount);
⢠repealing the rebuttable presumption that a small amount credit contract is unsuitable if:
- the consumer has entered into two or more small amount credit contracts in the past 90 days; or
- the consumer is in default under a small amount credit contract;
⢠requiring small amount credit contracts to have equal repayments and equal repayment intervals over the life of the loan;
⢠expressly prohibiting licensees from charging monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;
⢠prohibiting licensees from making unsolicited communications to consumers to apply for or enter into a small amount credit contract in certain circumstances;
⢠requiring licensees to document in writing their assessment or preliminary assessment that a small amount credit contract is not unsuitable for a consumer; and
⢠requiring licensees to display and give information to consumers about small amount credit contracts in accordance with the requirements determined by ASIC in a legislative instrument.
3.12 These amendments take effect on the day after the end of the period of six months beginning on the day this Bill receives Royal Assent.
Comparison of key features of new law and current law
|
New law |
Current law |
|
Licensees must not enter into a small amount credit contract with a consumer if the repayments under the contract would not meet the requirements prescribed in the regulations. |
Licensees must not enter into a small amount credit contract with a consumer if: ⢠the consumer is included in a class of consumers prescribed by the regulations; and ⢠the repayments do not meet the requirements prescribed by the regulations. |
|
The rebuttable presumption is repealed. |
A small amount credit contract is presumed to be unsuitable for a consumer if: ⢠the consumer has had two or more other small amount credit contracts in the past 90 days; or ⢠is in default under another small amount credit contract. |
|
Small amount credit contracts must have equal repayments and equal repayment intervals over the life of the loan, subject to certain limited exceptions. |
No equivalent. |
|
Licensees cannot charge a consumer monthly fees in respect of the residual term of the small amount credit contract where the consumer fully repays the loan early. |
No equivalent. |
|
Licensees are prohibited from making unsolicited communications to a consumer that contain an offer or invitation to enter into or apply for a small amount credit contract in certain circumstances. |
No equivalent. |
|
Licensees must document in writing their assessment that a small amount credit contract is not unsuitable for a consumer. |
No equivalent. |
|
Licensees must display information and give information to consumers about small amount credit contracts in accordance with requirements determined by ASIC in a legislative instrument. |
Licensees must display information about small amount credit contracts in accordance with the requirements prescribed by the regulations. |
Detailed explanation of new law
The protected earnings amount
Extending the protected earnings amount to all consumers
3.13 Existing section 133CC of the Credit Act allows regulations to be made that prescribe requirements for a small amount credit contracts made to certain classes of consumers.
3.14 Regulations made under existing section 133CC ensure that for consumers who receive at least 50 per cent of their gross income from social security payments, 80 per cent of the consumer’s gross income is protected and cannot be used to repay small amount credit contracts. The protected proportion of the income is referred to as the protected earnings amount.
3.15 Schedule 2 to this Bill repeals subsection 133CC(1) and replaces it with a general provision that prohibits licensees from entering into small amount credit contracts if the repayments under the contract would not meet the requirements prescribed by the regulations. [Schedule 2, item 10, subsection 133CC(1)]
3.16 The main change is that regulations made for the purposes of new subsection 133CC(1) do not need to prescribe a protected earnings amount in respect of a prescribed class of consumers. Rather, the new regulation-making power can be used to ensure all consumers are covered by a protected earnings amount (although different amounts may apply to different consumers).
3.17 This flexibility is needed as repeat borrowing through small amount credit contracts exposes all consumers to a degree of risk, regardless of the consumer’s income.
3.18 The regulation-making power in new subsection 133CC(1) is appropriate because the regulations will contain significant technical detail, such as the protected earnings amount and the method for calculating that amount. Any regulations made would be subject to parliamentary scrutiny and disallowance.
3.19 It is expected that the regulations will provide separate protected earnings amounts for consumers who receive 50 per cent or more their net income (rather than gross income) from social security payments, and those who do not.
⢠For consumers who receive 50 per cent or more of their net income from social security payments, a licensee must not enter into a small amount credit contract or a consumer lease with the consumer if:
- the total repayments under the consumer’s small amount credit contracts and consumer leases would exceed 20 per cent of the consumer’s net income; and
- within that 20 per cent, the total repayments under the small amount credit contracts would exceed 10 per cent of the consumer’s net income.
⢠For all other consumers, a licensee must not enter into a small amount credit contract with the consumer if the total repayments under the consumer’s small amount credit contracts would exceed 20 per cent of the consumer’s net income.
Consequences of failing to comply with the repayment requirements
3.20 Failure to comply with the repayment requirements attracts a civil penalty of up to 5,000 penalty units. It also constitutes the commission of an offence with a financial penalty of up to 50 penalty units. This is consistent with the existing penalties that apply to a contravention of subsection 133CC(1).
3.21 While the specified penalty for the contravention of the civil penalty provision is 5,000 penalty units, the maximum penalty applicable under section 167B of the Credit Act is:
⢠for individuals, the greater of:
- 5,000 penalty units; and
- if the court can determine—the benefit derived or detriment avoided because of the contravention, multiplied by three;
⢠for bodies corporate, the greater of the following:
- 5,000 penalty units multiplied by ten (50,000 penalty units);
- if the court can determine—the benefit derived or detriment avoided by the body corporate because of the contravention, multiplied by three; and
- 10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.
3.22 This penalty setting is intended to deter contraventions of the repayment requirements and reflects community expectations about an appropriate sanction for misconduct in the corporate and financial sector (including the credit sector).
3.23 The civil penalty framework in the Credit Act allows for a degree of proportionality between the seriousness of the contravention and the quantum of the penalty. That is, if a court declares that a person has contravened a civil penalty provision, the court may exercise its discretion to declare a financial penalty that is appropriate in the circumstances, taking into account the following matters:
⢠the nature and extent of the contravention;
⢠the nature and extent of any loss or damage suffered because of the contravention;
⢠the circumstances in which the contravention took place; and
⢠whether the person has previously been found by a court to have engaged in similar conduct (see section 167 of the Credit Act).
3.24 Therefore, a court will generally only apply the maximum penalty in the most egregious instances of non-compliance.
3.25 Currently, the value of a penalty unit is $222 (see section 4AA of the Crimes Act 1914 and the notice of indexation issued under that section).
3.26 This change gives effect to the Government’s response to recommendation 1 of the Review.
Introducing a loss of charges mechanism
3.27 A licensee who enters into a small amount credit contract in contravention of the repayment requirements will lose their entitlement to any permitted establishment and monthly fees that would otherwise be payable under the credit contract if:
⢠the court has made a declaration that the licensee has contravened the civil penalty provision in subsection 133CC(1) in relation to the contract; or
⢠the licensee is found guilty of an offence under subsection 133CC(2) in relation to that contract.
[Schedule 2, item 11, subsection 133CC(3)]
3.28 Consumers who have paid any permitted establishment fees and permitted monthly fees in these circumstances may recover those fees from the licensee, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 2, item 11, subsection 133CC(3)]
3.29 This creates a financial incentive for licensees to comply with the repayment requirements by allowing a consumer to recover from the licensee all the establishment fees and monthly fees that would otherwise be payable under the credit contract (not just the amount in breach of the repayment requirements).
3.30 The Review specifically identified that a loss of charges mechanism is appropriate with respect to contraventions of the repayment requirements as:
⢠these requirements are clear and can be clearly complied with;
⢠it is reasonable to expect that a diligent licensee would be readily able to ensure compliance; and
⢠a contravention of these requirements would have significant adverse consequences for consumers.
3.31 Introducing a loss of charges mechanism is also consistent with the existing approach in the Code where a small amount credit contract provider charges more than is permitted under sections 23A and 31B of the Code.
3.32 This change gives effect to the Government’s response to recommendation 23 of the Review.
Removing the unsuitability presumption
3.33 Schedule 2 to this Bill repeals the provisions in the Credit Act that create a rebuttable presumption that a small amount credit contract is unsuitable for the consumer if the consumer is:
⢠in default under another small amount credit contract; or
⢠the consumer has had two or more other small amount credit contracts in the previous 90-day period.
[Schedule 2, items 3, 4, 6 and 7, subsections 118(3A), 123(3A), 131(3A) and 133(3A)]
3.34 The Review determined that the rebuttable presumption has been ineffective in addressing the harm caused by repeat borrowing and should be replaced by the amendments to the protected earnings requirement outlined above. This approach also simplifies the responsible lending requirements that apply specifically to small amount credit contracts.
3.35 This change gives effect to the Government’s response to recommendation 2 of the Review.
Requirement for equal repayments and intervals
3.36 A licensee must not enter into, or offer to enter into, a small amount credit contract with a consumer unless:
⢠the contract provides for equal repayments;
⢠the due dates for each repayment (the date on or by which a repayment is required to be made) are set at equal intervals over the life of the loan; and
⢠the interval between the date on which the credit would first be provided and the due date of the first repayment is no more than twice the length of the interval between each repayment.
[Schedule 2, item 12, subsections 133CD(1) and (3)]
3.37 The treatment of the interval between the date on which the credit is first provided and the due date of the first repayment recognises the utility of having an initial grace period before repayments are due under a small amount credit contract. For example, this would allow a small amount credit contract with terms allowing a consumer to defer the first repayment to a day that is more suitable for the consumer. As the consumer has access to the funds during the grace period, there is no artificial extension of the term of the loan.
3.38 Flexibility is also provided if repayments are required on a fixed day and that day falls on a non-business day (such as a public holiday). If this occurs, the repayment interval will still be considered equal if the affected repayment is required on the immediately preceding or succeeding business day. [Schedule 2, item 12, subsection 133CD(4)]
3.39 Repayments under a small amount credit contract are taken to be equal if:
⢠each repayment is the same amount;
⢠each repayment (other than the final repayment) is the same amount and the final repayment is up to 5 per cent less than the other repayments; or
⢠the repayments satisfy the conditions determined by ASIC by legislative instrument.
[Schedule 2, item 12, subsections 133CD(2) and (5)]
3.40 These options are designed to give licensees reasonable flexibility where the total amount to be repaid under a small amount credit contract cannot be divided equally, or where there are other circumstances in which ASIC considers that unequal repayments may be appropriate. Any instrument made by ASIC would be subject to parliamentary scrutiny and disallowance.
3.41 The purpose of new section 133CD is to address the practice of ‘front-loading’ repayments. This occurs where licensees maximise revenue by entering into small amount credit contracts with consumers that involve ‘front-loading’ repayments and extending the overall term of the contract with lower repayments required in the later stages of the contract. By artificially extending the term of the contract in this way, the provider is able to gain additional revenue when the risk of default is minimal (as the bulk of the loan has been repaid), while also increasing the cost to the consumer.
3.42 These new requirements are not intended to limit the regulations which may be made for the purposes of subsection 133CC(1) (relating to the repayment requirements). [Schedule 2, item 12, subsection 133CD(6)]
Example 3.1: Equal repayments and equal repayment intervals
Nelson enters into a small amount credit contract with Carry-on Money to borrow $600 to be repaid over six months. The repayments under the contract are $66.46 per fortnight, including a 20 per cent establishment fee and a 4 per cent monthly fee. Nelson’s total repayments under the contract are $863.98.
Nelson’s contract with Carry-on Money complies with the equal repayments and equal repayment intervals requirements.
Example 3.2: Equal repayments and equal repayment intervals
Josie enters into a small amount credit contract with Smith’s Finance to borrow $600 to be repaid in 12 months through 26 fortnightly repayments, including a 20 per cent establishment fee and a 4 per cent monthly fee. The contract stipulates that:
⢠the first 13 repayments are $58.15; and
⢠the subsequent 13 repayments are $19.38.
The effect of ‘front loading’ the repayment schedule is that the contract is extended from six months to 12 months, requiring Josie to pay Smith’s Finance total repayments of $1,007.89.
As the contract does not provide for equal repayments over the life of the contract, Smith’s Finance is in breach of subsection 133CD(1).
Consequences of failing to comply with the equal repayments and intervals requirements
3.43 Failure to comply with these new requirements attracts a civil penalty of up to 5,000 penalty units. This is consistent with the other civil penalty provisions in the Credit Act and is intended to deter contraventions of the new requirements. [Schedule 2, item 12, subsection 133CD(1)]
3.44 Failure to comply with the new requirements also constitutes the commission of:
⢠an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and
⢠a strict liability offence, with a financial penalty of up to 10 penalty units.
[Schedule 2, item 12, subsections 133CD(7), (8) and (9)]
3.45 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer. The ability to seek a penalty without the need to prove fault therefore strengthens deterrence and reduces the likelihood of contraventions. The application of strict liability also preserves the defence of honest and reasonable mistake of fact, which maintains adequate checks and balances for persons who may be accused of committing the offence. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences .
3.46 These changes give effect to the Government’s response to recommendation 5 of the Review.
Prohibition on charging monthly fees after early repayment
3.47 A provider of a small amount credit contract is prohibited from requiring or accepting payment of an unexpired monthly fee by a consumer, where the consumer fully repays the balance of a small amount credit contract before the end of the original term of the loan. [Schedule 2, item 13, subsection 31C(1) of the Code]
3.48 An unexpired monthly fee is each permitted monthly fee in respect of a month covered by the contract that commences after the contract is fully repaid. That is, the provider may charge a permitted monthly fee (up to a maximum of 4 per cent of the adjusted credit amount) up to the month in which the small amount credit contract is repaid. However, in the following months, regardless of the original term of the loan, the provider cannot require or accept payments of those monthly fees (as they will be unexpired monthly fees). [Schedule 2, item 13, subsection 31C(2) of the Code]
Example 3.3: Treatment of monthly fees for the balance of the loan after early repayment of a small amount credit contract
Jake borrows $500 for three months under a small amount credit contract entered into with Cut-Price Loans. Under the contract, Cut-Price Loans charges:
⢠a $100 establishment fee; and
⢠a monthly fee of $20 for each month of the contract.
The total amount payable by Jake is $660, comprising equal fortnightly repayments of $110.
Jake subsequently decides he wants to pay out the small amount credit contract at the end of the second month of the contract, on the fourth repayment date. As Cut-Price Loans is not able to charge Jake the monthly fee for the third month of the contract, the total balance of the small amount credit contract is now $640, rather than $660.
Taking this adjustment into account, Cut-Price Loans requires Jake to pay $310 to pay out the small amount credit contract.
3.49 This addresses concerns about how some credit providers have structured the payment of permitted monthly fees. For example, some licensees have required all the permitted monthly fees to be paid up-front or required permitted monthly fees to be paid in advance of the month in respect of which the monthly fee applies.
3.50 This change also brings the protections for small amount credit contracts in line with the protections that apply to other credit contracts. For example, section 29 of the Code prevents a credit provider from requiring the payment of an interest charge at any time before the end of the day on which the interest charge applies. As providers of small amount credit contracts are not permitted to charge interest, and instead charge permitted monthly fees, section 29 does not apply in respect of small amount credit contracts.
Consequences of failing to comply with the prohibition on charging unexpired monthly fees
3.51 A contravention of this new requirement constitutes the commission of:
⢠an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and
⢠a strict liability offence with a financial penalty of up to 10 penalty units.
[Schedule 2, item 13, subsections 31C(4), (5) and (6) of the Code]
3.52 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions. The application of strict liability also preserves the defence of honest and reasonable mistake of fact, which maintains adequate checks and balances for persons who may be accused of committing the offence. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences .
3.53 A contravention of this requirement also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 2, items 13 and 16, subsection 31C(1) and paragraph 111(1)(ia) of the Code]
3.54 This provides an additional avenue for consumers to seek redress against providers of small amount credit contracts. In particular, applying the key requirements regime is appropriate in this context because the regime contains some unique features that further encourage compliance. For example:
⢠the court is directed to consider the effectiveness of a credit provider’s compliance systems in determining the size of any penalty (so the penalty may be higher for a provider with poor compliance systems); and
⢠it is likely that a credit provider will be subject to a lower penalty where it commences court action in response to a contravention (as opposed to a situation where a consumer commences the action), as this will indicate that the provider has been actively monitoring and responding to its contraventions.
3.55 If a provider requires or accepts payment by a consumer under a small amount credit contract of an unexpired monthly fee, the consumer may recover those fees from the licensee as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 2, item 13, subsection 31C(3) of the Code]
3.56 This loss of charges mechanism does not rely on a court to determine that there has been a contravention, as in most cases, this will be relatively straightforward to establish. This mirrors the loss of charges mechanism in section 31B of the Code and aims to encourage compliance with the new prohibition of charging unexpired monthly fees.
3.57 These changes give effect to the Government’s response to recommendation 7 of the Review.
Prohibiting unsolicited communications
3.58 If a consumer is (or was) a debtor under a small amount credit contract, a licensee must not make or arrange for the making of, an unsolicited communication to the consumer (whether orally, in writing or by electronic means) that contains:
⢠an offer to the consumer to enter into a small amount credit contract; or
⢠an invitation to the consumer to apply for a small amount credit contract.
[Schedule 2, item 12, subsection 133CF(1)]
3.59 An unsolicited communication to a consumer is a communication to a consumer or their agent that is made by a person dealing directly with the consumer or their agent where:
⢠there has been no prior request made by the consumer to the licensee for that communication;
⢠the consumer has made a prior request to the licensee for that communication and that request was solicited by or on behalf of the licensee; or
⢠the circumstances prescribed by the regulations are satisfied.
[Schedule 2, item 12, subsection 133CF(2)]
3.60 This is not intended to capture communications that are directed at consumers at large, such as general advertising of the availability of small amount credit contracts. Rather, it ensures that:
⢠licensees cannot make unsolicited communications to vulnerable consumers; and
⢠applications for small amount credit contracts are made actively by consumers and not in response to the consumer being prompted to apply.
3.61 The regulations may prescribe the circumstances where a communication is taken, or is not taken, to be an unsolicited communication. This adds flexibility and ensures the new prohibition on unsolicited communications can remain responsive to evolving industry practices. This regulation-making power is also consistent with the current arrangements in subsection 133BE(6) of the Credit Act, which provides that the regulations may make provisions that apply to determining whether a communication is a credit limit increase invitation. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 2, item 12, subsection 133CF(2)]
Example 3.4: Application of prohibition on unsolicited communication
Fast ‘n’ Quick Cash Limited is a small amount credit contract provider. On 10 June, Fast ‘n’ Quick Cash Limited runs an advertisement in the local papers regarding an upcoming promotion.
As the advertisement is directed to consumers at large, the advertising campaign is not captured by the prohibition on unsolicited communication in subsection 133CF(1).
Example 3.5: Application of prohibition on unsolicited communication
Cash4You is a small amount credit contract provider. On 1 August, Cash4You sends a text message inviting consumers to apply for a small amount credit contract to go into the running to win a holiday in Queensland.
Anne previously had a small amount credit contract with Fast ‘n’ Quick Cash. The communication is an unsolicited communication and prohibited under subsection 133CF(1) because:
⢠the text message sent by Cash4You includes an invitation to enter into a small amount credit contract; and
⢠Anne was previously a debtor under a small amount credit contract.
Consequences of failing to comply with the prohibition on certain unsolicited communications
3.62 Failure to comply with the new prohibition attracts a civil penalty of up to 5,000 penalty units. This is consistent with the other civil penalty provisions in the Credit Act and is intended to deter contraventions of the new prohibition. [Schedule 2, item 12, subsection 133CF(1)]
3.63 A contravention of this prohibition also constitutes the commission of an offence, with a financial penalty of up to 100 penalty units. [Schedule 2, item 12, subsections 133CF(3)]
Introducing a loss of charges mechanism
3.64 A licensee who enters into a small amount credit contract with a consumer within 30 days of making an unsolicited communication will lose their entitlement to any permitted establishment and monthly fees that would otherwise be payable under the credit contract if:
⢠the court has made a declaration that the licensee has contravened the civil penalty provision in subsection 133CF(1) in relation to the contract; or
⢠the licensee is found guilty of an offence under subsection 133CF(3) in relation to that contract.
[Schedule 2, item 12, subsection 133CF(4)]
3.65 Consumers who have paid any permitted establishment and monthly fees in these circumstances may recover those fees from the licensee, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 2, item 12, subsection 133CF(4)]
3.66 As with other similar provisions introduced by Schedule 2 to this Bill, this provision encourages compliance with the new prohibition. The Review specifically identified that a loss of charges mechanism is appropriate with respect to contraventions of the new unsolicited communication requirements as:
⢠these requirements are clear and can be easily complied with;
⢠it is reasonable to expect that a diligent licensee would be readily able to ensure compliance; and
⢠a contravention of these requirements would have significant adverse consequences for consumers.
3.67 These changes give effect to the Government’s response to recommendations 8 and 23 of the Review.
Documenting assessments that a contract is not unsuitable
3.68 As part of the existing responsible lending obligations under the Credit Act, licensees are required to assess whether a small amount credit contract (or increasing the credit limit of a small amount credit contract) will be unsuitable for a consumer before:
⢠entering into the small amount credit contract with the consumer;
⢠increasing the credit limit of the small amount credit contract; or
⢠making an unconditional representation to the consumer that the licensee considers that the consumer is eligible to enter into the small amount credit contract or that the credit limit will be able to be increased.
3.69 Schedule 2 to this Bill introduces a new requirement for licensees to document in writing and in accordance with any requirements determined by ASIC in a legislative instrument:
⢠any assessment that a small amount credit contract is not unsuitable for a consumer; and
⢠the inquiries and verifications made in relation to that assessment.
[Schedule 2, item 12, subsection 133CE(1)]
3.70 This requirement does not impose a record-keeping obligation in circumstances where the provider assesses that a small amount credit contract is unsuitable for a consumer.
3.71 The purpose of this new requirement is to enhance the transparency and accountability of decisions made by licensees that a proposed small amount credit contract is not unsuitable. It should therefore result in improvements to assessment practices.
3.72 The power for ASIC to determine the form in which the matters are to be documented in writing ensures that the documentation of the assessments contains an appropriate level of detail and information. It also allows ASIC to respond promptly to any deficiencies with the way in which licensees are documenting assessments. Any legislative instrument made by ASIC would be subject to parliamentary scrutiny and disallowance. [Schedule 2, item 12, subsection 133CE(2)]
3.73 Before ASIC can make a legislative instrument, it must consult with the Australian Information Commissioner in relation to matters that relate to the privacy functions (within the meaning of the Australian Information Commissioner Act 2010) and have regard to any submissions made by the Commissioner. This provides the appropriate checks and balances, as any legislative instrument made by ASIC for these purposes may affect the privacy of individuals. For example, the legislative instrument may set out the kinds of personal information that need to be documented. [Schedule 2, item 12, subsection 133CE(3)]
3.74 Failure to comply with the new record-keeping requirements attracts a civil penalty of up to 5,000 penalty units. This is consistent with the other civil penalty provisions in the Credit Act and is intended to deter contraventions of the new requirement. [Schedule 2, item 12, subsection 133CE(1)]
3.75 This requirement also extends to licensees that provide credit assistance in relation to small amount credit contracts. That is, these credit assistance providers are required to document in writing, the preliminary assessment that a small amount credit contract is not unsuitable. [Schedule 2, item 5, section 124C]
3.76 These changes implement the Government’s response to recommendation 20 of the Review.
Protection of account statements
3.77 The Credit Act currently requires providers of small amount credit contracts and licensees who provide credit assistance in relation to small amount credit contracts to obtain and consider a consumer’s account statements for the preceding 90 days. This forms part of the licensee’s obligation to verify a consumer’s financial situation, which is relevant to the licensee’s preliminary assessments or assessments about whether a small amount credit contract is unsuitable for a consumer.
3.78 Schedule 6 to this Bill introduces new restrictions on the use and disclosure of constrained documents. A constrained document includes an account statement obtained by a licensee in connection with a small amount credit contract or a proposed small amount credit contract. [Schedule 6, item 3, subsection 160CA(1)]
3.79 The new restrictions apply to these licensees (including former licensees) and any other persons who have obtained these account statements from the licensee, such as a representative of the licensee. However, these restrictions do not apply to a person in relation to a constrained document about the financial affairs of the person. In the context of account statements, this would include the account holder to which the account statements relate. [Schedule 6, item 3, subsections 160CA(1) and (2)]
3.80 A person (such as a licensee or a representative) must not use or disclose an account statement or information contained in an account statement unless the use or disclosure is:
⢠necessary for the person to comply with the person’s obligations under the Credit Act;
⢠required or authorised by or under a law of the Commonwealth, or of a State or Territory, or a court or tribunal order;
⢠for the purposes of considering a hardship notice;
⢠for the purposes of assisting ASIC to perform its functions or exercise its powers; or
⢠for the purposes of allowing AFCA to perform its functions or exercise its powers.
[Schedule 6, item 3, subsections 160CB(1) and (5)]
3.81 This ensures that the personal information of a consumer or a prospective consumer is not misused by a licensee or its representatives. For example, it prevents a consumer’s account statements from being used to market further products and services to the consumer, or being sold to third parties.
3.82 The exemptions allow, for example, a licensee to use account statements to determine whether a small amount credit contract is unsuitable for a consumer. A licensee may also rely on the exemption to disclose a consumer’s account statements to a third party if the disclosure is necessary to comply with the licensee’s other obligations under the Credit Act.
3.83 The exemptions operate as defences to the prohibition. The defendant therefore bears the evidential burden in relation to matters set out in the defence. This is appropriate as the circumstances which give rise to any of the defences (that is, the purpose of the defendant’s use or disclosure of the account statements) are peculiarly within the knowledge of the defendant. This is consistent with the principles in the Guide to Framing Commonwealth Offences .
Consequences of failing to comply with the restrictions on constrained documents
3.84 Failure to comply with the new restrictions on using or disclosing constrained documents, including account statements, attracts a civil penalty of up to 5,000 penalty units. This penalty setting is intended to deter contraventions of the new restrictions and is consistent with the existing civil penalty provisions in the Credit Act. [Schedule 6, item 3, subsection 160CB(1)]
3.85 A contravention of the new restrictions also constitutes the commission of:
⢠an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and
⢠a strict liability offence, with a financial penalty of up to 10 penalty units.
[Schedule 6, item 3, subsections 160CB(2), (3) and (4)]
3.86 Applying strict liability for this offence is appropriate because of the potentially serious impact a contravention may have on an affected consumer, in terms of privacy and implications for future transactions. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions occurring. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences .
3.87 A regulation-making power allows these protections for account statements to be extended to other constrained documents. This ensures the Government can promptly respond to concerns about the use of information (other than account statements) obtained by licensees in connection with small amount credit contracts. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 6, item 3, subsection 160CA(1)]
3.88 These changes give effect to the Government’s response to recommendation 19 of the Review.
Enhancing warning statements
3.89 The existing requirement for licensees to display information (also referred to as warning statements) as required by the regulations is repealed. It is replaced with a new requirement for these licensees (who represent they provide or are able to provide small amount credit contracts) to display information and give information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 2, item 9, subsection 133CB(1)]
3.90 ASIC may, by legislative instrument, determine the following matters:
⢠the information that the licensees must display and give to consumers; and
⢠how, when and in what form the licensees must display and give the information to consumers.
[Schedule 2, item 9, subsection 133CB(2)
3.91 In making a legislative instrument for this purpose, ASIC must take into account the risks associated with small amount credit contracts and the alternatives that may be available to consumers. [Schedule 2, item 9, subsection 133CB(3)]
3.92 The power for ASIC to determine the requirements for displaying and giving information in a legislative instrument (as opposed to the requirements being prescribed by regulations) is necessary to ensure the information provided is effective in highlighting risks with these contracts and assisting customers to make better use of alternatives where available. In particular, it will give ASIC flexibility to mandate requirements that take into account different media for delivery of warnings, and to better account for the behavioural biases of consumers. ASIC will be able to prescribe:
⢠different information to be provided to different classes of consumers (for example, consumers who are repeat users of small amount credit contracts could receive different messages from other consumers);
⢠different information to be provided at different points of time (for example, a consumer could receive a targeted message when they are applying for a small amount credit contract); and
⢠different modes of delivery (for example, consumers could be sent an SMS message as well as being able to view information on the licensee’s website).
3.93 The purpose of these changes is to ensure that consumers receive relevant and effective information about the financial implications of entering into or using a small amount credit contract. This will assist consumers to make informed decisions about whether to enter into the credit contract. It can also assist them to understand what alternatives are available and how they can be of assistance to particular consumers.
3.94 The existing civil and criminal penalties continue to apply to a contravention of this requirement. A contravention of this requirement therefore attracts a civil penalty of up to 5,000 penalty units and constitutes the commission of an offence with a financial penalty of up to 50 penalty units. [Schedule 2, item 9, subsections 133CB(1) and (4)]
3.95 This requirement also extends to licensees who represent they can provide, or are able to provide credit assistance in relation to, small amount credit contracts. That is, these credit assistance providers must display information and give information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 2, item 5, section 124B]
3.96 These changes implement the Government’s response to recommendation 21 of the Review.
Other amendments
Family violence as a cause of hardship
3.97 Section 72 of the Code provides for changes to a debtor’s obligation under a credit contract on grounds of hardship. Hardship is not defined in the Credit Act and there are no specified circumstances in which hardship must be considered.
3.98 However, the note to subsection 72(3) identifies illness and unemployment as reasonable causes of hardship. Schedule 2 to this Bill amends this note to make clear that family violence is also a reasonable cause of hardship. [Schedule 2, item 14, subsection 72(3) of the Code]
3.99 This applies in respect of all credit contracts regulated under the Credit Act.
3.100 The equivalent provision in respect of consumer leases is also similarly updated to make clear that family violence is a reasonable cause of hardship. [Schedule 3, item 32, subsection 177B(3) of the Code]
Statutory review
3.101 Schedule 2 to this Bill repeals the statutory requirement in section 335A of the Credit Act to conduct an independent review of the operation of the laws relating to small amount credit contracts, as this has been completed by the Review. [Schedule 6, item 4, section 335A]
Consequential amendments
3.102 The definitions in subsection 5(1) of the Credit Act and subsection 204(1) of the Code are updated to signpost the new definitions introduced by these amendments, including the definition of repayment date , unsolicited communication to a consumer and unexpired monthly fee . [Schedule 2, items 1 and 17, subsection 5(1) of the Credit Act and subsection 204(1) of the Code]
3.103 Subsection 5(1) of the Credit Act is also updated to refer to the definition of hardship notice currently in subsection 204(1) of the Code and signpost the new definition of constrained document . These definitions are relevant to the new protections regarding account statements. The guide to Part 3-6A of the Credit Act is also updated to reflect these new protections. [Schedule 6, items 1 and 2, subsection 5(1) and section 160A]
3.104 Subsection 82(2) of the Code, which sets out the amount required to pay out a credit contract, is updated to take into account unexpired monthly fees, which relates to the prohibition on charging or accepting unexpired monthly fees. As a result, the amount required to pay out a small amount credit contract under subsection 82(2) of the Code is:
⢠the sum of the following amounts:
- the amount of credit;
- all fees and charges payable by the consumer to the licensee up to the date of termination, excluding any unexpired monthly fee; and
- reasonable enforcement expenses;
⢠less any payments made under the small amount credit contract.
[Schedule 2, item 15, subsection 82(2) of the Code]
3.105 Early termination charges and rebate of premium are not referred to in this list, as subsection 31A(1) of the Code prevents a small amount credit contract from providing for these charges and premiums. For the avoidance of doubt, nothing in the list in subsection 82(2) of the Code is intended to allow a licensee to charge fees that are in addition to those that are expressly permitted under subsection 31A(1) of the Code.
3.106 The guide to Part 3-1 of the Credit Act is updated to reflect the new obligations on licensees that provide credit assistance in relation to small amount credit contracts, such as the requirement to record the preliminary assessment that a small amount credit contract is not unsuitable [Schedule 2, item 2, section 111]
3.107 The guide to Part 3-2C of the Credit Act is also updated to reflect the new obligations on providers of small amount credit contracts, such as the prohibition on entering into, or offering to enter into, small amount credit contracts where it would contravene the repayment requirements or the unsolicited communication prohibition. [Schedule 2, item 8, section 133C]
Application provisions
3.108 The amendments to enhance the consumer protection framework for consumers of small amount credit contracts commence on the day after the end of the period of six months beginning on the day this Bill receives Royal Assent. This is referred to as the commencement day. [Clause 2]
3.109 The amendments about warning statements and unsolicited communications (sections 124B, 133CB and 133CF of the Credit Act) apply to representations or communications made on or after the commencement day. [Schedule 7, item 4 of Schedule 19 to the Credit Transitional Act]
3.110 The amendments requiring preliminary assessments and assessments to be documented in writing (sections 124C and 133CE of the Credit Act) apply to preliminary assessment and assessments made on or after the commencement day. [Schedule 7, item 5 of Schedule 19 to the Credit Transitional Act]
3.111 The amendments regarding the new protected earnings requirement, equal repayments and intervals, and unexpired monthly fees (including related consequential amendments) in sections 133CC and 133CD of the Credit Act, and section 31C of the Code respectively apply to:
⢠small amount credit contracts that are entered into on or after the commencement day; or
⢠offers made to enter into small amount credit contracts on or after the commencement day.
[Schedule 7, items 7, 10 and 11 of Schedule 19 to the Credit Transitional Act]
3.112 The new restrictions on the use or disclosure of account statements in section 160CB of the Credit Act apply to uses or disclosures of account statements, or information contained in account statements, on or after the commencement day. [Schedule 7, item 9 of Schedule 19 to the Credit Transitional Act]
3.113 These commencement and application provisions are intended to provide affected industry participants sufficient time to prepare for the changes introduced by Schedules 2 and 6 to this Bill.
Chapter 4
Consumer lease reforms
Outline of chapter
4.1 Schedules 3 and 6 to this Bill amend the Credit Act to enhance the consumer protection framework for consumers of consumer leases. In particular, the amendments aim to promote financial inclusion by ensuring consumers do not enter into unaffordable consumer leases.
4.2 These amendments implement the Government’s response to the recommendations of the Review about consumer leases.
4.3 All legislative references in this Chapter are to the Credit Act, unless otherwise specified. General references to the Credit Act include the Code (which is Schedule 1 to the Credit Act). However, specific legislative references to the Code are identified as such.
Context of amendments
4.4 In addition to examining the laws about small amount credit contracts, the Review was also tasked with examining the effectiveness of the laws about consumer leases and considering whether any of the laws applying to small amount credit contracts should also apply to consumer leases.
4.5 Consumer leases that are regulated by the Credit Act include leases for goods that are hired wholly or predominantly for personal, domestic or household purposes for longer than four months, where:
⢠the lessee does not have the right or obligation to purchase the goods; and
⢠the total amount payable by the lessee exceeds the cash price of the goods.
4.6 As consumer leases are not considered to be credit contracts, the obligations in the Code that apply to credit contracts do not automatically apply to consumer leases.
4.7 The Consumer Credit Legislation Amendment (Enhancements) Act 2012 extended a number of consumer protections that apply to credit contracts to consumer leases, such as prohibiting lessors from charging specified fees or charges, and allowing lessees to terminate a lease before the goods have been provided.
4.8 Building on those reforms, the Review recommended that a cap on the cost of consumer leases is required to minimise the risk that consumers enter into unaffordable leases. The Review also considered that the cap on costs should be supported by the introduction of a protected earnings amount for leases for household goods.
4.9 The Government supported the majority of the Review’s recommendations.
Summary of new law
4.10 The key amendments in Schedules 3 and 6 to this Bill include:
⢠introducing a cap on the amount a lessor can charge in connection with a consumer lease;
⢠introducing the concept of ‘consumer leases for household goods’ in the Credit Act and introducing the following obligations in respect of those consumer leases:
- requiring lessors to collect and consider a consumer’s account statements for the 90 days prior to entering into a consumer lease for household goods with the consumer;
- requiring lessors to disclose to lessees the base price of the goods hired under the lease and the difference between the total amount payable by the lessee in connection with the lease and the base price;
- prohibiting lessors from undertaking door-to-door selling of consumer leases for household goods;
- requiring licensees to document in writing, their assessment or preliminary assessment that a consumer lease for household goods is not unsuitable for a consumer;
- requiring licensees to display and give information to consumers in accordance with the requirements determined by ASIC in a legislative instrument; and
⢠introducing a new regulation-making power to set a protected earnings amount for consumer leases for household goods;
4.11 Many of these changes mirror the consumer protections that apply to small amount credit contracts, with some modifications to reflect the differences between the two products.
4.12 These amendments take effect on the day after the end of the period of six months beginning on the day this Bill receives Royal Assent.
Comparison of key features of new law and current law
|
New law |
Current law |
|
There is a cap on the total amount that would be payable by the lessee in connection with the consumer lease. |
No equivalent. |
|
Lessors of household goods must obtain and consider a consumer’s account statements for the preceding 90 days in the course of verifying the consumer’s financial situation. |
There is a general obligation on lessors to take reasonable steps to verify a consumer’s financial situation, which in many cases would already involve obtaining and considering a consumer’s account statements. |
|
There is a regulation-making power to prescribe a protected earnings amount for consumer leases for household goods. |
No equivalent. |
|
Lessors of household goods are prohibited from visiting a place of residence for the purpose of inducing a person who resides there to apply for or obtain a lease, except by prior arrangement. |
No equivalent. |
|
Lessors of household goods are required to disclose the base price of the goods being leased and the difference between the base price and the total amount payable by the lessee in connection with the lease. |
Lessors are required to disclose, among other matters, the total amount of rental payments under the lease. |
Detailed explanation of new law
Introducing a cap on costs
4.13 Schedule 3 to this Bill introduces a cap on costs for all consumers leases regulated under the Credit Act.
4.14 A lessor must not enter into or vary a consumer lease so that the total amount that would be payable by the lessee in connection with the lease (including any applicable taxes and any add-on fees) is more than the permitted cap for the lease. [Schedule 3, item 31, subsection 175AA(1) of the Code]
4.15 The permitted cap for a lease is generally the maximum amount that may be paid by a lessee in connection with the lease. This prevents lessors and other parties from charging lessees excessive fees and charges, and further aligns the consumer protections for consumer leases with those for small amount credit contracts.
4.16 Some specified amounts, such as reasonable enforcement expenses, may be charged in addition to the permitted cap. These amounts are set out in new subsection 175AA(4) of the Code.
Permitted cap
4.17 The permitted cap for a consumer lease is the sum of:
⢠the base price of the goods hired under the lease;
⢠the permitted delivery fee (if any) for the consumer lease;
⢠the permitted installation fees (if any) for the consumer lease; and
⢠the sum of the above amounts, multiplied by:
- in the case of a consumer lease for a fixed term—0.04 for each whole month of the consumer lease to a maximum of 48 months; or
- in the case of a consumer lease for an indefinite period—1.92.
[Schedule 3, item 31, subsection 175AA(5) of the Code]
4.18 The method for calculating the base price of the goods hired under a lease will be prescribed by the regulations. This is appropriate as the calculation method contains significant technical detail and may need to be updated in response to evolving industry developments. Any regulations made would be subject to disallowance and parliamentary scrutiny. [Schedule 3, item 31, subsection 175AA(6) of the Code]
4.19 A fee or charge is a permitted delivery fee for a consumer lease if the fee or charge:
⢠is for the delivery to the lessee, at the lessee’s request, of the goods hired under the consumer lease; and
⢠is limited to the reasonable cost of delivery of the goods to the lessee.
[Schedule 3, item 31, subsection 175AA(7) of the Code]
4.20 For example, if a lessor delivers (or can deliver) a number of goods to a regional area at the same time, it may be reasonable for the cost of the delivery to be shared between the consumers. If the cost of delivery is not shared in this scenario, it is likely that the delivery fee would exceed the reasonable cost of delivery of the goods to the lessee. In that event, the delivery fee would not be a permitted delivery fee.
4.21 ASIC may declare by legislative instrument that specified fees which relate to the installation of particular kinds of goods hired under a consumer lease are permitted installation fees. This ensures there is sufficient flexibility to deal with the various kinds of goods that can be hired under a consumer lease. Any instrument made by ASIC would be subject to disallowance and parliamentary scrutiny. [Schedule 3, item 31, subsection 175AA(8) of the Code]
4.22 For consumer leases for a fixed term, the final component of the permitted cap practically allows for a 4 per cent monthly fee (based on the sum of the base price of the goods, and any permitted delivery fees and installation fees) to be charged to the lessee for each whole month of the consumer lease, up to a maximum of 48 months. This is in addition to the base price of the goods, the permitted delivery fees and permitted installation fees.
4.23 This is consistent with the 4 per cent permitted monthly fee that can be charged to consumers of small amount credit contracts. However, the inclusion of the permitted delivery fees and installation fees in the fee for consumer leases is a modification that reflects the differences between the two products (as delivery and installation fees are not relevant for small amount credit contracts).
Consumer leases entered into for an indefinite period
4.24 Consumer leases entered into for an indefinite period are treated as having a term of 48 months for the purposes of determining the permitted cap. Accordingly, the final component of the permitted cap for these consumer leases also allows for a 4 per cent monthly fee up to a maximum of 48 months. This is in addition to the base price of the goods, the permitted delivery fees and permitted installation fees.
4.25 In addition to the requirement set out in new subsection 175AA(1) relating to the permitted cap, the amount that a lessor can charge in any month of a consumer lease entered into for an indefinite period is also capped. The permitted monthly cap is the permitted cap divided by 48. [Schedule 3, item 31, subsection 175AA(2) of the Code]
4.26 This additional requirement prevents a lessor from entering into a lease for an indefinite period and ‘front-loading’ the payments (which could include 48 months’ worth of fees) with an understanding that the lease would be terminated before 48 months.
Total amount that would be payable by the lessee includes add-on fees
4.27 Add-on fees form part of the total amount that would be payable by the lessee in connection with the lease and therefore must be within the amount of the permitted cap. For example, if a lessor provides an ‘add-on’ appliance service to as leased good, it must not impose an extra fee or charge above the permitted cap, despite the lessor incurring a cost in providing the service.
4.28 An add-on fee is any fee or charge (whether an interest charge or not) that the lessee is liable to pay to the lessor or to another person under an agreement facilitated by or on behalf of the lessor or the other person where:
⢠the fee or charge relates to a product or service that either:
- facilitates or complements the lessee’s use of the goods hired under the consumer lease; or
- is marketed or offered by the lessor or another person as being complementary the lessee’s use of the goods hired under the consumer lease; and
⢠either:
- failure by the lessee to pay the fee or charge, or to acquire a service or product to which the fee or charge relates, affects the lessee’s rights or obligations under the lease; or
- the lessor or another person has represented to the lessee that failure by the lessee to pay the fee or charge, or to acquire a service or product to which the fee or charge relates, will or may affect the lessee’s rights or obligations under the lease.
[Schedule 3, item 31, subsection 175AA(3) of the Code]
4.29 For example, this could capture fees payable to brokers that facilitate the consumer obtaining the goods.
4.30 A service or product captured by the definition of add-on fee is to be distinguished from, for example:
⢠a bundled package, such as where a customer chooses to enter into a broadband internet service at the same time as they lease a laptop; or
⢠a DVD player leased with a television.
4.31 In most cases where multiple goods are provided these items would be considered separate leases, with each item subject to its own cap on costs.
4.32 The inclusion of add-on fees in the total amount that would be payable by the lessee ensures the cap on costs operates consistently and also mitigates the risk of new fees being introduced that are designed to circumvent the cap.
Example 4.1 Add-on fees
Stephen enters into a consumer lease with Lease on Life to lease a treadmill with a base price of $3,000 for three years. Stephen is charged delivery fees of $300. The maximum amount that Stephen can be charged under the permitted cap over the three year lease is $8,052, comprising:
⢠the base price and permitted delivery fees ($3,300); and
⢠monthly fees of $4,752 ($3,300 x 36 months x 0.04)
As a condition of the lease agreement, Stephen must also purchase a set of instructional exercise DVDs at a price of $250. As Stephen must purchase these products as a condition of the lease, these charges are add-on fees and must be within the permitted cap of $8,052 to comply with subsection 175AA(1).
Amounts that may be charged in addition to the permitted cap
4.33 The following amounts are not included in the total amount that would be payable by the lessee in connection with the consumer lease:
⢠an establishment fee—that is, a fee or charge that relates to the creation of the consumer lease, is charged only once and is not more than 20 per cent of the base price of the goods;
⢠default fees—that is, fees or charges that are payable in the event of a default in payment under the lease; and
⢠enforcement expenses that are recoverable in accordance with subsection 179R(1) of the Code.
[Schedule 3, item 31, subsection 175AA(4) of the Code]
4.34 The practical effect is that these amounts may be charged in addition to the permitted cap.
4.35 A lessor should be able to charge these amounts irrespective of the permitted cap as each of the amounts are clearly confined and are reasonable in the circumstances. This is consistent with the approach taken with the fees and charges that may be charged under a small amount credit contract in subsection 31A(1) of the Code.
4.36 A limit is placed on the amount that may be recovered if there is a default under a consumer lease. This ensures that lessors cannot charge excessive default fees in addition to the permitted cap. [Schedule 3, item 32A, section 179GA of the Code]
4.37 The regulations will prescribe a way of working out a limit on default fees. This is appropriate as the calculation of the limit will contain technical detail, and may need to be updated quickly in the future to respond to evolving industry practices. Any regulations made would be subject to disallowance and parliamentary scrutiny.
4.38 A contravention of the new limit on default fees will attract a civil penalty of up to 5,000 penalty units. Further, if a provision of a consumer lease allows a lessor to recover more than the limit on default fees, that provision is void. If an amount is recovered by a lessor in excess of the limitation, it may be recovered back by the lessee. [Schedule 3, item 32A, subsection 179GA(1) and (2) of the Code]
4.39 These consequences are intended to deter contraventions of the new limit on default fees and are consistent with the existing consequences that apply in respect of the limit on default fees for small amount credit contracts in section 39B of the Code.
4.40 The limit on default fees does not apply to enforcement expenses, which are set out in section 179R of the Code for consumer leases. [Schedule 3, item 32A, subsection 179GA(3) of the Code]
Example 4.2: Application of the permitted cap
Anh enters into a consumer lease with Whitegoods for You to lease a refrigerator with a base price of $1,000 for two years. Anh is charged:
⢠permitted delivery fees of $100; and
⢠installation fees of $50.
The maximum amount that Anh can be charged over the two-year lease is the permitted cap of $2,254, comprising:
⢠the base price, permitted delivery and installation fees ($1,150); and
⢠monthly fees of $1,104 ($1,150 x 24 months x 0.04).
The lease contract requires Anh to make payments of $5 per month to cover the risk of damage to the goods and $15 per month for a service contract provided to a third party service provider. These charges must be within the permitted cap of $2,254 to comply with subsection 175AA(1).
Example 4.3: Application of the permitted cap
Claire enters into a consumer lease with Summer Breeze Leases to lease an air-conditioner with a base price of $2,000 for five years. Claire is charged:
⢠permitted delivery fees of $100; and
⢠installation fees of $400.
As a condition of the lease agreement, Claire must also pay an establishment fee of $400.
The maximum amount that Claire can be charged over the five-year lease is $7,700 comprising:
⢠the base price, permitted delivery and installation fees ($2,500);
⢠the permitted establishment fee ($400); and
⢠monthly fees of $4,800 ($2,500 x 48 months x 0.04).
Summer Breeze Leases calculates Claire’s required fortnightly repayment of $59.23 by dividing the maximum amount ($7,700) by the number of fortnights in the term of the lease (130 fortnights).
As such, Claire pays $7,699.90 under the lease over five years, which is less than the maximum amount of $7,700.
Example 4.4: Variation of the lease
However, before Claire is able to make the first payment on the lease for her air-conditioner, the lessor varies the terms of the lease and requires her to pay a quarterly charge of $200 for servicing. Such a charge would cost Claire an additional $4,000 over five years ($200 x 4 x 5).
The total cost to Claire is now $11,699.90, which is more than the maximum amount that Claire can be charged ($7,700). As such, the lease now contravenes subsection 175AA(1).
Example 4.5: Application of the permitted monthly cap - leases for an indefinite period
Ruth enters into a lease with Super Fast Leasing to lease a computer with a base price of $1,200 for an indefinite period. Ruth is charged:
⢠permitted delivery fees of $50; and
⢠installation fees of $100.
The maximum amount that Ruth can be charged over the life of the lease is the permitted cap of $3,942, comprising:
⢠the base price, permitted delivery and installation fees ($1,350); and
⢠monthly fees of $2,592 ($1,350 x 1.92).
As the lease is for an indefinite period, the maximum amount that Ruth can be charged by Super Fast Leasing in any month of the lease is $82.13 ($3,942 divided by 48).
Consequences of entering into or varying a lease that contravenes the permitted cap
4.41 Failure to comply with the permitted cap or the permitted monthly cap constitutes the commission of an offence, with a financial penalty of up to 100 penalty units. [Schedule 3, item 31, section 175AB of the Code]
4.42 Currently, the value of a penalty unit is $222 (see section 4AA of the Crimes Act 1914 , and the notice of indexation issued under that section).
4.43 A contravention of these new requirements also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 3, items 9 and 31, subsections 111(2A), 175AA(1) and 175AA(2) of the Code]
4.44 The maximum penalty that may be imposed under Part 6 of the Code for a contravention of a key requirement in relation to a consumer lease is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price. However, if the loss suffered by the lessee is greater than that amount, a greater penalty may be imposed. The tolerances and assumptions in sections 180 and 182 of the Code may apply to the calculation of this amount. [Schedule 3, item 19, section 114A of the Code]
4.45 This provides an additional avenue for consumers to seek redress against lessors.
4.46 If a lessor enters into or varies a consumer lease that contravenes the permitted cap or the permitted monthly cap, the consumer may recover any payments above the base price of the goods from the lessor, as the consumer is not liable and is taken never to have been liable to pay those amounts. [Schedule 3, item 31, section 175AC of the Code]
4.47 This loss of charges mechanism does not rely on a court to determine that there has been a contravention, as in most cases, this will be relatively straightforward to establish. This mirrors the loss of charges mechanism in section 31B of the Code for small amount credit contracts and aims to encourage compliance with the new permitted cap and permitted monthly cap.
4.48 These changes give effect to the Government’s response to recommendations 11, 12, 13 and 14 of the Review.
Consumer leases for household goods
4.49 Schedule 3 to this Bill introduces the concept of a ‘consumer lease for household goods’ in the Credit Act.
4.50 A consumer lease for household goods is a regulated consumer lease where any of the goods hired under the lease are household goods. However, it does not include a consumer lease where any of the goods hired under the lease include:
⢠a motor vehicle;
⢠a vehicle that is not for use on a road and is of a kind intended primarily for use by persons with restricted mobility; or
⢠goods that are ordinarily used for accommodation (either permanently or temporarily).
[Schedule 3, item 35, subsection 204(1) of the Code]
4.51 This definition is designed to prevent a lessor from avoiding the new obligations relating to consumer leases for household goods by including a non-household good in the same lease contract as a household good.
4.52 Household goods are in turn defined as goods of a kind ordinarily acquired for domestic or household use. This definition is an objective definition based on the typical use of the goods. It is designed to avoid the need for a lessor to inquire into the purpose for which a particular consumer intends to use a particular hired good . [Schedule 3, item 35, subsection 204(1) of the Code]
4.53 Goods that are ordinarily used for accommodation include, for example, a caravan hired for the lessee to live in. These consumer leases are excluded from being a consumer lease for household goods as it may not be appropriate for some of the requirements relating specifically to consumer leases for household goods (such as the protected earnings requirement) to apply in respect of these leases. For example, it is generally appropriate for a lessee to spend a greater proportion of their income (in excess of the protected earnings requirement) on rental payments for a caravan to live in. The other consumer protections relating to all consumer leases would still apply to these leases, such as the cap on costs.
4.54 This rationale also extends to the exclusion for motor vehicles and vehicles that are intended primarily for use by persons with restricted mobility (such as mobility scooters). However, this exclusion is also intended to put beyond doubt that these vehicles are not considered to be ‘household goods’.
4.55 Where leases of motor vehicles, mobility vehicles or accommodation goods are bundled with household goods in the same lease, the entire lease is excluded from being a consumer lease for household goods. For example, this could occur if a caravan furnished with household goods is hired by the licensee to live in for a period of time.
Introducing a protected earnings amount
4.56 Schedule 3 to this Bill prohibits lessors from entering into, or offering to enter into, a consumer lease for household goods if the amount required to be paid under the lease would not meet the requirements (such as the protected earnings amount) prescribed by the regulations. [Schedule 3, item 7, subsection 156B(1)]
4.57 For consumer leases for household goods, this requirement operates in addition to the new cap on costs in section 175AA of the Code.
4.58 The regulation-making power in new subsection 156B(1) is appropriate as the requirements which will be prescribed by the regulations will contain technical detail, including the protected earnings amount and the calculation method. Any regulations made would be subject to disallowance and parliamentary scrutiny.
4.59 It is expected that the regulations will provide separate protected earnings amounts for consumers who receive 50 per cent or more their income from social security payments, and those who do not:
⢠For consumers who receive 50 per cent or more of their net income from social security payments, a licensee must not enter into a small amount credit contract or a consumer lease with the consumer if:
- the total repayments under the consumer’s small amount credit contracts and the total payments under the consumer’s proposed consumer lease and any existing consumer leases would exceed 20 per cent of the consumer’s net income; and
- within that 20 per cent, the total repayments under the small amount credit contracts would exceed 10 per cent of the consumer’s net income.
⢠For all other consumers, a licensee must not enter into a consumer lease with the consumer if the total payments would need to be paid under the consumer’s leases would exceed 20 per cent of the consumer’s net income.
Consequences of failing to comply with the repayment requirements
4.60 Failure to comply with the repayment requirements attracts a civil penalty of up to 5,000 penalty units. It also constitutes the commission of an offence with a financial penalty of up to 50 penalty units. [Schedule 3, item 7, subsections 156B(1) and (2)]
4.61 These penalties are consistent with the existing penalties that apply to a contravention of the repayment requirements for small amount credit contracts.
4.62 While the specified penalty for the contravention of the civil penalty provision is 5,000 penalty units, the maximum penalty applicable under section 167B of the Credit Act is:
⢠for individuals, the greater of:
- 5,000 penalty units; and
- if the court can determine—the benefit derived or detriment avoided because of the contravention, multiplied by three;
⢠for bodies corporate, the greater of the following:
- 5,000 penalty units multiplied by ten (50,000 penalty units);
- if the court can determine—the benefit derived or detriment avoided by the body corporate because of the contravention, multiplied by three; and
- 10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.
4.63 This penalty is intended to deter contraventions of the repayment requirements and reflects community expectations about an appropriate sanction for misconduct in the corporate and financial sector (including the credit sector).
4.64 Additionally, the civil penalty framework in the Credit Act allows for a degree of proportionality between the seriousness of the contravention and the quantum of the penalty. That is, if a court declares that a person has contravened a civil penalty provision, the court may exercise its discretion to declare a financial penalty that is appropriate in the circumstances, taking into account the following matters:
⢠the nature and extent of the contravention;
⢠the nature and extent of any loss or damage suffered because of the contravention;
⢠the circumstances in which the contravention took place; and
⢠whether the person has previously been found by a court to have engaged in similar conduct (see section 167 of the Credit Act).
4.65 Therefore, a court will generally only apply the maximum penalty in the most egregious instances of non-compliance.
Introducing a loss of charges mechanism
4.66 A licensee who enters into a consumer lease that contravenes the protected earnings amount will lose their entitlement to any fees or charges above the base price of the goods hired under the lease if:
⢠the court has made a declaration that the licensee has contravened the civil penalty provision in subsection 156B(1) in relation to the lease; or
⢠the licensee is found guilty of an offence under subsection 156B(2) in relation to the lease.
[Schedule 3, item 7, subsection 156B(3)]
4.67 Consumers who have paid any fees or charges above the base price of the goods hired under the lease may recover those fees and charges from the lessor, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 3, item 7, subsection 156B(3)]
4.68 This creates a greater financial incentive for lessors to comply with the payment requirements prescribed by the regulations, by allowing a consumer to recover all the fees or charges above the base price that would otherwise be payable under the lease.
4.69 The Review specifically identified that a loss of charges mechanism is appropriate with respect to contraventions of the protected earnings amount for consumer leases as:
⢠these requirements are clear and can be easily complied with;
⢠it is reasonable to expect that a diligent licensee would be readily able to ensure compliance; and
⢠a contravention of these requirements would have significant adverse consequences for consumers.
4.70 These changes give effect to the Government’s response to recommendations 15 and 23 of the Review.
Obtaining and considering account statements
4.71 Schedule 3 to this Bill introduces a new obligation on lessors offering consumer leases for household goods to obtain and consider a consumer’s account statements that cover the immediately preceding period of 90 days. This is for the purpose of verifying the consumer’s financial situation, which informs a licensee’s assessment about whether the consumer lease will be unsuitable for the consumer. [Schedule 3, item 6, subsection 153(1A)]
4.72 This requirement does not limit or replace the obligation on the lessor to take reasonable steps to verify the consumer’s financial situation, which may involve considering other information. For example, for consumers who receive social security payments it is expected that the regulations will be amended to require a lessor to consider statements showing their Centrepay deductions. [Schedule 3, item 6, subsection 153(1B)]
4.73 The same requirement is also introduced for licensees that provide credit assistance in relation to consumer leases. [Schedule 3, item 3, subsections 140(1A) and (1B)]
4.74 These provisions address concerns that lessors are not making adequate inquiries about a consumer’s expenses and capacity to pay before entering into the lease with the consumer. It also mirrors existing provisions relating to small amount credit contracts.
Protection of account statements and other documents
4.75 Schedule 6 to this Bill introduces new restrictions on the use or disclosure of constrained documents. A constrained document includes an account statement obtained by a lessor in connection with a consumer lease for household goods or a proposed consumer lease for household goods. [Schedule 6, item 3, subsection 160CA(1)]
4.76 The new restrictions apply to these lessors and any other persons who have obtained these account statements from the lessor, such as a representative of the lessor. However, these restrictions do not apply to the account holder to which the account statements relate. [Schedule 6, item 3, subsections 160CA(1) and (2)]
4.77 A person (such as the lessor or a representative of the lessor) must not use or disclose an account statement or information contained in an account statement unless the use or disclosure is:
⢠necessary for the person to comply with the person’s obligations under the Credit Act;
⢠required or authorised by or under a law of the Commonwealth, or of a State or Territory, or a court or tribunal order;
⢠for the purposes of considering a hardship notice;
⢠for the purposes of assisting ASIC to perform its functions or exercise its powers; or
⢠for the purposes of allowing AFCA to perform its functions or exercise its powers.
[Schedule 6, item 3, subsections 160CB(1) and (5)]
4.78 This ensures that the personal information of a consumer (or a prospective consumer) is not misused by a lessor or their representatives. For example, it prevents a consumer’s account statements from being used to market further products and services to the consumer, or being sold to third parties.
4.79 These exemptions ensure that, for example, a lessor can use account statements to determine whether a consumer lease is not unsuitable for a consumer. A lessor may also disclose a consumer’s account statements to a third party if it is necessary to comply with the person’s obligations under the Credit Act, such as the responsible lending obligations.
4.80 The exemptions operate as defences to the prohibition. For the purposes of the offence and the strict liability offence, a defendant bears an evidential burden in relation to the defence. This is appropriate as the circumstances which give rise to the defences (that is, the purpose of the defendant’s use or disclosure of the account statements) are peculiarly within the knowledge of the defendant. This is consistent with the principles in the Guide to Framing Commonwealth Offences .
Consequences of failing to comply with the restrictions on constrained documents
4.81 Failure to comply with the new restrictions on using or disclosing constrained documents, including account statements, attracts a civil penalty of up to 5,000 penalty units. This is intended to deter contraventions of the restrictions and is consistent with the existing civil penalty provisions in the Credit Act. [Schedule 6, item 3, subsection 160CB(1)]
4.82 A contravention of these requirements also constitutes the commission of:
⢠an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and
⢠a strict liability offence, with a financial penalty of up to 10 penalty units.
[Schedule 6, item 3, subsections 160CB(2), (3) and (4)]
4.83 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer, in terms of privacy and implications for future transactions. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions occurring that could have a significant impact on vulnerable consumers. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences .
4.84 The new provisions contain a regulation-making power to extend these protections for account statements to other constrained documents. This ensures the Government can promptly respond to concerns about the use of information (other than account statements) obtained by lessors in connection with consumer leases for household goods. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 6, item 3, subsection 160CA(1)]
4.85 These changes give effect to the Government’s response to recommendation 19 of the Review.
Documenting assessments that a contract is not unsuitable
4.86 As part of the existing responsible lending obligations under the Credit Act, lessors are required to assess whether a consumer lease will be unsuitable for the consumer before:
⢠entering into the consumer lease with the consumer; or
⢠making an unconditional representation to the consumer that the lessor considers that the consumer is eligible to enter into a consumer lease.
4.87 Schedule 3 to this Bill introduces a new requirement for lessors of consumer leases for household goods to document in writing and in accordance with any requirements determined by ASIC:
⢠any assessment that a consumer lease is not unsuitable for a consumer; and
⢠the inquiries and verifications made in relation to that assessment.
[Schedule 3, item 7, subsection 156C(1)]
4.88 This requirement does not impose a record-keeping obligation in circumstances where the lessor assesses that a consumer lease for household goods is unsuitable for a consumer.
4.89 The purpose of this new requirement is to enhance the transparency and accountability of decisions made by lessors that a proposed contract is not unsuitable. It should therefore result in improvements to assessment practices.
4.90 The power for ASIC to determine the requirements by legislative instrument ensures that the written documentation of the assessments contains an appropriate level of detail and information. It also allows ASIC to respond promptly to any deficiencies with the way in which lessors are documenting assessments. [Schedule 3, item 7, subsection 156C(2)]
4.91 Before ASIC can make such a legislative instrument, it must consult with the Australian Information Commissioner in relation to matters that relate to the privacy functions (within the meaning of the Australian Information Commissioner Act 2010), and have regard to any submissions made by the Commissioner. This provides the appropriate checks and balances, as any legislative instrument made by ASIC for these purposes may affect the privacy of individuals. For example, the legislative instrument may set out the kinds of personal information that need (or do not need) to be documented. [Schedule 3, item 7, subsection 156C(3)]
4.92 A contravention of this requirement attracts a civil penalty of up to 5,000 penalty units. This is consistent with the existing civil penalties in the Credit Act and is intended to deter contraventions of the new record-keeping requirements. [Schedule 3, item 7, subsection 156C(1)]
4.93 This requirement also extends to licensees that provide credit assistance in relation to consumer leases for household goods. That is, these credit assistance providers are required to document in writing, the preliminary assessment that a consumer lease for household goods is not unsuitable. [Schedule 3, item 4, section 147B]
4.94 These changes implement the Government’s response to recommendation 20 of the Review.
Prohibition on door-to-door selling of consumer leases
4.95 Schedule 3 to this Bill introduces a prohibition on lessors visiting a place of residence for the purpose of inducing a person who resides there to apply for or obtain a consumer lease for household goods, unless there is a prior arrangement with a person who resides at the property. [Schedule 3, item 34, subsection 179VA(1) of the Code]
4.96 The arrangement between the lessor and the person who resides there would need to be made in advance and the following situations are not intended to be characterised as a prior arrangement:
⢠where a consumer provides their contact details for a purpose other than discussing a prospective lease; or
⢠where a consumer returns a missed call to a caller who is unknown to the consumer.
4.97 This new prohibition aims to address the unfair sales practices that are often used by lessors in the course of door-to-door selling at residential properties. In particular it recognises the potential for the sales environment to make it difficult for the consumer to refuse to enter into the lease and to ask the lessor to leave.
4.98 A contravention of the new prohibition constitutes the commission of:
⢠an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and
⢠a strict liability offence, with a financial penalty of up to 10 penalty units.
[Schedule 3, item 34, section 179VA of the Code]
4.99 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences .
4.100 A contravention of this prohibition also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 3, items 9 and 34, subsections 111(2A) and 179VA(1) of the Code]
4.101 The maximum penalty that may be imposed under Part 6 of the Code for a contravention of this key requirement is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price. However, if the loss suffered by the lessee is greater than that amount, a greater penalty may be imposed. The tolerances and assumptions in sections 180 and 182 of the Code may apply to the calculation of this amount.
4.102 This provides an additional avenue for lessees to seek redress against lessors.
4.103 These changes give effect to the Government’s response to recommendation 18 of the Review.
Warning statements
4.104 Licensees who offer consumer leases for household goods will be required to display information and give information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 3, item 7, subsection 156A(1)]
4.105 ASIC may, by legislative instrument, determine the following matters:
⢠the information that the licensees must display and give to consumers; and
⢠how and when the licensees must display and give the information to consumers.
[Schedule 3, item 7, subsection 156A(2)
4.106 The power for ASIC to determine the requirements of the warning statements in a legislative instrument ensures this the information provided is effective in highlighting risks with these contracts and assisting consumers to make better use of alternatives where available. In particular, it will give ASIC flexibility to mandate requirements which take into account different media for delivery of warnings, and to better account for the behavioural biases of consumers. The power would enable ASIC to prescribe:
⢠different information to be provided to different classes of consumers (for example, consumers who are repeat users of small amount credit contracts could receive different messages from other consumers);
⢠different information to be provided at different points of time (for example, a consumer could receive a targeted message when they are applying for a small amount credit contract); and
⢠different modes of delivery (for example, consumers could be sent an SMS message as well as being able to view information on the licensee’s website).
4.107 The purpose of these new obligations is to ensure that consumers receive relevant and effective information about the financial implications of entering into or using a consumer lease for household goods. This will assist consumers to make informed decisions about whether to enter into the lease. It can also assist them to understand what alternatives are available and how they can be of assistance to particular consumers.
4.108 A contravention of these new requirements attracts a civil penalty of up to 5,000 penalty units, and constitutes the commission of an offence with a financial penalty of up to 50 penalty units. This is consistent with the consequences that apply to this contravention in respect of small amount credit contracts. [Schedule 3, item 7, subsections 156A(1) and (3)]
4.109 This requirement also extends to licensees that provide credit assistance in relation to consumer leases for household goods. That is, these credit assistance providers must display information and provide information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 3, item 4, section 147A]
4.110 These changes implement the Government’s response to recommendation 21 of the Review.
Base price disclosure
4.111 In a consumer lease for household goods lessors must disclose:
⢠the base price of the goods hired under the lease; and
⢠the difference between the base price of the goods hired under the lease and the sum of:
- the total amount payable in connection with the lease (including any applicable taxes and any add-on fees) but not including an amount set out in subsection 175AA(4); and
- the establishment fee (if any), as described in paragraph 175AA(4)(a).
[Schedule 3, item 30, subsection 174(1A) of the Code]
4.112 The regulations may prescribe additional information that lessors are required to disclose in a consumer lease for household goods and the form the disclosure must take. This is appropriate as the matters that should be required to be disclosed under a consumer lease may need to be supplemented to take into account evolving industry practices, including practices that may emerge as a result of the reforms introduced by this Bill. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 3, item 30, subsection 174(1A) of the Code]
4.113 The purpose of the new disclosure requirements is to ensure a lessee is aware of the financial implications of the lease. In particular, the new requirements are intended to clearly show lessees the difference between the cost of the good (the base price of the good) and how much they are paying to lease the good. This will assist lessees to make informed decisions about the lease.
4.114 These new disclosure requirements supplement the existing matters that are required to be disclosed by lessors in a consumer lease, which are set out in section 174 of the Code. Among other things, lessors are currently required to disclose the amount of each rental payment, the total number of rental payments and the total amount of rent payable under the lease.
4.115 A contravention of section 174 (including these new disclosure requirements) currently attracts a civil penalty of up to 5,000 penalty units. It also constitutes the commission of a strict liability offence with a financial penalty of up to 100 penalty units.
4.116 A contravention of the new disclosure requirements also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 3, items 9 and 30, subsections 111(2A) and 174(1A) of the Code]
4.117 Generally, the maximum penalty that may be imposed under Part 6 of the Code for a contravention of this key requirement is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price.
4.118 This change gives effect to the Government’s response to recommendation 22 of the Review.
Consequential amendments
4.119 The definitions in subsection 5(1) of the Credit Act and subsection 204(1) of the Code are updated to signpost the new definitions introduced by Schedule 3 to this Bill, including the definition of add-on fee , base price , consumer lease for household goods , household goods , permitted cap , permitted delivery fee , and permitted installation fees . [Schedule 3, items 1, 35 and 37, subsection 5(1) of the Credit Act and subsection 204(1) of the Code]
4.120 Subsection 5(1) of the Credit Act is also updated to refer to the definition of hardship notice currently in subsection 204(1) of the Code and signpost the new definition of constrained document . These definitions are relevant to the new protections regarding account statements. The guide to Part 3-6A of the Credit Act is also updated to reflect these new protections. [Schedule 6, items 1 and 2, subsection 5(1) and section 160A]
4.121 The guide to Part 3-4 of the Credit Act is updated to reflect the new obligations on lessors offering consumer leases for household goods, such as the new protected earnings requirement. [Schedule 3, item 5, section 148]
4.122 The guide to Part 3-3 of the Credit Act is updated to reflect the new obligations on licensees that provide credit assistance in relation to consumer leases for household goods, such as the requirement to record the preliminary assessment that a consumer lease is not unsuitable [Schedule 3, item 2, section 134]
4.123 The existing definition of market value in the Code is also updated to ensure it applies to consumer leases as well as credit contracts. This may be relevant for the purposes of determining the base price of the goods under the lease. [Schedule 3, item 36, subsection 204(1) of the Code]
4.124 Given Schedule 3 to this Bill introduces provisions relating to consumer leases into the key requirements regime for the first time, a number of consequential amendments to Part 6 of the Code are made to ensure the regime operates as intended. Many of these changes involve inserting references to ‘consumer leases’, ‘lessors’ and ‘lessees’ in Part 6 of the Code where appropriate. For example, the consequential amendments ensure that a party to a consumer lease can apply to the court for an order relating to key requirements. [Schedule 3, items 8 to 29, Part 6 of the Code]
Application provisions
4.125 The amendments to enhance the consumer protection framework for consumers of consumer leases commence on the day after the end of the period of six months beginning on the day this Bill receives Royal Assent. This is referred to as the commencement day. [Clause 2]
4.126 The amendments about warning statements (see sections 147A and 156A of the Credit Act) apply in relation to representations made on or after the commencement day. [Schedule 7, item 4 of Schedule 19 to the Credit Transitional Act]
4.127 The amendments requiring preliminary assessments and assessments to be documented in writing (see sections 147B and 156C of the Credit Act) apply to preliminary assessment and assessments made on or after the commencement day. [Schedule 7, item 5 of Schedule 19 to the Credit Transitional Act]
4.128 The amendments requiring licensees to obtain and consider a consumer’s account statements for the purpose of verifying the consumer’s financial situation (see sections 140 and 153 of the Credit Act) apply to verifications made on or after the commencement day. [Schedule 7, item 6 of Schedule 19 to the Credit Transitional Act]
4.129 The amendments regarding the new protected earnings requirement, in section 156B of the Credit Act apply to consumer leases that are entered into, or offers made to enter into consumer leases on or after the commencement day. [Schedule 7, item 7 of Schedule 19 to the Credit Transitional Act]
4.130 The new restrictions on the use of account statements in section 160CB of the Credit Act, apply to uses or disclosures of account statements, or information contained in account statements on or after the commencement day. [Schedule 7, item 9 of Schedule 19 to the Credit Transitional Act]
4.131 The new restrictions on door-to-door selling of consumer leases in section 179VA of the Code apply to a visit made on or after the commencement day. [Schedule 7, item 13 of Schedule 19 to the Credit Transitional Act]
4.132 The remaining amendments about consumer leases apply to consumer leases entered into on or after the commencement day. [Schedule 7, item 12 of Schedule 19 to the Credit Transitional Act]
4.133 The commencement and application provisions are intended to provide affected industry participants sufficient time to prepare for the changes introduced by Schedules 3 and 6 to this Bill.
Chapter 5
Anti-avoidance measures
Outline of chapter
5.1 Schedules 4 and 5 to this Bill introduce anti-avoidance measures to:
⢠prohibit schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts and consumer leases; and
⢠regulate consumer leases for an indefinite period under the Credit Act.
5.2 These measures are intended to broadly deal with avoidance practices and limit the need to develop individual responses to address a specific practice after it has commenced.
5.3 All legislative references in this Chapter are to the Credit Act, unless otherwise specified. General references to the Credit Act include the Code (which is Schedule 1 to the Credit Act). However, specific legislative references to the Code are identified as such.
Context of amendments
5.4 The Review noted that under both the Credit Act and its predecessor, the Uniform Consumer Credit Code, the introduction of conduct obligations has resulted in some lenders and lessors seeking to avoid those obligations through a range of avoidance practices.
5.5 The Review identified multiple benefits from a robust anti-avoidance provision:
⢠drive competition by ensuring that all providers are meeting the same obligations in relation to the costs they charge and their assessments of suitability of the proposed contract;
⢠avoid a drift to non-compliance where providers who are complying with the Credit Act are losing business to those who are not complying and are, therefore, under financial pressure to lower their own standards; and
⢠minimise consumer detriment resulting from businesses which are avoiding compliance with cost caps and additional responsible lending and conduct requirements.
5.6 The new anti-avoidance measures in Schedules 4 and 5 to this Bill seek to meet these objectives by encouraging compliance with the Credit Act, including the new obligations introduced by this Bill. These measures are designed to minimise financial harm to consumers and disincentive businesses from undertaking avoidance practices.
5.7 These changes give effect to the Government’s response to recommendation 24 of the Review.
Summary of new law
5.8 Schedule 4 to this Bill introduces prohibitions on avoidance schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts and consumer leases.
5.9 Schedule 5 to this Bill extends the operation of Credit Act to consumer leases entered into for an indefinite period. The effect of this extension is that all of the provisions in the Credit Act that currently apply to consumer leases will also apply to consumer leases for an indefinite period, so far as they are capable of applying.
Comparison of key features of new law and current law
|
New law |
Current law |
|
A person must not enter into, begin to carry out a scheme or carry out a scheme for an avoidance purpose. |
No equivalent. |
|
Consumer leases for an indefinite period are regulated under the Credit Act. |
No equivalent - consumer leases for an indefinite period are excluded from regulation under the Credit Act. |
Detailed explanation of new law
Prohibition of avoidance schemes
5.10 Schedule 4 to this Bill introduces new rules that prohibit schemes that are designed to prevent a contract from being a small amount credit contract or a consumer lease.
5.11 The general prohibition provides that a person must not enter into a scheme, begin to carry out a scheme, or carry out a scheme if, having regard to specified matters (referred to in this document as avoidance matters), it would be reasonable to conclude that the purpose, or one of the purposes, of the person engaging in that conduct was an avoidance purpose. [Schedule 4, item 3, subsection 323A(1)]
5.12 Each of the following is an avoidance purpose :
⢠to prevent a contract from being either a small amount credit contract or a consumer lease (and so would, for example, prohibit a scheme in which a contract was structured as a small amount credit contract in order to avoid provisions specifically applying to consumer leases, or vice versa ) ;
⢠to cause a contract to cease to be a small amount credit contract or a consumer lease;
⢠to avoid the application of a provision of the Credit Act to a small amount credit contract or a consumer lease;
⢠to avoid the application of a provision of the Credit Act to a contract that has ceased to be a small amount credit contract or a consumer lease.
[Schedule 4, item 3, subsection 323A(2)]
5.13 The definition of avoidance purpose covers two kinds of avoidance:
⢠where a scheme is structured to avoid being regulated by the Credit Act altogether; and
⢠where a licensee uses a scheme to avoid the application of particular provisions of the Credit Act.
5.14 In addition to the general prohibition on persons, Schedule 4 to this Bill introduces prohibitions in similar terms that apply to:
⢠any constitutional corporations (either alone or with others) that enter into a scheme, begin to carry out a scheme or carry out a scheme;
⢠any person (either alone or with others) who enters into a scheme, begins to carry out a scheme or carries out a scheme in the course of constitutional trade or commerce; and
⢠any person (either alone or with others) using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution) who enters into a scheme, begins to carry out a scheme, or carries out a scheme.
[Schedule 4, item 3, subsections 323A(3), (4) and (5)]
5.15 These prohibitions are independent from and do not limit each other. However, under section 175 of the Credit Act, while the same conduct may engage more than one of these prohibitions, a person can only be ordered to pay a pecuniary penalty under one of the prohibitions. [Schedule 4, item 3, subsection 323A(6)]
5.16 A scheme is defined broadly to capture:
⢠any agreement, arrangement, understanding, promise or undertaking whether express or implied; or
⢠any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral of otherwise.
[Schedule 4, item 1, subsection 5(1)]
5.17 This would include, for example, an arrangement, plan or scheme that includes a number of elements, any of which could itself be considered a scheme under this definition.
5.18 This definition mirrors the definition of scheme in other anti-avoidance provisions in the A New Tax System (Goods and Services Tax) Act 1999 and the Income Tax Assessment Act 1997 .
5.19 The reference to whether it would be ‘reasonable’ to draw the conclusion that a person has a relevant avoidance purpose ensures that the prohibition applies objectively. Having to prove the subjective intention of the person in question would otherwise not be feasible in many cases or would allow a person to artificially document the purpose of a scheme as being other than for avoidance. Using reasonableness ensures the integrity of the Credit Act and ensures that the effectiveness of the anti-avoidance provisions are not undermined.
Avoidance matters
5.20 The avoidance matters that must be considered in determining whether there is an avoidance purpose are:
⢠whether the scheme or the contract was, is or would be:
- a means of providing a consumer with credit (or financial accommodation equivalent to providing the consumer with credit) in a manner more complex, or more costly to the consumer, than a small amount credit contract would have been; or
- a means of enabling a consumer to have the use of goods in a manner more complex, or more costly to the consumer, than a consumer lease would have been;
⢠whether representations were made (by the person or anyone else) about the scheme or the contract, or about schemes or contracts of that kind, that:
- were similar to representations made (by the person or anyone else) about small amount credit contracts or consumer leases; or
- were made to persons in a group similar to a group of persons to whom representations about small amount credit contracts or consumer leases were made; and
⢠any matters prescribed by the regulations.
[Schedule 4, item 3, subsection 323B(1)]
5.21 These matters are generally considered to be the key indicators of avoidance practices, and have been identified in, or associated with, past avoidance practices (in relation to either the Credit Act or its State and Territory predecessors).
5.22 The complexity of the contract or scheme, and whether it is more complex than a small amount credit contract or a consumer lease, is an indicator of avoidance as in many cases the purpose of that complexity is to avoid the contract from being regulated as a small amount credit contract or a consumer lease. This will generally be the case if the complexity is not needed to meet the objectives or requirements of the consumer. Examples of complexity in this context may include:
⢠having multiple parties involved in an arrangement (for example, by splitting functions between different parties when normally they are undertaken by one party); or
⢠breaking up a contract into a number of different transactions, so financial accommodation is provided to a consumer, even if it is not legally structured as a provision of credit.
5.23 It will also generally be the case that this complexity does not benefit the consumer and may instead operate in a way that is inconsistent with their objectives or requirements.
5.24 A contract or scheme that is more costly to the consumer than a small amount credit contract or a consumer lease is also a key indicator of avoidance because a common driver of avoidance behaviour is to charge the consumer higher amounts to maximise profits. Examples of this behaviour may involve:
⢠the inclusion of unnecessary goods or services in the transaction; or
⢠charging inflated or above market value prices for the goods or services; or
⢠the artificial characterisation of fees or charges
5.25 Finally, the representations about the scheme or contract are relevant as many contracts that have an avoidance purpose are represented as though they are small amount credit contracts or consumer leases. For example:
⢠an advertisement about the contract may be similar to existing advertisements for regulated small amount credit contracts; or
⢠an advertisement may make representations targeted at consumers who also use small amount credit contracts (such as consumers who are unable to obtain or be eligible for credit from a bank or mainstream lender).
5.26 The regulation-making power recognises that industry participants may develop new avoidance practices which may require the Government to specify additional matters that must be considered in determining whether the relevant avoidance purpose exists. This flexibility is therefore necessary to ensure the prohibitions remain fit for purpose as entities prepared to engage in avoidance purposes will respond to legislative changes by identifying gaps in its scope and changing their practices accordingly.
5.27 The legislation also makes clear that matters other than the avoidance matters may be considered in determining whether the relevant avoidance purpose exists. [Schedule 4, item 3, subsection 323B(2)]
Consequences of failing to comply with the prohibition
5.28 Failure to comply with any of the new prohibitions attracts a civil penalty of up to 5,000 penalty units [Schedule 4, item 3, subsections 323A(1), (3), (4) and (5)]
5.29 A contravention of any of the prohibitions also constitutes the commission of an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence. [Schedule 4, item 3, subsection 323A(7)]
5.30 These penalties reflect the serious financial impact that avoidance schemes have on consumers and regulated industry participants, and the need for a strong deterrent. It also supports ASIC’s ability to take effective enforcement action in respect of these schemes.
Presumption of avoidance for certain schemes
5.31 It is presumed, other than for criminal proceedings, that it is reasonable to conclude that a person entered into or carried out a scheme for an avoidance purpose if the scheme is a scheme prescribed by the regulations or determined by ASIC in a legislative instrument. [Schedule 4, item 3, subsection 323C(1)]
5.32 However, the presumption does not apply if the person proves that it would not be reasonable to conclude that there was a relevant avoidance purpose, having regard to the avoidance matters in subsection 323B(1). [Schedule 4, item 3, subsection 323C(2)]
5.33 Placing the legal burden of proof on the person is appropriate as it will be considerably easier for the person to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose, compared with requiring ASIC to disprove that matter. For example, if the scheme in question does have a legitimate (non-avoidance) purpose, that matter would be peculiarly within the knowledge of the person.
5.34 Further, the presumption applies only in civil cases (not in criminal proceedings), and any regulations or legislative instrument made to prescribe or determine schemes that are presumed to have the relevant avoidance purpose will be subject to parliamentary scrutiny and disallowance.
5.35 The conferral of a regulation-making power and a power for ASIC to make a legislative instrument in this context also reflects historical experience that avoidance schemes tend to proliferate quickly if they are seen by other industry participants to be effective. This flexibility therefore ensures that either the Government or ASIC can respond quickly to evolving practices as needed.
Exemption by ASIC
5.36 ASIC also has a power to, by legislative instrument, exempt a scheme or class of schemes from all or specified parts of the prohibitions set out in section 323A. ASIC may impose any conditions on such an exemption. [Schedule 4, item 3, section 323D]
5.37 This ensures that ASIC is able to provide appropriately deal with a scheme and provide certainty, where the scheme:
⢠does not cause harm to consumers or regulated industry participants; and
⢠has a legitimate (non-avoidance) purpose.
Consumer leases entered into for an indefinite period
5.38 Consumer leases are regulated under the Code. However, currently the Code does not apply to consumer leases that are entered into for an indefinite period.
5.39 Schedule 5 to this Bill removes the provisions in the Code that exclude consumer leases entered into for an indefinite period from being regulated under the Credit Act. [Schedule 5, items 1 and 2, subsection 171(1) of the Code]
5.40 This change is made to reflect the risk that the introduction of the new obligations in Schedule 3 to this Bill, such as the introduction of a cap on the total amount that can be charged in connection with a consumer lease, will incentivise lessors to offer unregulated products where there is no cap.
5.41 However, the extension only applies to a consumer lease entered into for an indefinite period that
⢠meets the definition of a consumer lease under section 169 of the Code—that is, a contract for the hire of goods by a natural person or strata corporation under which that person or corporation does not have a right or obligation to purchase the goods;
⢠is otherwise a consumer lease to which Part 11 of the Code applies—that is, each of the following is satisfied when the lease is entered into:
- the goods are hired wholly or predominantly for personal, domestic or household purposes;
- a charge is or may be made for hiring the goods and the charge together with any other amount payable under the consumer lease exceeds the cash price of the goods; and
- the lessor hires the goods in the course of a business of hiring goods carried on in this jurisdiction or as part of or incidentally to any other business of the lessor carried on in this jurisdiction; and
⢠is within the constitutional limitations.
5.42 The extension of the operation of the Credit Act to consumer leases entered into for an indefinite period is confined by constitutional limitations.
5.43 As a result, the extension only applies where:
⢠the lessor under the lease is a constitutional corporation at the time the lease is entered into;
⢠the lease was entered into in the course of constitutional trade and commerce; or
⢠the lease was entered into using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution).
[Schedule 5, item 3, subsection 171(1A) of the Code]
5.44 Lessors that are not constitutional corporations are prohibited from:
⢠using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution) to enter into a consumer lease for an indefinite period; or
⢠entering into a consumer lease for an indefinite period in the course of constitutional trade and commerce.
[Schedule 3, item 34, subsections 179VB and 179VC of the Code]
5.45 This ensures the extension of the operation of the Credit Act to consumer leases entered into for an indefinite period is as broad as possible, while staying within the constitutional limitations.
5.46 A contravention of either of these prohibitions attracts a civil penalty of up to 5,000 penalty units and constitutes the commission of an offence with a financial penalty of up to 100 penalty units. [Schedule 3, item 34, subsections 179VB and 179VC of the Code]
Effect of regulating consumer leases entered into for an indefinite period
5.47 The effect of extending the operation of the Credit Act to consumer leases entered into for an indefinite period is that all the provisions of the Credit Act that currently apply to consumer leases will also apply to consumer leases entered into for an indefinite period, so far as they are capable of applying.
5.48 For example, as a lessor under a consumer lease entered into for an indefinite period will now be considered to be engaging in a credit activity regulated under the Credit Act, the lessor must obtain an Australian credit licence authorising it to engage in that activity.
Other amendments
5.49 This Bill amends section 175H of the Code so that lessors under both fixed-term and indefinite-term consumer leases must give the lessee an end of lease statement. [Schedule 5, item 4, subsection 175H(1) of the Code]
5.50 A lessor under a consumer lease entered into for an indefinite period must provide the statement before the end of seven business days after:
⢠the lessor receives a request for a statement from the lessee; or
⢠the day that the lease ends.
[Schedule 5, item 5, subsection 175H(1A) of the Code]
5.51 This Bill also amends section 179 of the Code so that it applies to termination of both fixed-term and indefinite-term consumer leases. This means that:
⢠a lessee under a consumer lease entered into for an indefinite period can terminate it at any time and in the same way as under a fixed-term consumer lease;
⢠the amount payable by a lessee on the termination of a consumer lease entered into for an indefinite period is calculated on the same basis as for a fixed-term consumer lease; and
⢠principles affecting that calculation can also be prescribed by the Credit Regulations .
[Schedule 5, items 6 to 10, section 179 of the Code]
Consequential amendments
5.52 The definitions in subsections 5(1) of the Credit Act and subsection 204(1) of the Code are updated to include definitions relating to the new avoidance measures, including the definition of constitutional corporation and constitutional trade and commerce . [Schedules 4 and 5, items 1 and 11, subsection 5(1) of the Credit Act and subsection 204(1) of the Code]
5.53 The guide to Part 7-1 of the Credit Act is updated to reflect the new prohibitions on schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts and consumer leases. [Schedule 4, item 2, section 323]
Application provisions
5.54 The amendments in Schedule 4 to this Bill (prohibiting avoidance schemes) commence on the day after the Bill receives Royal Assent. These amendments apply to conduct that relates to schemes connected with contracts entered into on or after that day, and that occurs on or after that day. [Clause 2 and Schedule 7, item 10 of Schedule 19 to the Credit Transitional Act]
5.55 The amendments in Schedule 5 (relating to consumer leases entered into for an indefinite period) commence on the day after the end of the period wf six months beginning on the day this Bill receives Royal Assent (referred to as the commencement day). These amendments apply to consumer leases entered into on or after the commencement day. [Clause 2 and Schedule 7, item 12 of Schedule 19 to the Credit Transitional Act]
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Changes to the responsible lending obligations
Overview
6.2 Schedule 1 to the Bill amends the Credit Act so that responsible lending obligations apply only to small amount credit contracts and consumer leases (and small amount credit contract-equivalent loans by ADIs) beginning on 1 March 2021 (or the day after Royal Assent, if it occurs later). This forms part of the Government’s Consumer Credit Reforms aimed at improving the flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can continue to spend and businesses can invest and create jobs. There is otherwise no change to the existing civil or criminal penalty provisions for these provisions.
6.3 The best interest obligations are extended from mortgage brokers to other credit assistance providers when they provide credit assistance with respect to a credit contract or a consumer lease, requiring licensees to act in the best interest of consumers. These laws improve consumer outcomes by requiring credit assistance providers to act in the best interests of their clients.
6.4 The key features of this new law are:
⢠credit assistance providers must act in the best interests of consumers when providing credit assistance in relation to credit contracts and consumer leases; and
⢠where there is a conflict of interest, credit assistance providers must give priority to consumers’ interests.
6.5 Additionally, licensees are prohibited from providing a reverse mortgage to certain borrowers.
6.6 Additionally, a new framework is established to empower the Minister to make non-ADI credit standards, by way of legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes which relate to certain non-ADI credit conduct.
6.7 These credit licensees will be required to ensure that they establish and maintain systems, polices and processes that comply with the standards, and are also required to not repeatedly fail to comply with the requirements of those systems, policies and processes.
6.8 The standards will require licensees to implement adequate systems, policies and processes relating to non-ADI credit conduct rather than impose individual conduct-level obligations. Therefore, the requirements will be system-level obligations rather than focusing on individual loans engaged in by licensees.
Human rights implications
6.9 Schedule 1 to the Bill engages the following rights:
⢠the right to a fair trial and public hearing (Article 14 of the International Covenant on Civil and Political Rights (ICCPR)), and
⢠the right to equality and non-discrimination (Articles 2 and 26 of the ICCPR).
Right to fair trial and public hearing
6.10 Schedule 1 (in items 62 to 67, 74 and 75) engages, or may engage, the right to a fair trial and public hearing contained in Article 14 of the International Covenant on Civil and Political Rights due to the imposition of civil penalties in those provisions.
Assessment of civil penalties
6.11 Article 14 of the ICCPR provides for a right to a fair trial and fair hearing. A range of protections are afforced to persons accused and convicted of a criminal offence under Article 14. Civil penalties may engage the criminal process rights under Article 14 where the penalty is regarded as ‘criminal’ for the purposes of international human rights law.
6.12 Schedule 1 (in items 74 and 75) amends sections 158L and 158LD of the Credit Act. These amendments provide for existing civil penalty provisions relating to the best interests obligations to be contravened in any of the following additional circumstances:
⢠a licensee provides credit assistance to a consumer in relation to either a credit contract, or a consumer lease, and fails to act in the best interests of the consumer (see section 158LA);
⢠a licensee provides credit assistance to a consumer in relation to either a credit contract or a consumer lease, and a conflict of interest arises, and the licensee fails to give priority to the consumer’s interests (see section 158LB);
⢠a credit representative provides credit assistance to a consumer in relation to either a credit contract, or a consumer lease, and fails to act in the best interests of the consumer (see section 158LE(1));
⢠a licensee fails to take steps to ensure that the credit representative complies with section 158LE(1), with respect to providing credit assistance to a consumer in relation to either a credit contract or a consumer lease (see section 158LE(2));
⢠a credit representative provides credit assistance to a consumer in relation to either a credit contract or consumer lease, and knows, or ought reasonably to know, that there is a conflict of interest, and fails to give priority to the consumer’s interests (see section 158LF(1));
⢠a licensee fails to take steps to ensure that the credit representative complies with section 158LF(1) (see section 158LF(2)).
6.13 Schedule 1 (in item 66) also introduces section 133DF into the Credit Act, which contains new civil penalty provisions relating to reverse mortgages that will be contravened in either of the following circumstances:
⢠a licensee offers a reverse mortgage to a borrower who is under 56 years of age and the loan to value ratio of the mortgage exceeds 15% and the person did not have a special circumstance;
⢠a licensee offers a reverse mortgage to a borrower who is at least 56 years of age and the loan to value ratio of the mortgage exceeds 16% and 1% for each year the borrower is more than 56 years of age and the person did not have a special circumstance.
6.14 Schedule 1 (in items 62 to 65) amends section 133DB of the Credit Act, concerning equity projections and related information for reverse mortgages. The existing civil penalty provision for a failure to comply with the requirements is extended to a failure to provide a comparison of the consumer’s expected aged care costs with the equity projections.
6.15 Schedule 1 (in item 67) introduces sections 133EB, 133EC, 133ED(1) and 133ED(3) into the Credit Act, which contain new civil penalty provisions relating to the non-ADI credit standards that will be contravened in any of the following circumstances:
⢠a licensee engages in non-ADI credit conduct and the licensee does not establish or maintain systems, policies and processes that comply with a non-ADI credit standard;
⢠a licensee engages in non-ADI credit conduct and does not document the systems, policies and processes required by a non-ADI credit standard in a written plan;
⢠a licensee does not keep a record of a written plan for 7 years after the end of the period that the plan applies to;
⢠a licensee fails to comply, on a repeated basis, with the requirements of the systems, policies and processes it has established, prior to engaging in non-ADI conduct;
⢠a licensee does not give a consumer a copy of a document at a time specified by a non-ADI credit standard;
⢠a licensee requests or demands payment from a consumer for giving the consumer a copy of a required document.
6.16 For each of these provisions, the maximum civil penalty is at least 5,000 penalty units (subject to sections 167A and 167B of the Credit Act).
6.17 The civil penalty provisions contained in Schedule 1 are not ‘criminal’ for the purposes of human rights law. While a criminal penalty is deterrent or punitive, these provisions are regulatory and disciplinary. Further, the provisions do not apply to the general public, but to a sector or class of people (credit licensees and credit representatives) who should reasonably be aware of their obligations under the Credit Act.
6.18 Imposing these civil penalties enables an effective disciplinary response to non-compliance. Finally, the civil penalties come with no sanction of imprisonment for non-payment of the penalty. Based on the above factors, the cumulative effect and the nature and severity of the civil penalties introduced by Schedule 1, those civil penalties are not ‘criminal’ for the purposes of human rights law.
Strict liability offences
6.19 Schedule 1 (in item 67) inserts sections 133ED(4) and (5) into the Credit Act, which contain a strict liability offence. This offence provision will be contravened by a person if they are under a requirement to provide a consumer a copy of a document or to not request payment in providing the document and they engage in conduct which contravenes those requirements. This penalty provision is consistent with the existing penalties in the Credit Act for similar offences (such as section 132(5) of the Credit Act).
6.20 To prove the strict liability offence, the prosecution must only prove that the accused engaged in the prohibited conduct; there is no requirement to prove the accused’s criminal intentions.
6.21 A strict liability offence is appropriate in this circumstance, as it is necessary to enhance the effectiveness of the enforcement regime and strongly deter misconduct that can have serious and detrimental impacts on consumers engaging in non-ADI credit conduct with non-ADI credit providers.
6.22 The offence likely enhances enforcement by deterring non-ADI credit providers from avoiding their obligation to provide documents to consumers as required by a non-ADI credit standard or requesting payments for copies of required documents. Non-ADI credit providers will always have control over when they provide consumers documents or whether they ask for payments for required documents and will be aware of all matters that are relevant to demonstrating whether documents were provided at a specified time and whether payment was requested.
6.23 The strict liability offence also protects consumers from non-ADI credit providers who may take advantage of them. Consumers place trust in credit providers to act in accordance with the law and where that trust is breached, it can have serious detriments for consumers. The offence will allow non-ADI credit providers to be brought to account for conduct which adversely affects consumers.
6.24 The strict liability offence in Schedule 1 meets all the conditions listed in the Guide to Framing Commonwealth Offences . The fine for the offence is 50 penalty units and does not exceed 60 penalty units for persons other than a body corporate, which is consistent with the Guide.
6.25 Additionally, the strict liability offence bolsters the integrity of the regulatory regime enforced by ASIC. Strict liability is particularly beneficial to regulators as they need to deal with offences expeditiously to maintain public confidence in the regulatory regime.
6.26 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.
6.27 To the extent that Schedule 1, item 67, sections 133ED(4) and (5) engage the rights under Article 14 of the International Covenant on Civil and Political Rights, those provisions are compatible with human rights as the strict liability offences are appropriate and consistent with the requirements of the Guide to Framing Commonwealth Offences .
Right to protection from arbitrary or unlawful interference with equality and non-discrimination
Prohibition on providing reverse mortgages with specific loan to value ratio to consumers of certain ages
6.28 Article 2 of the ICCPR provides for rights against non-discrimination.
6.29 Article 26 of the ICCPR provides for equality before the law.
6.30 In addition to the grounds specifically enumerated in Articles 2 and 26 of the ICCPR, discrimination is prohibited on 'other status'. The UN Human Rights Committee has not attempted to define this term, but have decided it on a case-by-case basis. Among others, age is one of the statuses that have been held to qualify as prohibited grounds.
6.31 Schedule 1 to the Bill may limit the right to equality and non-discrimination. This is because the Schedule 1 to the Bill prohibits younger individuals from obtaining a reverse mortgage at a certain loan to value ratio, and exempts the reverse mortgage scheme from the operation of the Age Discrimination Act 2004 (Age Discrimination Act).
6.32 Schedule 1 to the Bill introduces section 133DF into the Credit Act which:
⢠prohibits a licensee from offering a reverse mortgage to a borrower who is under 56 years of age where the loan to value ratio of the mortgage exceeds 15% and the person did not have a special circumstance. The civil penalty is 5,000 penalty units; and
⢠prohibits a licensee from offering a reverse mortgage to a borrower who is at least 56 years of age where the loan to value ratio of the mortgage exceeds 16% and 1% for each year the borrower is more than 56 years of age and the person did not have a special circumstance. The civil penalty is 5,000 penalty units.
6.33 Schedule 1 to the Bill at item 66 inserts new section 133DF in to Schedule 2 to the Age Discrimination Act, which sets out provisions of laws for which an exemption (for things that would otherwise be age discrimination) is provided by section 39(1A) of that Act. The result is that anything done in direct compliance with section 133DF of the Credit Act is not unlawful under the Age Discrimination Act.
6.34 In addition to the grounds specifically set out in Articles 2 and 26 of the International Covenant on Civil and Political Rights , discrimination is prohibited on 'other status' grounds. The UN Human Rights Committee has not attempted to define this term, but have decided it on a case-by-case basis. Among others, age is a status that has been held to qualify as a prohibited ground.
6.35 In order for an interference with the right to equality and non-discrimination to be lawful, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be ‘reasonable and proportionate’ to achieving a legitimate objective in the particular circumstances.
6.36 The objective of the prohibition is to continue to protect consumers of certain ages from being sold reverse mortgages, at certain loan to value ratios, that would likely lead to a consumer degrading the equity in their home, so that they are unable to meet their needs later in life, such as their aged care needs.
6.37 Schedule 1 to the Bill is reasonable, necessary and proportionate to achieving this legitimate objective. Generally speaking, a reverse mortgage is a type of home loan product specifically designed for pensioners and retirees who are typically ‘asset rich’ but ‘cash poor’. A reverse mortgage allows older Australians to borrow against the equity in their home. Repayments are not required until a later time, typically when the borrower has vacated the property or passed away. This product allows older Australians to remain in their home and fund their retirement.
6.38 A reverse mortgage is a complex product that individuals will typically only access once in their lifetime, meaning there is limited experience with the market or product prior to borrowers seeking to access a reverse mortgage. For this reason, there is a risk of borrowers over-drawing on the equity in their home at the start of their retirement, leaving them with no assets in later years when there is a greater chance they will need to access aged care or other high-cost services. The need to access the equity in a home to fund retirement is related to an individual’s superannuation balance which, in turn, is related to their age.
6.39 This risk is amplified by the number of variables within a reverse mortgage, and potential for fluctuations over the life of the loan, including the asset price, interest rates and life expectancy.
6.40 The Government imposed additional protections on reverse mortgages in 2013 to protect older Australians from these risks. One of the protections was a presumption of unsuitability if the loan to value ratio of a reverse mortgage exceeds a formula based on an individual’s age. The formula, expressed in regulation 28LC of the Credit Regulations , and replicated in Schedule 1 of the Bill, is intended to continue to allow borrowers to have greater access to equity in their home as their life expectancy reduces.
6.41 The calculation in the section 133DF maintains the policy expressed in regulation 28LC of the Credit Regulations. It hinges on the age of 55 for two reasons:
⢠Coherence with other Australian Government policies: the preservation age for superannuation ranges between 55 and 60 depending on an individual’s date of birth [43] . As a result, there is a cohort of individuals for whom 55 represents the age of retirement. It is therefore appropriate that the loan to value ratio for reverse mortgages increases for each year the consumer is older than 55.
⢠Design meets demand: The scheme allows individuals to access a greater proportion of the equity in their home as they age. This means that as a consumer ages, and progressively exhausts their superannuation balance if available, they will have greater capacity to access the equity in their home to meet living expenses at a time when they are likely to face higher costs, such as aged care.
6.42 Reverse mortgage products are marketed for older borrowers in retirement due to these considerations. However, the Bill recognises that there may be circumstances where it is appropriate for an individual wants to access the equity in their home prior to retirement, or an amount in excess of the loan to value ratio prescribed for a particular age, to receive a reverse mortgage on those terms.
6.43 To ensure that the prohibition in section 133DF is reasonable, necessary and proportionate, the law provides that a licensee will not be liable to a civil penalty in instances where a licensee reasonably believed that the credit contract, or the increase to the credit limit of the credit contract, was appropriate because of special circumstances of the consumer. The law does not prescribe what special circumstances are, however, the explanatory memorandum to this Bill provides the example of a consumer who has a terminal illness.
6.44 Based on ASIC’s survey of the reverse mortgage industry from 2013-17, reverse mortgage lenders rebutted the presumption of unsuitability, and exceeded the loan to value ratio in the legislation, in a negligible number of cases (estimated at less than 1% of reverse mortgages). Overall, these changes to the legislation are therefore reasonable, necessary and proportionate to the legitimate objective of protecting consumers of reverse mortgages from depleting the equity in their property.
Conclusion
6.45 Schedule 1 to the Bill is compatible with human rights because to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.
6.46 To the extent that Schedule 1 engages with Article 14 of the International Covenant on Civil and Political Rights, it is compatible with human rights as it does not raise any human rights issues.
Small amount credit contract and consumer lease reforms
Overview
6.49 This Bill amends the Credit Act to enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases. They key reforms introduced by Schedules 2 to 6 include:
⢠imposing a cap on the total payments that can be made by a lessee in connection with a consumer lease;
⢠extending the protected earnings requirement for small amount credit contracts to cover all consumers, and introducing a similar protected earnings requirement for consumer leases for household goods;
⢠restricting the use or disclosure of account statements;
⢠enhancing requirements for licensees to disclose information to consumers; and
⢠introducing broad anti-avoidance protections to prohibit schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts and consumer leases.
6.50 Schedules 2 to 6 implement the Government’s response to the Review.
Human rights implications
6.51 Schedules 2 to 6 engage the following human rights:
⢠the right to a fair trial and fair hearing rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights; and
⢠the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the International Covenant on Civil and Political Rights.
Right to a fair trial and fair hearing rights
Assessment of civil penalties
6.52 Civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights regardless of the distinction between criminal and civil penalties in domestic law. This is because the word ‘criminal’ has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a ‘criminal’ penalty for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.
6.53 While the civil penalty provisions in this Bill are intended to deter people from non-compliance with the obligations, none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty.
6.54 Therefore, the civil penalty provisions introduced by Schedules 2 to 6 should not be considered ‘criminal’ for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.
Strict liability offences
6.55 Schedules 2, 3 and 6 introduce the following strict liability offences:
⢠section 133CD(8) of the Credit Act, which is contravened if a small amount credit contract does not have equal repayments and repayment intervals;
⢠section 160CB(3) of the Credit Act, which is contravened if a person uses or discloses an account statement that is obtained in connection with a small amount credit contract or a consumer lease for household goods, other than for a permitted purpose;
⢠section 31C(5) of the Code, which is contravened if a credit provider charges or accepts unexpired monthly fees in respect of small amount credit contracts; and
⢠section 179VA(2) of the Code, which is contravened if a lessor engages in unsolicited door-to-door selling of consumer leases for household goods.
6.56 These offences enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases, many of whom are financially vulnerable. A contravention of any of these offences is likely to result in severe financial consequences for affected consumers.
6.57 For example, the requirement in section 160CB of the Credit Act restricts the use or disclosure of account statements. This is necessary to address concerns about a consumer’s personal information, including account statements, being misused by licensees to market further products or being sold to third parties. Applying strict liability is therefore appropriate because of the serious impact a contravention may have on an affected consumer, both in terms of privacy and future financial position.
6.58 Applying strict liability to these offences is appropriate as requiring proof of fault in respect of these offences would undermine deterrence.
6.59 Further, these strict liability offences are punishable by a fine of up to 10 penalty units for an individual and up to 100 penalty units for a body corporate. None of these offences are punishable by imprisonment.
6.60 The application of strict liability also preserves the defence of honest and reasonable mistake of fact, which maintains adequate checks and balances for persons who may be accused of committing the offence.
6.61 Therefore, the application of strict liability to these offences is compatible with human rights because it achieves the legitimate object of protecting the general public from misconduct and is rationally connected to the objective of significantly improving the likelihood of compliance with these new obligations.
Extension of existing strict liability offences
6.62 This Bill also extends the application of the existing strict liability offences in:
⢠section 174(4) of the Code, by inserting new section 174(1A); and
⢠section 175H(3) of the Code, by inserting new section 175H(1A).
6.63 New section 174(1A) provides that a consumer lease for household goods must also contain:
⢠the base price of the goods hired under the lease; and
⢠the difference between the base price of the goods hired under the lease and the total amount payable by the lessee in connection with the lease.
6.64 As a result, it will be a strict liability offence under existing section 174(4) of the Code if a lessor enters into a consumer lease for household goods that contravenes new section 174(1A).
6.65 Similarly, new section 175H(1A) provides that lessors must give a lessee an end of lease statement within a specified timeframe before the end of a consumer lease for an indefinite period. An end of lease statement contains information such as:
⢠the total amount that the lessee will pay for the goods under the consumer lease;
⢠the date the goods must be returned to the lessor; and
⢠a statement as to whether the lessor is prepared to negotiate the sale of the goods.
6.66 It will be a strict liability offence under existing section 175H(3) of the Code if a lessor does not give a lessee an end of lease statement within the specified timeframe.
6.67 The maximum penalty that can be imposed under these strict liability offences is 100 penalty units for an individual and 1,000 penalty units for a body corporate (due to section 288D(1) of the Credit Act).
6.68 While this maximum penalty exceeds the maximum penalty referred to in the Guide to Framing Commonwealth Offences , these are existing penalty amounts that are not being changed by this Bill.
6.69 The existing penalty amounts reflect that these documents (the consumer lease and the end of lease statement) are critical features of the consumer lease framework (including the consumer protection framework). In particular, as these documents outline the rights and obligations of lessees and lessors under the lease, contraventions in respect of these documents may adversely affect a consumer’s ability to make informed decisions, which may cause significant financial harm to the consumer.
Presumption of avoidance for certain schemes in civil cases
6.70 New section 323C(1) of the Credit Act introduces a presumption that a person entered into or carried out a scheme for an avoidance purpose if the scheme is a scheme prescribed by the regulations or determined by ASIC in a legislative instrument.
6.71 However, the presumption does not apply if the person proves that it would not be reasonable to conclude that there was a relevant avoidance purpose, having regard to the avoidance matters specified in section 323B(1) of the Credit Act.
6.72 Placing the legal burden of proof on the person is appropriate as it will be considerably easier for the person to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose, compared with requiring ASIC to disprove that matter. For example, if the scheme in question does have a legitimate (non-avoidance) purpose, that matter would be peculiarly within the knowledge of the person.
6.73 Further, the presumption applies only in civil cases (not in criminal proceedings), and any regulations or legislative instrument made to prescribe or determine schemes that are presumed to have the relevant avoidance purpose will be subject to parliamentary scrutiny and disallowance.
Right to protection from arbitrary or unlawful interference with privacy
6.74 This Bill engages with the right to protection from arbitrary or unlawful interference with privacy in Article 17 of the International Covenant on Civil and Political Rights, by:
⢠requiring licensees to document in writing preliminary assessments and assessments that a small amount credit contract or consumer lease for household goods is not unsuitable for a consumer (new sections 124C(1), 133CE(1), 147B(1) and 156C(1)); and
⢠requiring lessors to obtain and consider account statements (new sections 140(1A) and 153(1A)).
6.75 In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirement of ‘reasonableness’ to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.
Documenting assessments that a contract is not unsuitable
6.76 This Bill requires a licensee to document in writing, its assessment (or preliminary assessment) that a small amount credit contract or a consumer lease for household goods is not unsuitable for a consumer. This Bill also provides ASIC with the power to, by legislative instrument, specify the form in which the assessment or preliminary assessment is to be documented in writing.
6.77 The purpose of this new obligation is to enhance transparency around this kind of decision-making and ensure licensees are accountable for their decisions.
6.78 A legislative instrument made by ASIC for these purposes may engage with the right to privacy as it may specify the kinds of personal information that need (or do not need) to be documented in writing. To address these concerns, ASIC must, before making such a legislative instrument, consult with the Australian Information Commissioner in relation to matters that relate to the privacy functions and have regard to any submissions made by the Commissioner.
6.79 In any event, licensees will continue to be subject to all relevant privacy obligations, including obligations under the Privacy Act 1988 relating to the collection, use and integrity of personal information.
Lessors obtaining and considering account statements
6.80 This Bill also introduces a requirement that lessors under consumer leases for household goods must, in verifying a consumer’s financial situation, obtain and consider 90 days of the consumer’s account statements. A similar requirement is also introduced for licensees who provide credit assistance in relation to consumer leases.
6.81 This replicates existing provisions in the Credit Act relating to small amount credit contracts and is designed to address concerns that lessors of household goods are not making sufficient inquiries about a consumer’s capacity to pay before entering into a lease with the consumer. The purpose of the provision is therefore aimed at the legitimate objective of ensuring that lessors do not enter into unaffordable leases with consumers.
6.82 This new requirement formalises a step that, in any event, is likely necessary for a lessor to discharge its existing obligation to verify a consumer’s financial situation in the course of assessing whether the lease is unsuitable for the consumer.
6.83 This Bill recognises that account statements contain personal information and introduces a restriction on using information obtained from account statements or other sensitive documents (called constrained documents) other than for limited permitted purposes. Among the permitted purposes is where the use or disclosure of the information is necessary to comply with a person’s obligations under the Credit Act. This protection also extends to documents that are obtained in respect of small amount credit contracts.
6.84 These changes are therefore reasonable and proportionate to the legitimate objective of protecting consumers of small amount credit contracts and consumer leases.
Conclusion
[1]
The Review can be
accessed online through the Australian Parliament House
website:
https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22publications%2Ftabledpapers%2F88aaae8c-48cd-49c4-af69-96a0f0d7360d%22
[2] Available at: https://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-309-update-to-rg-209-credit-licensing-responsible-lending-conduct/ (accessed 2 December 2020).
[3] Requirements on ADIs relating to lending practices are currently set out in APS 220 Credit Quality. This standard requires lenders to adopt prudent credit risk management policies and procedures, which include having a robust system for the prompt identification, monitoring and accurate and complete measurement of credit risk. This is designed to ensure creditworthiness and that lending does not occur where borrowers would only be able to repay loans with substantial hardship. APS 220 is supported by APG 223 Residential Mortgage Lending which provides guidance on prudent lending practices in residential lending, including the need to address credit risk within the ADI’s credit risk management framework, sound loan origination criteria, appropriate security valuation practices, the management of hardship loans and a robust stress-testing framework. While a breach of guidance is not considered a breach of law, banks consider the guidance as setting the expectations of how to comply with the law. APRA announced a revised APS 220, now called Credit Risk Management, would take effect from 1 January 2021 (although it was delayed to 1 January 2022 as part of providing the industry with COVID-relief). The updated standard makes clearer the requirements imposed on an ADI in relation to the credit risk management framework that is appropriate to its size, business mix, and complexity. The standard now includes a requirement to have sound credit assessment and approval criteria, including for the comprehensive assessment of a borrower’s repayment capacity.
[4] ABS 5601 Lending indicators.
[5] Since establishment only 5,533 have been lodged relating to responsible lending complaints, of 4,425 were accepted by AFCA. Accepting a complaint does not mean that AFCA has found in favour of a complainant. Those found in favour of complainants, or resolved prior to a formal resolution are a subset of the complaints accepted. This information was obtained by Treasury in consultation with AFCA.
[6] ASIC 2019 RG 209. Available at: https://download.asic.gov.au/media/5403117/rg209-published-9-december-2019.pdf (accessed 2 December 2020)
[7] See Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 (26 June 2020). Available at: https://download.asic.gov.au/media/5644950/asic-v-westpac-banking-corporation-2020-fcafc-111.pdf (accessed 2 December 2020). The case found that the use of statistical measures, such as the Household Expenditure Measure, when carrying out the assessment of unsuitability under the Credit Act was permitted. However, this conclusion did not override the need to make inquiries and verifications about expenses. Rather, it allowed for the information identified through the inquiries to be replaced with a statistical measure for the assessment. As a result, this did little to clarify the level of inquiries or verifications that are required to meet the process obligations in the law in any given case.
[8] Standing Committee on Economics - Reserve Bank of Australia annual report 2019, p. 20. Available at: https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F868db039-2384-4ce9-a502-1354709677d2%2F0000%22 (accessed 2 December 2020)
[9] CP 309 Update to RG 209: Credit licensing: Responsible lending conduct. Available at: https://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-309-update-to-rg-209-credit-licensing-responsible-lending-conduct/ (accessed 2 December 2020)
[10] REP 643 Response to submissions on CP 309 Update to RG 209: Credit licensing: Responsible lending conduct. Available at:https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-643-response-to-submissions-on-cp-309-update-to-rg-209-credit-licensing-responsible-lending-conduct/
[11] See generally Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Vol 1, pp. 495-496.
[12] This would be based on reduced time needed to undertake verification of expenses.
[13] REP 643 Response to submissions on CP 309 Update to RG 209: Credit licensing: Responsible lending conduct. Available at: https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-643-response-to-submissions-on-cp-309-update-to-rg-209-credit-licensing-responsible-lending-conduct/ (accessed 2 December 2020) . The Australian Competition and Consumer Commission’s Home loan price inquiry 2020 Interim Report described the consumer benefit that could be garnered from refinancing their home loans with a different lender. As at 30 September 2019, customers with new owner-occupier loans were paying, on average, 26 basis points less than customers with existing loans. This disparity is accentuated for older loans, where customers with greater than five year old loans were, on average, paying 40 basis points above what new customers were paying [13] . Price reductions for customers with existing loans are often not as large as discounts for new loans, demonstrating the importance of home loan customers shopping around to capitalise on lower rates.
[14] NAB submission to RG 209, 2019.
[15] See Australian Securities and Investments Commission v Westpac Banking Corporation [2018] FCA 1733 (13 November 2018), (Perram J).
[16] See https://financialservices.royalcommission.gov.au/publications/Documents/Treasury-Request-for-Information-Reforms-to-Consumer-Lending-Background-paper-5.pdf . For example, APRA has continued to update its Prudential Practice Guide APG 223 Residential Mortgage Lending to outline what APRA considers to be prudent ADI practices in managing risks, including sound loan origination criteria. In addition, APRA increased its level of supervisory intensity to ensure ADIs increased their understanding and active monitoring of risks within residential mortgage lending portfolios in the lead up to its 2014 and 2017 housing lending measures, which also reinforced sound residential mortgage lending practices. Also see https://www.apra.gov.au/sites/default/files/141209-Letter-to-ADIs-reinforcing-sound-residential-mortgage-lending-practices.pdf (accessed 2 December 2020)
[17] RBA, Financial Stability Review, 2020; APRA 2018, Round 1 Hearing Submission to the Royal Commission
[18] Between 2006 and 2020, RBA data indicates that non-performing housing loans have been less than 1 per cent of all housing loans on average: https://www.rba.gov.au/publications/fsr/2020/oct/household-business-finances-in-australia.html (accessed 2 December 2020).
[19] Productivity Commission Inquiry into Competition in the Australian Financial System Final Report (2018), 151, available at https://www.pc.gov.au/inquiries/completed/financial-system/report/financial-system.pdf (accessed 2 December 2020)
[20] The current cost of SACCs is limited to a 20 per cent establishment fee and a 4 per cent monthly fee. For a $500 SACC, this would result in a 112 per cent annual percentage rate (APR) over 12 months. The cost of consumer leases is not capped under the law. ASIC’s 2015 report on the cost of consumer leases reported APRs between 250 and 884 per cent.
[21] Small Amount Credit Contract Review Panel, Review of the Small Amount Credit Contract Laws (2016), available at: https://treasury.gov.au/sites/default/files/2019-03/C2016-016_SACC-Final-Report.pdf (accessed 2 December 2020).
[22] Senate Economics References Committee, Credit and financial services targeted at Australians at risk of financial hardship report (2019), available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Creditfinancialservices/Report (accessed 2 December 2020).
[23] https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id:%22committees/commrep/868db039-2384-4ce9-a502-1354709677d2/0000%22
[24] ABSFEO, 2019.
[25] The Australian Small Business and Family Enterprise Ombudsman in its submission to Treasury noted that “ Access to capital is an ongoing problem for small businesses. Easier access to capital will help some small businesses to survive this exceptionally difficult trading period. Borrowing will be made more accessible by easing responsible lending obligations… ”.
[26] The provisions will draw on the new APS 220 which will commence from 1 January 2022. This include the need to consider the following criteria, where appropriate, when undertaking a credit assessment: reasonable inquires and reasonable verifications of income; reasonable inquiries and reasonable verification of indebtedness; and reasonable estimate of ongoing expenses.
[27] A borrower’s income and debt is a fundamental determinant of a borrower’s capacity repay and the quantum of debt they can service. These two components are generally not subject to variation and there is little a borrower can reasonably do to vary their income or debt after they enter into new a loan. An individual’s past spending behaviour does not necessarily reflect their future spending behaviour. This information is also much more difficult for a lender to verify and doing so imposes high costs.
[28] This reform does not amend the existing ‘predominant purpose test’ in the Credit Act - the Credit Act applies when the credit being extended is predominantly for personal, domestic or household purposes. The ‘predominant purpose’ is the purpose for which more than half of the credit is intended to be used. Lending which is predominantly for a small business, or any other, purpose is not regulated by the Credit Act.
[29] Ministerial Instruments are still subject to Parliamentary scrutiny and can be disallowed by the Parliament.
[30] See generally Australian Financial Complaints Authority, Complaint Resolution Scheme Rules (published 25 April 2020), rule D.2.1
[31] See generally Australian Financial Complaints Authority, Complaint Resolution Scheme Rules (published 25 April 2020), rule D.2.1.
[32] This aligns with the definition of ‘sophisticated investor’ under the Corporations Act (s708).
[33] While some of the larger lenders have been able to make significant technological upgrades to automate some of the process and therefore reduce the overall time of processing applications, this is not evidenced across the majority of lenders. In particular, smaller lenders, where there isn’t the scale for systems upgrades, face longer processing times.
[34] ACCC, Home Loan Price Inquiry Interim Report (2020).https://www.accc.gov.au/system/files/ACCC%20Home%20Loan%20Price%20Inquiry%20-%20Interim%20report%20-%2030%20March%202020.pdf
[35] Australian Government, Government response to the final report of the review of the small amount credit contract laws https://ministers.treasury.gov.au/ministers/kelly-odwyer-2016/media-releases/government-response-final-report-review-small-amount
[36] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Vol 1, 496.
[37] Based on average number of loans written per year of 1,257,000 (ABS 5601 Lending indicators) and an average hourly earnings for the finance industry of $50 (ABS 6302 Average Weekly Earnings).
[38] Over the life of a loan consumers may enter in and out of hardship as a result of changes in their circumstances e.g. job loss or illness. However, as demonstrated by the recent COVID-19 pandemic, consumers entering hardship may not indicate poor lending practices on the part of a lender where that hardship arises as a result of unforeseen circumstances.
[39] Australian Government, Government response to the final report of the review of the small amount credit contract laws , https://ministers.treasury.gov.au/ministers/kelly-odwyer-2016/media-releases/government-response-final-report-review-small-amount
[40] Among ADIs, there is the Banking Code of Practice issued by both the Australian Banking Association and the Customer Owned Banking Association. The Codes of Practice bind members to obligations contained in the code. Breaches of the Code are enforceable by AFCA.
[41] The HEM is a report which examines household expenditure in Australia undertaken by the Melbourne Institute, University of Melbourne. Using local survey data linked to the Consumer Price Index, the HEM looks at what families actually spend in relation to different types of household. The HEM classifies more than 600 items in the Australian Bureau of Statistics’ Household Expenditure Survey as absolute basics, discretionary basics or non-basics. These items are then used to calculate modest expenditure for eight types of household.
[42] Between 2006 and 2020, RBA data indicates that non-performing housing loans have been less than 1 per cent of all housing loans on average: https://www.rba.gov.au/publications/fsr/2020/oct/household-business-finances-in-australia.html (accessed 2 December 2020).
[43] https://www.ato.gov.au/individuals/super/in-detail/withdrawing-and-using-your-super/withdrawing-your-super-and-paying-tax/?page=2#Preservationage