The National Consumer Credit Protection reform - proposed regulatory framework for lenders who have carried over instruments in force when the National Credit Act commences

This article is part of our series of articles on the National Consumer Credit Protection reforms.  It deals with the recent Ministerial announcement on the proposed regulatory framework under the National Consumer Credit Protection Act (2009) (National Credit Act) for credit providers and lessors (lenders) who have pre-existing credit contracts and leases regulated by existing State or Territory consumer credit legislation, and which are in force on 1 July 2010 (carried over instruments).  From 1 July 2010, the National Credit Code will also apply in a modified way to carried over instruments.

Proposed regulatory framework
Last week, Chris Bowen MP, the Minister for Financial Services, Superannuation and Corporate Law, announced details of the government’s proposed regulatory framework for lenders who have carried over instruments in force on 1 July 2010 when the National Credit Act commences.

It is proposed to categorise these lenders as follows:

• lenders who only have a closed pool of carried over instruments on 1 July 2010 and who will not offer new credit contracts or consumer leases from that date (COI lenders); and
• lenders who will continue to offer new credit contracts and consumer leases from 1 July 2010 alongside their existing carried over instruments.  These lenders will need to register with ASIC by 30 June 2010 and apply for an Australian credit licence (ACL) between 1 July 2010 and 31 December 2010.  That ACL and the obligations attached to it will cover both the lender’s ‘old and new loans’.

Options for COI lenders
There are two options available to COI lenders.

• A COI lender can choose to apply for an ACL.  In this case, the provisions of the National Credit Act will apply to the COI lender unmodified.  COI lenders proceeding under this option will need to register with ASIC by 30 June 2010, and apply for an ACL between 1 July 2010 and 31 December 2010; and
• COI lenders who choose not to apply for an ACL (or who have their ACL cancelled by ASIC or voluntarily surrender it), will be automatically subject to the statutory scheme (second option).  Under this second option, COI lenders will need to notify ASIC by 30 June 2010 of their intention not to offer new credit contracts or consumer leases after 1 July 2010, and not to become registered or licensed.  Where this notification is given, the COI lender will be subject to regulation under the statutory scheme.

The notification process for the second option will require COI lenders to provide certain information about themselves to ASIC such as the COI lenders name, ABN, business address, number of loans and an estimate of when their last contract will be finalised (based on when payments are due under the relevant contracts), and of any external dispute resolution scheme membership.

Obligations and requirements under the statutory scheme
The statutory scheme will apply to all COI lenders who choose to proceed with the second option (ie not to register or apply for an ACL). 

The announcement provides that many of the requirements and obligations in Chapter 2 of the National Credit Act applying to licensees, such as the general conduct obligations in section 47(1), will apply to COI lenders. Some of those obligations include the requirement to act efficiently, honestly and fairly, maintain competence to engage in credit activities in respect to carried over instruments, have in place adequate arrangements and systems to ensure no clients of the COI lender are disadvantaged by conflict of interest, have an internal dispute resolution system in place and, among other things, have adequate resources and risk management systems. 

Other provisions such as the requirement to lodge an annual compliance certificate, providing a statement to or obtaining an audit report for ASIC, giving information or assistance to ASIC when requested or required and financial record keeping requirements will also apply to COI lenders. 

Generally, the way in which COI lenders comply with these obligations and requirements and the adequacy of their arrangements, systems, processes and measures will depend on the nature, scale and complexity of their business.

The announcement sets out the following additional requirements for COI lenders who choose to proceed with the second option and be regulated under the statutory scheme:

• a COI lender may be required to undertake their activities such as collecting payments or responding to requests for hardship variations through a licensee in lieu of direct contact with the consumer.  The announcement suggests this could include, for example, a COI lender who would not qualify for an ACL due to a State or Territory ‘control’ order being in place;
• a requirement to report significant breaches of the credit legislation to ASIC and maintain a register of complaints;
• a requirement to provide a quarterly report to ASIC on applications for hardship variations and their outcomes; and
• a requirement to lodge an independent report by 1 January 2011 as to whether their contracts comply with the disclosure requirements in sections 15 and 152 of the Uniform Consumer Credit Code.

What next?
It is important to make a determination as to which option to proceed with early, because not making the required applications or giving the appropriate notification within the prescribed times may result in an unwanted disruption to the smooth continuation of your business.

In particular, ASIC have indicated that if you apply for registration after 18 June 2010, there is a risk ASIC may not be able to make a decision on your application in time for you to continue business from 1 July 2010.

You will also need to be familiar with the applicable general conduct obligations and special requirements and put in place and have documented as required, adequate arrangements, systems, processes and measures to comply with and satisfy those obligations and requirements.

In all instances, we recommend you seek appropriate legal advice to cater to your specific circumstances.

The government’s invitation for comments on the proposed framework close today and regulations giving effect to that framework for carried over instruments are anticipated to be made in early May 2010.

Further information
For further information please contact Kylie O’Keeffe, Partner, on (08) 9288 6852 or email her at kylie.okeeffe@lavanlegal.com.au.