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CONSUMER CREDIT AND CORPORATIONS LEGISLATION AMENDMENT (ENHANCEMENTS) BILL 2011 Explanatory Memorandum

CONSUMER CREDIT AND CORPORATIONS LEGISLATION AMENDMENT (ENHANCEMENTS) BILL 2011

                                    2010-2011



      THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA




                        HOUSE OF REPRESENTATIVES




CONSUMER CREDIT AND CORPORATIONS LEGISLATION AMENDMENT
                (ENHANCEMENTS) BILL 2011




                      EXPLANATORY MEMORANDUM




                         (Circulated by the authority of the
Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon
                                  Bill Shorten MP)


Table of contents Glossary .................................................................................................. 1 General outline and financial impact ....................................................... 3 Chapter 1 Introduction .................................................................... 7 Chapter 2 Enhancements ............................................................. 11 Chapter 3 Reverse mortgages ..................................................... 31 Chapter 4 Small amount credit contracts ..................................... 51 Chapter 5 Caps on costs etc. for credit contracts ........................ 59 Chapter 6 Consumer Leases........................................................ 71 Chapter 7 Application provisions .................................................. 95 Chapter 8 Voting at AGMs of Public Companies .......................... 99 Chapter 9 Regulation impact statement ..................................... 101 Chapter 10 Regulation impact statement ..................................... 201 Chapter 11 Regulation impact statement ..................................... 233 Index ................................................................................................... 313


Glossary The following abbreviations and acronyms are used throughout this explanatory memorandum. Abbreviation Definition ACL Australian credit licence ADI Authorised Deposit taking Institution AGM annual general meeting APR Annual percentage rate ASIC Australian Securities and Investments Commission ASIC Act Australian Securities and Investments Commission Act 2001 COAG Council of Australian Governments Code National Credit Code. This is Schedule 1 to the National Consumer Credit Protection Act 2009 Corporations Act Corporations Act 2001 Credit Act National Consumer Credit Protection Act 2009 EDR scheme External dispute resolution scheme Enhancements Bill Consumer Credit and Corporations Legislation Amendments (Enhancements) Bill 2011 FAA Financiers Association of Australia KMP key management personnel licensee A holder of an Australia credit license issued by ASIC under the National Consumer Credit Protection Act 2009 NCCP Act National Consumer Credit Protection Act 2009 NFSF National Financial Services Federation RIS Regulation Impact Statement 1


Abbreviation Definition the Code National Credit Code, Schedule 1 of the National Consumer Credit Protection Act 2009 Transitional Act National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 UCCC Uniform Consumer Credit Code 2


General outline and financial impact Outline The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill) amends the National Consumer Credit Protection Act 2009 (NCCP Act). The NCCP Act implemented a national framework for the regulation of credit by the Commonwealth. The key reforms introduced by the Enhancements Bill are: · a number of specific changes to the provisions of the NCCP Act, to improve its operation (for example, changes to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship); · product-specific obligations in respect of reverse mortgages, including a statutory protection against negative equity and improved disclosure requirements, intended to assist consumers to make more informed choices in relation to the use of these products; · caps on the maximum amount credit providers can charge under both small amount credit contracts, and all other credit contracts, and additional obligations in relation to small amount contracts (namely, restrictions on multiple borrowings and new disclosure requirements); and · changes to provide greater regulatory consistency between consumer leases and credit contracts (to address regulatory arbitrage arising from the current lower level of obligations applying to consumer leases). The Enhancements Bill also amends the Corporations Act 2001 (the Corporations Act) to clarify that the chair of an annual general meeting can vote undirected proxies in a non-binding shareholder vote on remuneration where the shareholder provides express authorisation. 3


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Summary of regulation impact statement Impact: The Enhancements Bill will affect businesses that engage in credit services, particularly in relation to consumer leases, short-term small amount loans and reverse mortgages. It will also affect ASIC as national regulator for consumer credit. The main beneficiaries of the new laws will primarily be consumers of those types of credit products. Main points: · Enhancements to the NCCP Act: - consumers will benefit as, first, licensees will be required to meet higher standards of conduct, and, second, the procedures for debtors seeking changes to their contracts on the grounds of financial hardship will be made more accessible; - there will be a limited financial impact on persons engaging in credit activities as the changes largely target misconduct; and · Reverse mortgages: - consumers will be assisted to make more informed choices in respect of the balance between current access to credit and the future restrictions on lifestyle choices from reduced equity; - consumers will have protections that reduce the risk of them being evicted from their home; - the changes to procedures and to the content of contract documents will have a low level of compliance costs for reverse mortgage providers (as many already meet similar standards on a voluntary basis); - third parties will find to easier to provide advice to consumers about reverse mortgages, because there will be consistent statutory requirements in relation to matters such as no negative equity guarantees, default clauses and the position of non-title holding residents (reducing their time and cost, and making advice more accessible); and · Small amount credit contracts: 4


General outline and financial impact - the prohibitions on multiple borrowing and refinancing will address the risk of debtors entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments; - improving disclosure about the availability of alternatives will help consumers to make better and more informed financial decisions and to seek out lower cost alternatives to relatively higher cost short-term credit contracts; - the introduction of these requirements will have a low level of compliance costs (because of the limited nature of these obligations); and · Caps on costs: - specifying the maximum amount that can be charged will reduce the cost to customers, and particularly assist low-income consumers (as currently the financial position of many borrowers, together with the level of costs that can be charged by credit providers can result in such a reduction in income that the debtor may, in a very short period, be placed in a position where the debt cannot be repaid); - the introduction of the cap would generally not require significant compliance costs, given that the cap on small amount credit contracts is straightforward in its application, and that, in relation to other credit contracts, most larger credit providers will already be complying with a similar cap that is in force in the Australian Capital Territory, New South Wales and Queensland; and - the introduction of the cap may have a significant impact on the revenue generated by individual credit providers, although this will vary depending on their business models; and · Consumer leases: - consumers who enter into consumer leases will have rights similar to those available to consumers in relation to credit contracts (and that have proved effective in that context); and 5


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 - the application to consumer leases of obligations that currently apply to credit contracts will require changes to internal procedures, but the cost would be limited given that these obligations are already well understood. Date of effect: Sections 1 to 3 commence on the day the Act receives the Royal Assent. Schedules 1, 2, 3, 5 and 6 (which respectively cover general enhancements to the NCCP Act, reverse mortgages, prohibitions and disclosure obligations in relation to small amount credit contracts, consumer leases, and application provisions), commence on 1 July 2012. Schedule 4, which introduces the caps on costs, commences on 1 January 2013. Schedule 7, relating to the amendment to the Corporations Act, commences on the day after the Act receives the Royal Assent. Proposal announced: The reforms in Schedule 2 in respect to the regulation of reverse mortgages are part of the Government's Delivering for Seniors package, announced on 7 August 2010. The remaining reforms, in respect to enhancements, consumer leases and short term small amount lending, are implemented as part of Phase Two of the COAG National Credit Reform agenda announced in July and October 2008. 6


Chapter 1 Introduction Outline of chapter 1.1 This chapter provides a summary of reforms implemented by the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill). Context of amendments 1.2 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection. 1.3 The NCCP Act implemented Phase One of the implementation plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, primarily lenders and brokers. 1.4 The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 introduced reforms in relation to home loans (by requiring credit providers to make available a Key Facts Sheet to enable consumers to compare different products more effectively) and credit card contracts (to address specific practices that had developed in relation to these products, for example, by introducing a payment allocation hierarchy, so that the highest interest bearing component of a consumer's liability would be repaid first). 1.5 The Enhancements Bill introduces a number of specific changes to the regulation of credit to improve its effectiveness. It also provides additional obligations and protections in respect of three further classes of credit products: reverse mortgages, small amount credit contracts and consumer leases (to address particular risks identified with those products). 7


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Summary of new law 1.6 The Enhancements Bill amends the NCCP Act to provide protections to consumers when they use credit and to assist consumers to make more efficient use of credit contracts and consumer leases. 1.7 These reforms will: · enhance the regulation of credit by a number of specific reforms (for example, introducing a remedy for unfair or dishonest conduct by credit service providers); · implement the Government's election commitments in relation to reverse mortgages through the introduction of a statutory protection against negative equity, pre-contractual disclosure requirements and other protections relevant to seniors; · introduce protections for consumers who enter into small amount credit contracts (including a cap on the maximum amount credit providers can charge under these contracts); and · address the current regulatory gap in respect of consumer leases. 1.8 The Enhancements Bill also amends the Corporations Act to clarify that the chair of an annual general meeting is able to vote undirected proxies in the non-binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy. Detailed explanation of new law Commencement 1.9 Sections 1 to 3 and any other provision for which a commencement date is not specified commence on the day the Enhancements Bill receives the Royal Assent. 1.10 Schedules 1, 2 and 3 apply from 1 July 2012, immediately after the commencement of Part 2 of Schedule 1 to the National Consumer Protection Amendment (Home Loans and Credit Cards) Act 2011. Schedule 1 contains general enhancements to the National Credit Code (Code). Schedule 2 contains amendments relating to reverse mortgages. 8


Introduction Schedule 3 contains amendments relating to small amount credit contracts. 1.11 Schedule 4 applies from 1 January 2013. Schedule 4 introduces a cap on costs for small amount credit contracts, and a complementary cap for all other credit contracts. 1.12 Schedules 5 and 6 apply from 1 July 2012, immediately after the commencement of Schedule 2 to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011. Schedule 5 contains amendments relating to consumer leases. Schedule 6 specifies the way in which the provisions in Schedules 1 to 5 will apply to conduct and to contracts before and after the commencement of those Schedules. 1.13 Schedule 7 commences the day after the Bill receives Royal Assent. This schedule contains amendments to the Corporations Act relating to voting at AGMs of public companies. 1.14 These new reforms will: · enhance the regulation of credit by: - improving the capacity of borrowers to obtain hardship variations; - introducing a remedy for unfair or dishonest conduct by credit service providers; - restricting the use of high impact terms and representations by licensees; - giving ASIC and consumers comprehensive standing in relation to contraventions of the Code; and · implement the Government's election commitments in relation to reverse mortgages through the introduction of: - a statutory protection against negative equity; - pre-contractual disclosure requirements (including a requirement on licensees to present the consumer with different scenarios in relation to the impact of a reverse mortgage on the equity in their home before they enter into a reverse mortgage); 9


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 - other protections relevant to seniors (including an obligation to make reasonable attempts to personally contact a defaulting debtor); and · introduce protections for consumers who enter into small amount credit contracts by: - imposing a cap on the maximum amount credit providers can charge under these contracts (complemented by a more restrictive cap on all other credit contracts); - introducing multiple contract prohibitions, to address the risk of a debtor entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments; and - requiring credit providers and providers of credit assistance to disclose the availability of alternatives; and · addressing the current regulatory gap in respect of consumer leases, by requiring lessors to comply, where appropriate, with similar obligations to those that currently apply to credit providers. 1.15 The Enhancements Bill also amends the Corporations Act to clarify that the chair of an annual general meeting is able to vote undirected proxies in the non-binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy. Application provisions 1.16 Schedule 6 of the Enhancements Bill specifies the conduct and the contracts to which the provisions in Schedules 1 to 5 will apply 10


Chapter 2 Enhancements Outline of chapter 2.1 The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Enhancements Bill) introduces a number of changes to enhance the operation of the NCCP Act. The key elements of the reforms in Schedule 1 are that they: · enhance the capacity of debtors who are in financial hardship to seek a variation of their credit contract; · introduce a remedy for unfair or dishonest conduct by credit service providers; · restrict the use of particular words or phrases; · enhance the range of remedies available to consumers; and · increase the circumstances in which ASIC has standing to apply to the court for an order. Context of amendments 2.2 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection. 2.3 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 2.4 COAG agreed that in Phase Two the Commonwealth would examine issues that had been identified in relation to the operation of the Uniform Consumer Credit Codes in force in the States and Territories, but that had not been resolved prior to the transfer to the Commonwealth of responsibility for the regulation of credit. 11


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 2.5 The Enhancements Bill addresses the following issues: · the current statutory procedures inhibit the capacity of debtors to apply for a variation to their credit contract; · there is no counterpart to the remedy for unjust conduct in the Code in relation to the conduct of credit service providers (even though their conduct can result in debtors incurring significant liabilities to credit providers under credit contracts); · a credit provider is able to commence enforcement action even while the consumer is waiting for a reply to their hardship variation request, and without their underlying hardship being addressed; · certain high impact words and phrases are being used in ways which can mislead consumers; and · some restrictions prevent both ASIC and consumers from seeking comprehensive remedies for contraventions of the National Credit Code. Summary of new law 2.6 The Enhancements Bill amends the NCCP Act, to give greater protections to consumers and provide greater certainty for licensees. Key elements of these reforms are that they: · make it easier for debtors to apply for hardship variations, by making the procedures more flexible; · require credit providers to respond to an outstanding application for a hardship variation before commencing enforcement proceedings; · introduce a remedy for unfair or dishonest conduct by credit service providers; · restrict the use of particular words or phrases which have an emotional or high impact resonance with consumers, so that these words and phrases will only be able to be used where they strictly describe or relate to particular types of conduct or arrangements; 12


Enhancements · enhance the range of remedies available to consumers, so that consumers can seek restitution or compensation for an offence, in addition to the remedy available under the civil effect of that offence; and · improve ASIC's enforcement capacity by giving it standing to apply to the court for an order under section 124 of the NCCP Act, irrespective of whether or not a specific civil effect is prescribed for a contravention of the Code. Comparison of key features of new law and current law New law Current law All debtors have a statutory right to The debtor only has a statutory right request a hardship variation to request a hardship application regardless of the amount of credit that where the amount of credit provided is provided under their contract. is less than $500,000. There are no limits to the form of An application for hardship variation hardship variation that can be must seek to change the contract in requested, making it easier for one of three ways stipulated in the consumers to engage with their credit Code. provider. Credit providers must respond to an Credit providers are not required to outstanding application for a hardship respond to applications for hardship variation before commencing variations before they can commence enforcement proceedings. enforcement proceedings Consumers have a remedy for credit The NCCP Act does not provide service providers' conduct that is consumers with a general remedy for unfair or dishonest. credit service providers' conduct that is unfair or dishonest The use of particular words or There are no direct restrictions on the phrases which have an emotional or use of these terms. high impact resonance with There are general prohibitions against consumers is restricted to where they providing misleading information and describe or relate to particular types making false or misleading of conduct or arrangements. representations. These prohibitions Use of the following terms or lack the clarity of prohibitions in representations is regulated: respect of specified terms, and do not · independent, impartial and necessarily apply to all situations unbiased; covered by the proposed restrictions. · financial counsellor and financial counselling; and · representations that consumer is eligible for credit before an 13


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 New law Current law unsuitability assessment has been conducted. ASIC has standing to apply to the ASIC does not have standing under court for an order regardless of section 124 of the Code to apply to whether a civil remedy is also the court for an order in relation to available under another provision. offences which provide for a specific civil effect. Consumers may seek restitution in Consumers are not able to seek relation to offences for which a restitution in relation to offences for specific civil effect is already which a specific civil effect is already provided. provided. Detailed explanation of new law Part 1 -- Protection of debtor in cases of hardship 2.7 Part 1 amends the Code in relation to hardship applications made by debtors. 2.8 Where a debtor cannot meet their obligations under a credit contract, they may give the credit provider notice of this (a hardship notice). This notice may be given orally or in writing. [Schedule 1, item 1, section 72] 2.9 Within 21 days after receiving a hardship notice, the credit provider must give the debtor notice of whether or not they agree to negotiate a change to the credit contract. Where the credit provider agrees to negotiate, the form of the notice will be prescribed in the regulations. If the credit provider does not agree to negotiate, the credit provider must give a written notice that includes: · the reasons for not agreeing to negotiate; · the name of the external dispute resolution scheme which the credit provider is a member of; and · the debtor's rights under that scheme. [Schedule 1, item 1, subsection 72(2)] 2.10 The effect of this amendment is to expand the circumstances in which a credit provider will need to consider whether to change the terms of the credit contract, rather than the onus being on the debtor to make a request in a specific and limited way. 14


Enhancements 2.11 A breach of this section will attract a criminal penalty of 30 penalty units and is an offence of strict liability [Schedule 1, item 1, subsection 72(4)]. 2.12 The imposition of a strict liability offence is appropriate since: · the requirement for the credit provider to provide a response within 21 days is procedural in nature; · it is important that the consumer receives the response from the credit provider in a timely manner, so that they can assess their options as quickly as possible; and · it significantly enhances ASIC's ability to enforce this requirement. 2.13 If a credit provider has given notice that they agree to negotiate, but subsequently decides not to change the contract they would need, within 21 days of the first notice, to give the debtor another notice to this effect [Schedule 1, item 1, subsection 72(3)]. This affords the credit provider an extended period of time to determine whether or not to provide a variation (noting that the credit provider has absolute discretion whether or not to vary the contract). 2.14 If, as a result of negotiations, the credit provider agrees to a change to the terms of the credit contract, they must comply with the existing requirements in section 73 of the Code. 2.15 Where a credit provider does not agree to change the terms of the credit contract, a debtor still has the option to apply to a court for a change in the terms pursuant to section 74 of the Code. The court is restricted from making any order that reduces the total amount ultimately payable by the debtor under the credit contract, and is therefore confined to orders affecting the amount and timing of individual payments made under the credit contract. 2.16 The requirements in section 88 of the Code, requiring credit providers to give a default notice before they can commence enforcement proceedings against a debtor continue to operate. However, the cross-references to sections 72 and 94 in subparagraphs 88(3)(f)(i) and (ii) are changed, so that their wording is consistent with the changes to those provisions. [Schedule 1, item 5, subparagraphs 88(3)(f)(i) and (ii)] 2.17 A new section 89A is introduced to restrict the capacity of credit providers from commencing enforcement action until they have responded to any hardship notice under section 72. [Schedule 1, item 6, section 89A] 15


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 2.18 A credit provider will be prohibited from commencing enforcement action where the following conditions apply: · they are required to serve a default notice under section 88; · the debtor has given a current hardship notice under section 72; and · the debtor has not previously given a hardship notice or had given one not materially different from the current hardship notice in the four month period before the current hardship notice was given. [Schedule 1, item 6, subsection 89A(1)] 2.19 The credit provider cannot begin enforcement proceedings until they have given the debtor notice of their refusal to negotiate and 14 days have passed from the day on which this notice was given. [Schedule 1, item 6, subsection 89A(2)] 2.20 Under the current section 88, the credit provider must allow the debtor at least 30 days from the date of the default notice to remedy the default. The 14 day period from the day the lessor gave the hardship notice may therefore occur before, during, or after the 30 day period. 2.21 A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability [Schedule 1, item 6, subsection (2) and (4)]. 2.22 The imposition of a strict liability offence is appropriate since: · it is important that debtors have certainty regarding whether or not their credit provider will negotiate or intends to commence enforcement proceedings; · the requirement to give the debtor notice is procedural, so that the credit provider should be able to comply with it in all circumstances; and. · it significantly enhances ASIC's ability to enforce this requirement. 2.23 However, the credit provider may take possession of any mortgaged goods if the credit provider believes on reasonable grounds that: 16


Enhancements · the debtor has, without the credit provider's permission, removed or disposed of the mortgaged goods, or intends to do so; or · urgent action is necessary to protect the goods. [Schedule 1, item 6, subsection 89A(3)] 2.24 The burden rests on the credit provider to show that they held this belief on reasonable grounds. Repossession of mortgaged goods has a serious consequence for the debtor, mortgagor or guarantor. Credit providers should therefore only be able to rely on these exceptions where they reasonably believe circumstances to be in existence which establish the requisite belief. [Schedule 1, item 6, subsections 89A(2) and (3)] 2.25 A debtor who has been given a default notice can make a postponement request regarding postponement of enforcement proceedings or of any acceleration clauses. There have been minor changes to the wording of this provision so that it operates more clearly. [Schedule 1, item 7, subsection 94(1)] 2.26 If a debtor gives the postponement request the credit provider must not begin enforcement proceedings unless they have responded to the postponement request and 14 days has elapsed from when they gave that response. [Schedule 1, item 9, subsection 94(3)] 2.27 A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability. The imposition of a strict liability offence is appropriate since: · it is important that debtors have certainty regarding whether or not their credit provider will negotiate or intends to commence enforcement proceedings; · this requirement is strictly procedural, requiring no fault element; and · it significantly enhances ASIC's ability to enforce this requirement (which seeks to give the debtor an opportunity to assess their options following receipt of the notice). [Schedule 1, item 9, subsection 94(3) and (5)] 17


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Part 2 -- Remedies for unfairness or dishonesty by providers of credit services 2.28 Item 10 inserts section 180A into the NCCP Act. This provision introduces a remedy for unfairness or dishonesty by providers of credit services, and sets out matters relevant to a court determining whether conduct has been unfair or dishonest. [Schedule 1, item 10, section 180A] 2.29 The court will have power to make orders where it is satisfied that: · a person (the defendant) provided a credit service to a consumer (the plaintiff); · the defendant engaged in conduct that was connected with the provision of the service and that was unfair or dishonest; and · the conduct had one or more of the following results: - the consumer entered into a credit contract, consumer lease, mortgage or guarantee that they would not have entered into had the conduct not occurred; - the consumer entered into a credit contract, consumer lease, mortgage or guarantee with different terms to one that they would have entered into apart from the conduct; or - the consumer became liable to pay fees or costs to the defendant or a third party. [Schedule 1, item 10, section 180A] 2.30 The conduct may precede or follow the provision of the credit service, provided that it is connected with the provision of those services. 2.31 The requirement that the unfair or dishonest conduct had a result listed in paragraph 180A(1)(c) is to be determined objectively. For example, if the defendant engaged in unfair conduct in relation to the supply of goods, and subsequently arranged a credit contract to finance the purchase of those goods, it could be reasonably concluded that their unfair conduct had the result the consumer entered into that contract as a result of the unfair conduct. 2.32 The term engage in conduct is defined as meaning the doing of an act or omitting to perform an act, and would therefore encompass 18


Enhancements conduct such as failing, unfairly or dishonestly, to disclose information to the consumer. [Schedule 2, item 6, subsection 204(1)] 2.33 If the defendant engaged in unfair or dishonest conduct a court can make orders: · that the defendant take, or refrain from taking specified action; · that the defendant pay the plaintiff a specified amount; · that a specified sum is not due or owing by the plaintiff to the defendant; and · orders that the court thinks are appropriate to redress the unfairness or dishonesty, or to prevent the defendant from profiting from the plaintiff in connection with the unfairness or dishonesty. [Schedule 1, item 10, subsection 180A(2)] 2.34 The power of the court to make orders to prevent the provider of credit services from profiting from their unfairness or dishonesty recognises that the provider of credit services may not be remunerated directly by the consumer, but may receive, and be motivated by, financial benefits such as commissions from third parties. The purpose of giving the court the power to require them to disgorge these payments ensures these persons should not be able to profit from unfair or dishonest conduct in situations where the consumer was not charged a fee. [Schedule 1, item 10, paragraph 180A(2)(d)] 2.35 The court may not, however, make an order that affects a credit contract, consumer lease, mortgage or guarantee to which the conduct related. Consumers have other remedies available to them in the NCCP Act in relation to credit providers and lessors, including where the transaction was unjust. Determining whether conduct was unfair or dishonest 2.36 Section 180A sets out elements that the court must consider in determining whether conduct was unfair or dishonest, but does not limit the matters to which the court may have regard. A person providing credit services may therefore still have engaged in conduct that was unfair or dishonest even where none of the factors listed in subsection 180A(4) are present. 19


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 2.37 The effect of subsection 180A(3) is that the existence of factors listed in subsection 180A(4) will in all cases be relevant to a court considering whether conduct was unfair or dishonest. 2.38 However, these factors are not prerequisites or necessary to a finding that conduct was unfair or dishonest. For example, it would not be necessary to find a consumer was under a special disadvantage (as discussed in paragraph 180A(4)(a)) in order for conduct by the provider of credit services to be unfair or dishonest. 2.39 The first element is whether the consumer was at a special disadvantage in dealing with the person in relation to the transaction [Schedule 1, item 10, paragraph 180A(4)(a)]. The concept of special disadvantage refers to the consumer being in a position where they are unable to protect their own interests, as discussed in Commercial Bank of Australia v Amadio (1983) 151 CLR 447. 2.40 The special disadvantage may exist in relation to: · the provision of the credit service; · a credit contract, consumer lease, mortgage or guarantee to which the conduct related; and · any other contract requiring the consumer to make payments, for the purposes of which it is reasonable to expect that the consumer would or did enter into such a credit contract, consumer lease, mortgage or guarantee. 2.41 The special disadvantage may exist in relation to all of these three categories or only a single one. 2.42 The court must consider whether the consumer was a member of a class whose members were more likely than others to be at such a disadvantage. [Schedule 1, item 10, paragraph 180A(4)(b)] 2.43 Where the plaintiff was a member of such a class, the court must determine whether a reasonable person would consider that the defendant's conduct was directed at that class [Schedule 1, item 10, paragraph 180A(4)(c)]. The purpose of this provision is to address practices where a credit service provider will target a class of persons (for example, elderly or commercially unsophisticated persons) on the basis the perceived characteristics of the class mean that individuals within it are more likely to succumb to unfair or dishonest conduct (irrespective of whether the credit service provider is aware that any particular individual under the class was under a special disability). 20


Enhancements 2.44 Another element is whether the plaintiff was unable or considered themselves unable to be able to enter into a credit contract, consumer lease, mortgage or guarantee other than with the credit provider, lessor, mortgagee or beneficiary to whom the conduct related [Schedule 1, item 10, paragraph 180A(4)(d)]. Where a plaintiff either had, or considered themselves to have, no other choices they are at greater risk of entering into transactions that exploit this vulnerability. 2.45 A credit service provider may have contributed to this belief by, for example, representing that they can arrange credit or a consumer lease irrespective of the circumstances of the consumer, in order to attract potential clients who would then be prepared to accept whatever terms are offered, irrespective of the cost. 2.46 Another element is whether the conduct involved a technique that in good conscience should not have been used, or that manipulated the plaintiff [Schedule 1, item 10, paragraph 180A(4)(e)]. These terms may largely overlap in practice, and are primarily intended to address coercive or manipulative marketing techniques. 2.47 Some providers of credit services use sophisticated marketing techniques designed to persuade consumers to enter into a contract. This process can be incremental rather than overt through, for example, a series of questions, where the consumer is directed or guided, through those techniques, to a position where it becomes increasingly difficult for the consumer to refuse to enter into the transaction (but where the conduct may not meet the higher threshold required by remedies such as unconscionability or duress). 2.48 The court must also consider whether the defendant could determine or significantly influence either the terms of a credit contract, consumer lease, mortgage or guarantee to which the conduct related or any other contract where it is reasonable to expect the consumer entered into the credit contract or consumer lease to finance their liability under that other contract. [Schedule 1, item 10, paragraph 180A(4)(g)] 2.49 The term `determine or significantly influence' is used to describe situations where the provider of credit services has the capacity to actively influence the terms of a transaction beyond ordinary negotiations. It would clearly apply in situations where the provider of credit services may have an agreement with a third party in which they can fix the price or cost within limits specified in the agreement, or subject to a right of veto by the third party. 21


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Example 2.1 A broker attracts potential customers through running wealth creation seminars. Attendees are encouraged to purchase investment properties, and to have finance arranged by the broker. However, the broker has an arrangement with the developer selling the properties that it will receive as commission 50 per cent of the amount of the purchase price in excess of a base price. The broker does not tell the consumer about this arrangement and it can be presumed that they were unlikely to have agreed to purchase the units, either at all or for the price for which they purchased it, had this been the case. This conduct would therefore be unfair or dishonest. 2.50 The final element the court must consider is whether the terms of the transaction were less favourable to the consumer than the terms of a comparable transaction [Schedule 1, item 10, paragraph 180A(4)(g)]. This factor recognises the role of the provider of credit services in arranging credit or consumer leases, and, commonly, in arranging other transactions as well (for example, for the purchase or supply of goods or services). If the consumer could have entered into a comparable transaction with more favourable terms, this may suggest that they entered into the less favourable contract as a result of unfair or dishonest conduct. 2.51 Applications for orders can only be made within 6 years after the defendant first started engaging in the conduct. The court can only make an order under this section where either a plaintiff or ASIC specifically applies for such an order. [Schedule 1, item 10, subsection 180A(5)] 2.52 ASIC may make an application on behalf of a plaintiff where the plaintiff has given their consent in writing, before the application is made [Schedule 1, item 10, subsection 180A(6)]. ASIC can apply on behalf of more than one plaintiff provided they all consent (for example, where they are members of a class as described in paragraph 180A(4)(b)). 2.53 Where a provider of credit services engages in unfair or dishonest conduct, and it has a successful outcome, they can be expected to repeat that conduct. Section 180A is therefore intended to address both individual and systemic conduct that is unfair or dishonest, and to enable ASIC to take action where a provider of credit services has engaged in similar unfair or dishonest conduct towards different consumers. 2.54 Where the court orders that the defendant pay an amount to the plaintiff, the plaintiff may recover this amount as a debt due to them. [Schedule 1, item 10, subsection 180A(7)] 2.55 This section does not apply to credit assistance by a person who is, or becomes, a credit provider under the contract to which the assistance relates. The section also does not apply to lessors under a consumer lease 22


Enhancements to which the assistance relates, mortgagees under a mortgage connected to the credit contract to which the assistance relates, or beneficiaries of a guarantee connected to the credit contract to which the assistance relates. [Schedule 1, item 10, subsection 180A(8)] 2.56 This provision is necessary as the definition of providing credit assistance in section 8 of the NCCP Act can include credit providers or lessors (where they engage in conduct as described in that section in relation to credit contracts or consumer leases where they will be the provider). Consumer are provided with remedies in the Code and in other legislation against credit providers and lessors. Part 3 -- Representations about eligibility to enter credit contracts, consumer leases etc. without assessing unsuitability 2.57 Sections 125 and 128 of the NCCP Act are amended so that a credit provider is prohibited from representing to the consumer that they are eligible to enter into a credit contract, or to have the credit limit of an existing contract increased unless the credit provider has made an assessment that the contract or the increase will be suitable in accordance with the requirements of section 129. [Schedule 1, items 12 to 16, sections 125 and 128], 2.58 The effect of these amendments is to prohibit credit providers from making representations to consumers that they are eligible to enter into a contract, or have their credit limit increased irrespective of, for example, their personal circumstances or credit history. These types of representations can encourage a consumer to apply for credit because of the certainty their application will be accepted, but where the resulting terms on which the credit is provided may be more onerous than those offered by other credit providers. 2.59 As a result of the amendments the credit provider can represent to the consumer they are eligible to enter into the contract (or have the credit limit increased) once an assessment has been made. This representation can only be made for the same period of time following an assessment that the credit provider is able to rely on the assessment in order to enter into the credit contract or increase its limit (that is, for a period of 90 days or such other period as may be prescribed in the regulations). 2.60 Item 19 replaces the existing section 151 of the NCCP Act with a replacement section. The new section implements the same restrictions in respect of representations to a consumer that they are eligible to enter into a consumer lease. [Schedule 1, item 19, section 151] 23


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 2.61 There are consequential changes to section 148 of the NCCP Act and to the heading to Division 3 of Part 3-4. [Schedule 1, items 17 and 18, section 148 and heading to Division 3] 2.62 A breach of the requirements in section 151 attracts a civil penalty of 2,000 penalty units. [Schedule 1, item 19, section 151] 2.63 These provisions will also prevent credit providers or lessors from using advertisements which represent that a consumer is eligible to enter into a contract, even where they have poor credit. Advertisements of this type will need to be suitably qualified. Part 4 -- Prohibitions on certain representations and other matters 2.64 A new Part 3-6A will be inserted into the NCCP Act, and will include a number of miscellaneous prohibitions that apply to persons who engage in credit activities. 2.65 As a result section 33, which prohibits a person from giving misleading information when they are engaging in credit activities, is more appropriately located in Part3-6A, and has been repealed. [Schedule 1, item 24, section 33] 2.66 The repeal of section 33 results in a number of consequential amendments to the Guide to Part 2-1 in section 27, and to the heading to Division 3 of Part 2-1. [Schedule 1, items 22 and 23, section 37 and the heading to Division 3 of Part 2-1] 2.67 The Enhancements Bill introduces a new Part 3-6A and a Guide to the Part in section 160A. [Schedule 1, item 25, Part 3-6A and section 160A] 2.68 Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee's actions in providing the assistance: · `independent'; · `impartial'; · `unbiased'; and · any other term (in English or any other language) of similar meaning to those words. [Schedule 1, item 25, section 160B] 24


Enhancements 2.69 However, a licensee may use those terms if they satisfy all of the following requirements: · the licensee does not receive any commissions (apart from commissions that are rebated in full to the person's clients) or any other gifts or benefits from a credit provider or lessor that may reasonably be expected to influence the licensee; · the licensee's employer (if any) or any other person (or class of person) that may be identified in the regulations does not receive any of the commissions, gifts or benefits described above; · in providing a credit service, the licensee does not operate under any direct or indirect restrictions, other than restrictions imposed by the NCCP Act or by an Australian credit licence (so that this would cover, for example, directions from a credit provider that restrict the capacity of the provider of credit services to arrange credit contracts with other credit providers); and · in providing a credit service, the licensee does not operate under any conflicts of interest that might arise from the person's associations or relationships with credit providers and lessors, that may reasonably be expected to influence the person in providing the services. [Schedule 1, item 25, subsection 160B(2)] 2.70 The prohibition applies to any representation or means of communication, whether written, oral or otherwise. 2.71 The reference to commissions does not include amounts paid to the licensee by consumers who use their services. 2.72 Contravention of this prohibition attracts a civil penalty of 2,000 penalty units. [Schedule 1, item 25, subsection 160B(1)] 2.73 The licensee bears the evidentiary burden in relation to this defence. This is appropriate as the circumstances which give rise to the defences are matters which are particularly within the knowledge or control of the licensee, as they relate to their commercial arrangements with third parties. 2.74 Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination 25


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee's actions in providing the assistance: · `financial counsellor'; · `financial counselling'; and · any other term prescribed by the regulations that is of similar import to these phrases (whether in English or any other language). [Schedule 1, item 25, subsection 160C(1)] 2.75 The power to provide for additional terms to be prescribed by regulations recognises that these terms may evolve or change over time. 2.76 However, a licensee may use those terms if : · they are providing, or offering to provide, the credit service on behalf of another person (the principal); · they are a representative (as defined in section 5 of the NCCP Act) of the principal; · regulations exempt the principal from this prohibition in relation to a credit activity because the principal engages in the activity as part of a financial counselling service; and · the person's actions in providing or offering to provide the credit service are within the authority of the principal. [Schedule 1, item 25, subsection 160C(3)] 2.77 The section applies to any representation or means of communication, whether written, oral or otherwise. 2.78 Contravention of this prohibition attracts a civil penalty of 2,000 penalty units. [Schedule 1, item 25, subsection 160C(1)] 2.79 The effect of the defence is to allow these terms to only be used by Government funded or not for profit financial counsellors (who currently meet the exemption from the need to hold an Australian credit licence in subregulation 20(5) of the National Consumer Credit Protection Regulations 2010). These organisations are exempted as they provide free services to consumers, including financial education and advice, and assisting consumers to communicate and negotiate with creditors and other organisations. 26


Enhancements 2.80 A licensee may also use those terms in the negative, for example, to represent that the licensee is not a financial counsellor. [Schedule 1, item 25, subsection 160C(4)] 2.81 The person providing or offering to a credit service bears the evidentiary burden in relation to both defences, as the defences relate to matters which are largely or particularly within their knowledge or control (and in the case of financial counsellors where they have already identified that they do not need to be a licensee). 2.82 There is a consequential amendment to the NCCP Act, so that section 33, which prohibits a person from giving misleading information when they are engaging in credit activities, is moved into Part3-6A, and renumbered as section 160D. [Schedule 1, item 25, section 160D] Part 5 -- Civil remedies for contravention of the National Credit Code 2.83 Subsection 124(1) of the Credit Code will be amended to remove the words `other than one for which a civil effect is specifically provided by Division 1 or by any other provision of this Code'. [Schedule 1, item 27, subsection 124(1)] 2.84 This amendment results in two changes: · consumers will be able to seek orders both for a specific civil effect (where this is provided for in the Code), and for compensation or restitution resulting from the contravention; and · ASIC will have comprehensive standing under the Code, in relation to contraventions where a specific civil effect is provided for in the Code, and all other contraventions. 2.85 The following entities can make an application to the court under this section: · ASIC on its own behalf; · ASIC on behalf of a person affected by the contravention, if that person has consented in writing to ASIC making the application; and · a person affected by the contravention. [Schedule 1, item 28, subsection 124(4)] 27


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 2.86 The amendment does not create new offences for past conduct that did not previously give rise to a penalty or a liability to a consumer. The amendment will mean that where the remedy available to a consumer for a past contravention was limited to the civil effect, they will now be able to obtain a more comprehensive remedy where they have suffered additional loss or damage. 2.87 There is no retrospectivity in regards to what constitutes a contravention, so entities would always have been operating with full knowledge about the legality of their conduct. The amendment to section 124 therefore does not introduce new or retrospective obligations on persons who engage in credit activities. Part 6 -- Miscellaneous amendments 2.88 Part 6 contain consequential amendments to the Code to resolve ambiguities, clarify the operation of certain provisions and ensure internal consistency throughout the Code with the new amendments. 2.89 In relation to alterations of documents, subsection 19(1) is amended to refer to a new contract document, instead of a contract document. [Schedule 1, item 29, subsection 19(1)] 2.90 Section 32 of the National Credit Code is repealed and replaced with a new section 32. The amendment changes the language of section 32 to mirror the language of the proposed new section 176D under this Enhancements Bill. [Schedule 1, item 30, section 32] 2.91 In relation to statements of amounts owing under credit contracts, amendments are made to the operation of paragraphs 36(1)(c) and 36(1)(d) to clarify that any overdue amounts must be accompanied by the date they became due, and amounts currently payable must be accompanied by the date they become due. [Schedule 1, items 31 and 32, paragraphs 36(1)(c) and (d)] 2.92 Section 40 of the Code outlines when certain transactions are not to be treated as contracts in relation to credit contracts. This section is amended to clarify its operation and ensure consistency with the new section 175J which applies to consumer leases. [Schedule 1, item 38, section 40] 2.93 Subsection 71(1) of the Code which refers to changes by agreement of parties is amended to clarify that it applies to changes made under existing credit contracts. [Schedule 1, item 39, subsection 71(1)] 28


Enhancements 2.94 Section 83 has two overlapping criminal offences. The section is amended to remove the offence in subsection 83(1). [Schedule 1, items 40, 41 and 42, section 83] 2.95 Section 87 is amended to omit references to a direct debit default notice, and instead, refer to a notice complying with the section. [Schedule 1, items 43 and 44, section 87] 2.96 Paragraphs 88(5)(a) and (d), subsection 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d) are amended to change the phrase `believes on reasonable grounds' to `reasonably believes'. The Code currently uses both expressions to refer to the same concept and it is preferable to use one expression only. [Schedule 1, items 45, 46, 47 and 48, paragraphs 88(5)(a) and (d), subsection 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d)] 2.97 Subsection 95(1) is amended to omit references to a default notice or demand for payment, and clarify its operation by referring to a default notice under section 88 or a demand for payment under section 90. [Schedule 1, item 49, subsection 95(1)] 2.98 Section 206 currently specifies that the way in which headings, notes and punctuations are to be used for the purposes of interpreting the Code. This approach was inherited from the State and Territory predecessor to the Code, the Uniform Consumer Credit Code. The provision is being repealed so that the interpretation of headings, punctuation and notes will be in accordance with the Acts Interpretation Act 1901, and therefore consistent with Commonwealth legislation generally. [Schedule 1, item 51,section 206] Part 7 -- Technical corrections 2.99 Part 7 contains a series of technical amendments. The NCCP Act is amended: · to amend incorrect cross- references in section 128 and subsection 130(1) [Schedule 1, items 52 and 53,section 128 and subsection 130(1)]; and · to correct the omission of the word `section' in paragraph 181(b) [Schedule 1, item 54, paragraph181(b)]. 2.100 Part 7 amends the Code by: · correcting a reference to `or' instead of `and' in subparagraph 88(3)(g)(i) [Schedule 1, item 55, subparagraph 88(3)(g)(i)]; 29


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · correcting the reference to a tied continuing credit contract in subsection 127(2) [Schedule 1, item 56, subsection 127(2)]; · changing a number of headings and sections in Division 3 of Part 7 that contain references to a provision, section 73 of the Trade Practices Act 1974, that has now been repealed [Schedule 1, items 57, 58, 59, 60 and 61, headings to sections 129, 130, 131, 132 and 133]; and · correcting a grammatical error in the definition of approved external dispute resolution scheme in subsection 204(1) [Schedule 1, item 51,subsection 204(1)]. 30


Chapter 3 Reverse mortgages Outline of chapter 3.1 Schedule 2 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Enhancements Bill) introduces new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are: · introducing a `no negative equity guarantee' protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions); · mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act: - using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home; - provide the consumer with a print out of these projections; - notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and - give the consumer a reverse mortgage information statement; · prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract; · disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract; 31


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and · new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default. Context of amendments 3.2 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth. 3.3 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 3.4 Under Phase Two, COAG agreed the Commonwealth would consider reforms to the regulation of reverse mortgages. 3.5 In August 2010, the Government announced the Delivering for Seniors package which included enhancements to protections for seniors seeking to access the equity in their homes using reverse mortgages and home reversion schemes. 3.6 Reverse mortgage contracts require targeted regulation because they differ from other credit contracts. Some of the main differences are that: · they are marketed exclusively to seniors or persons approaching an age where they will retire from the workforce; · interest is capitalised as there is no obligation on the borrower to make regular repayments, meaning the amount owing increases over time; 32


Reverse mortgages · at the time they are considering taking out the loan, consumers have no way of accurately determining the value of the equity in their home over time; and · debtors may be required to repay more than the value of the mortgaged property at a stage in their life when they may no longer have the financial resources to be able to do so. 3.7 The Enhancements Bill contains amendments to the NCCP Act to address these issues. Summary of new law 3.8 The Enhancements Bill contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages. 3.9 In general terms a reverse mortgage contract is defined as a contract in which the balance of the credit contract will increase over time (as the borrower will ordinarily only repay the debt following sale of their residence). 3.10 The key elements of these amendments are: · creating a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property; · requiring licensees to undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act: - using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home; - provide the consumer with a print out of these projections; - notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and - give the consumer a reverse mortgage information statement. 33


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract; · disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract; · prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and · new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default. Comparison of key features of new law and current law New law Current law Specific obligations will be The NCCP Act regulates reverse introduced on credit providers and mortgage contracts consistently with persons engaging in credit services all other credit contracts. It does not in relation to reverse mortgage include any responsible lending contracts. conduct obligations, requirements in relation to the reverse mortgages or disclosure requirements that are specific to reverse mortgages. Credit providers cannot demand or The NCCP Act does not include any accept payment of an amount to specific requirements in relation to discharge the debtor's liability reverse mortgages. which exceeds the value of the reverse mortgaged property (subject to limited exceptions). Licensees must give consumers The obligations under the NCCP Act projections of equity before do not require the disclosure of providing credit assistance or projections of future equity. entering into a reverse mortgage credit contract. Licensees must make available a The obligations under the NCCP Act reverse mortgage information do not require the provision of a statement on their website or upon reverse mortgage information request by a consumer. statement. 34


Reverse mortgages Detailed explanation of new law Commencement 3.11 Schedule 2 commences on 1 July 2012, immediately after the commencement of Part 2 of Schedule 2 to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011. Schedule 2 -- Reverse mortgages Part 1 -- Definitions Division 1 -- Definition of reverse mortgage 3.12 Part 1 inserts definitions of expressions relevant to these reforms into both section 5 of the NCCP Act and section 13A of the Code. 3.13 A reverse mortgage is defined for the purposes of the NCCP Act as having the same meaning as in section 13A of the Code. [Schedule 2, item 1, subsection 5(1)] 3.14 A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor's obligations under the contract and either: · the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage [Schedule 2, item 2, paragraph 13A(1)(b) and subsection 13A(4)]; or · the arrangement meets the following two conditions: - the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure less than that maximum amount [Schedule 2, item 2, paragraph 13A(1)(a) and subsection 13A(2)]; and - the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation-making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate) [Schedule 2, item 2, paragraph 13A(1)(a) and subsection13A(3)]. 35


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Example 3.1 A lender offers a credit product which provides the borrower with a $50,000 loan. The credit contract allows the borrower to not have to make regular repayments but that full repayment has to be made if the borrower sells or permanently vacates their home, or upon the death of the borrower. Until this time, interest on the loan is compounded with the total amount owing under the loan able to increase above the $50,000. Since the credit contract allows the borrower's total debt to exceed the initial $50,000 without any obligation to reduce that liability under that amount (and meets any of the additional prerequisites under the regulations) the contract would be a reverse mortgage for the purposes of the Code and the NCCP Act. 3.15 ASIC may, by a legislative instrument, declare a credit contract to be a reverse mortgage [Schedule 2, item 2, subsection 13A (4)]. This will allow ASIC, as the national regulator for consumer credit, to ensure that changes in product design do not have the result that those credit contracts which should be regulated under the NCCP Act as a reverse mortgage will not be subject to the protections introduced in Schedule 2. ASIC's power to make this type of declaration in respect to reverse mortgage contracts is analogous to its power under section 761AE of the Corporations Act 2001 in relation to margin lending facilities. 3.16 There is a cross-reference to the definition of a reverse mortgage in subsection 204(1) of the Code, with that subsection specifying that the term is defined in section 13A of the Code. [Schedule 2, item 3, subsection 204(1)] Division 2 -- Other definitions 3.17 For the purposes of the NCCP Act, a reverse mortgage information statement is defined as a document relating to reverse mortgages which complies with the regulations. [Schedule 2, item 4, subsection 5(1)] 3.18 It is anticipated that the form of the reverse mortgage information statement will be a document containing generic information regarding the key features and implications of reverse mortgages. 3.19 The Enhancements Bill also introduces a definition of a bridging finance contract, as a contract where, first, at the time the contract is made the debtor reasonably expects to receive a lump sum before the end of the contract and to use that sum as far as possible to meet their obligations under the contract, and, secondly, if the regulation prescribe any conditions, those conditions are meet. [Schedule 2, item 5, subsection 204(1)] 36


Reverse mortgages 3.20 Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary. 3.21 It is anticipated that additional conditions that must be met in order for the definition of bridging finance contract to be met will be prescribed by regulations, including conditions in relation to the term of such contracts. 3.22 The Enhancements Bill also introduces the following definitions: · engage in conduct is defined as meaning the doing of an act or omitting to perform an act [Schedule 2, item 6, subsection 204(1)]; · practising lawyer is defined as a person admitted to the legal profession by a federal court or State or Territory Supreme Court who holds a practising certificate entitling them to practice law [Schedule 2, item 7, subsection 204(1)]; and · reverse mortgaged property in relation to a credit contract is defined as a dwelling or land that is mortgaged to secure a borrower's obligation under a reverse mortgage contract. [Schedule 2, item 8, subsection 204(1)] Part 2 -- Provisions applying to licensees 3.23 A note is inserted into section 133 of the NCCP Act to illustrate the consequences of a breach of section 133. The example in the note states that if a person has suffered loss or damage from entering into a credit contract which is unsuitable, when a reverse mortgage would have been not unsuitable, that person may apply to a court under sections 178 or 179 for appropriate orders. These orders may either compensate them for the loss or damage or reduce the loss or damage suffered, by putting the consumer in the position they would have been in had they been placed into a not unsuitable reverse mortgage. [Schedule 2, item 9, section 133] 3.24 This note will assist licensees and debtors to understand the power of the court to make flexible orders to provide a remedy under section 179 where a licensee arranged a credit contract which was unsuitable. 37


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Part 3-2D -- Licensees and reverse mortgages 3.25 Part 3-2D of Schedule 2 of the Enhancements Bill imposes obligations on licensees that are intended to enhance a consumer's understanding of the potential outcomes of entering into a reverse mortgage, before they decide whether or not to enter into a particular reverse mortgage contract. These obligations will be in addition to those currently required under Chapter 3 of the NCCP Act. 3.26 The introduction of a new Part 3-2D results in the need to include a Guide to this Part. [Schedule 2, item 10, section 133DA] 3.27 The first obligation will be that licensees use an ASIC-approved website to generate projections made in accordance with the regulations, and to show them to a consumer in person. It is expected these projections will illustrate the effect a reverse mortgage contract may have on the equity the consumer has in their home over time, and the potential impact of interest rates and house price movements. They may also show the effect on their equity of different types of loan payments (for example, the difference in the rate at which the consumer's liability increases where they borrow a lump sum or drawdown regular monthly payments). [Schedule 2, item 10, subsection 133DB(1)] 3.28 The licensee must also give the consumer a printed copy of the projections. [Schedule 2, item 10, paragraph 133DB(1)(b)] 3.29 The requirement to show the projections in person is intended to assist the consumer by enabling them to seek explanations directly from the licensee, or ask them questions prompted by the projections. 3.30 It is a defence to these requirements if the licensee reasonably believes the consumer has been shown the projections and received a copy of them from another person [Schedule 2, item 10, subsection 133DB(3)(a)]. The projections would need to have been the same or substantially the same as those the licensee would otherwise be required to show the consumer [Schedule 2, item 10, subsection 133DB(3)]. 3.31 Licensees will also have a defence to these requirements in any circumstances that may be prescribed in the regulation. This will enable the obligations to be applied flexibly and respond to changes in licensee procedures. [Schedule 2, item 10, subsection 133DB(4)] 3.32 These defences will avoid duplication if, for example, the credit provider knows that a consumer has already received a copy of the projections from an intermediary such as a mortgage broker. 38


Reverse mortgages 3.33 The second obligation will be that licensees tell the consumer in person certain matters that relate to reverse mortgages and are prescribed in the regulations [Schedule 2, item 10, paragraph 133DB(1)(c)]. It is anticipated these matters will include notifying the consumer that: · there are alternatives to a reverse mortgage which they could consider (such as downsizing to a smaller house); and · taking out a reverse mortgage may affect their entitlements to any government benefits they receive (if any). For example, if the proceeds of a reverse mortgage are placed into a financial investment, such as a term deposit, then income from that investment would be assessed under the deeming rules that apply to all financial investments. 3.34 The third obligation will be to give the consumer a reverse mortgage information statement (as discussed at paragraph 2.18). [Schedule 2, item 10, paragraph 133DB(3)(d)] 3.35 It is a defence to this requirement if the licensee reasonably believes the consumer has already received a statement from another person within the previous 90 days. [Schedule 2, item 10, subsection 133DB(5)] 3.36 A defendant will bear the onus of proving the defences under subsections 133DB(3) and (4). This is appropriate since it would be relatively easier for the defendant to prove that they believed a consumer has been provided with either the projections or information statement by reference to internal procedures. 3.37 A breach of these requirements will attract a civil penalty of 2000 penalty units and also be an offence attracting a criminal penalty of 50 penalty units. [Schedule 2, item 10, subsections 133DB(1) and (2)] 3.38 In addition to the obligation to provide a reverse mortgage information statement under subsection 133DB(3), the following classes of persons must also make available a reverse mortgage information statement: · credit providers under one or more reverse mortgages; and · licensees who provide, or hold themselves out as providing, credit assistance in relation to reverse mortgages. 3.39 The circumstances in which they must provide an information statement are: 39


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · through their website (where the person has a website which provides information about reverse mortgages) [Schedule 2, item 10, subsections 133DC(1) and (2)]; · when the consumer asks the licensee for an information statement, and the consumer has given the licensee their contact details as required by the regulations [Schedule 2, item 10, subsections 133DD(1) and (2)]; and · the regulations require a consumer to be given an information statement (and the consumer has given the licensee their contact details as required by the regulations) [Schedule 2, item 10, subparagraph 133DD(1)(b)(ii)]. 3.40 Failure to provide an information statement in the above circumstances will attract a civil penalty of 2000 penalty units and is an offence attracting a criminal penalty of 50 penalty units. [Schedule 2, item 10, subsections 133DC(2) and (3) and subsections 133DD(2) and (3)] 3.41 There are two defences provided for a contravention of the requirement to provide a reverse mortgage information statement in response to a consumer's request. These are: · that the licensee has already given the consumer, or reasonably believes the consumer has already been given, an information statement [Schedule 2, item 10, subparagraph 133DD(4)(i)]; and · if they are a credit provider who offers reverse mortgages, the licensee reasonably believes the consumer would not be eligible for a reverse mortgage from them. [Schedule 2, item 10, subparagraph 133DD(4)(ii] 3.42 A defendant will bear the evidentiary burden in relation to these defences. This is considered appropriate since it would be relatively easier for the defendant to prove that they believed a consumer need not be provided with an information statement (either because they establish facts or circumstances as to why they reasonably believe another person has done so or because the consumer would not be eligible for their products, by reference to internal procedures). 3.43 The regulations may also prescribe circumstances in which licensees are not required to give a consumer a reverse mortgage information statement. [Schedule 2, item 10, paragraph 133DD(4)(c)] 3.44 The Enhancements Bill will prohibit licensees, when providing or offering to provide a credit service to a consumer, from using the 40


Reverse mortgages phrase `reverse mortgage' or another term of similar import to it. [Schedule 2, item 10, subsections 133DE(1)and (2)] 3.45 This provision ensures that consumers can have confidence that the term `reverse mortgage' will be used to describe only those contracts where they will have the benefit of the statutory protections introduced by the Enhancements Bill. Licensees should not be able to use this term where the effect or result may be to encourage a consumer to enter into a credit contract with none of these protections (for example, where they are required to repay the contract after five years). 3.46 A breach of the prohibition on the use of the term `reverse mortgage' will attract a civil penalty of 2000 penalty units. [Schedule 2, item 10, subsection 133DE(2)] 3.47 It is a defence to this requirement if the use of the phrase reverse mortgage (or phrase of similar import) accurately represents that the credit contract or mortgage being referred to: · is or will be a reverse mortgage: or · is not or will not be a reverse mortgage. [Schedule 2, item 10, subsection 133DE(3)] 3.48 Section 179 of the NCCP Act is amended to provide for specific consequences where a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for orders to let the plaintiff reside in a reverse mortgaged property to prevent or reduce any loss or damage they have suffered, or are likely to suffer if they were otherwise required to vacate the property. [Schedule 2, item 11, paragraph 179(6)(d)] 3.49 Under section 179 the court is given power to make orders to compensate a consumer or to reduce the loss or damage suffered by a consumer. The power to reduce the loss or damage suffered by a consumer can be exercised through specifying that an unsuitable contract should operate in accordance with orders of the court. 3.50 In the case of a consumer who is placed into a contract that is unsuitable, where a reverse mortgage would have been not unsuitable, this power would allow the court to make orders so that the unsuitable credit contract is rewritten to apply in the way that the suitable reverse mortgage would have (for example, by allowing the consumer to remain in their residence until they permanently vacate it). 3.51 The effect of the amendment to section 179 is to specify circumstances in which a consumer may apply for such orders, and where the court would be able to make such orders. 41


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 3.52 The circumstances under which a plaintiff may apply for such an order are: · the defendant is a credit provider who has contravened section 133 of the NCCP Act in relation to a credit contract that is not a reverse mortgage; · the debtor's obligations under that contract are secured by a mortgage over their principal place of residence; and · the court is satisfied that, at any time when the assessment needed to be made in relation to the contract under section 128 of the NCCP Act: - a credit provider was offering reverse mortgages; - the debtor would have been eligible to enter into a reverse mortgage; and - the reverse mortgage would not have been unsuitable under section 133 of the NCCP Act. [Schedule 2, item 11, subsection 179(6)] 3.53 If these circumstances are met and a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for the orders, the court must consider the order appropriate and make the order, unless it would adversely affect a person other than the debtor and the defendant. [Schedule 2, item 11, subsection 179(7)] 3.54 This approach reflects the importance of protecting elderly consumers who may be placed in unsuitable credit contracts, and the desirability, where this is the case, of allowing these consumers to be able to remain in their residence (rather than, for example, being provided with compensation through a lump sum). It is considered appropriate to protect these consumers and to avoid the consequences of this class of borrowers having to vacate their residence (such as social dislocation and potential isolation). Part 3 -- Provisions applying to credit providers generally 3.55 Some potential debtors will be concerned about the rights of a fellow resident to remain in the property after they vacate it; for example, a debtor may want their spouse (who does not share title to the residence) to be able to remain in the residence after they themselves move into aged care accommodation. 42


Reverse mortgages 3.56 If a reverse mortgage contract gives residency protections for non-title holding residents, the Enhancements Bill regulates the way in which those protections are to be provided. The contract document must provide that the debtor may at any time nominate to the credit provider a person who will be allowed to occupy the property under the same rights as the debtor. The debtor must also be able to revoke any such nomination. [Schedule 2, item 12, subsection 17(15A)] 3.57 This provides a consistent and minimum level of protections for non-title holding residents across all credit providers who elect to who offer such protections. 3.58 This requirement only applies if a reverse mortgage contract provides for non-title holding resident protections. This provision: · does not require all credit providers to offer protections to non-title holding residents; and · does not regulate or prescribe who can be a non-title holding resident (so that credit providers can adopt different eligibility criteria). Example 3.2 A credit provider offers reverse mortgages that do not provide residency protections to persons living the home over which the reverse mortgage is secured, apart from the title holder. Therefore, subsection 17(15A) would not apply to the credit provider in relation to its reverse mortgages. Example 3.3 A credit provider offers a reverse mortgage under which non-title holding residents nominated by the borrower are allowed to remain in the property after the borrower has died. This credit provider will need to comply with subsection 17(15A). This credit provider could also have their own criteria regarding who can be nominated by the borrower to have these residency protections (for example, they must be over a certain age). 3.59 Subsection 17(15A) will be inserted into Part 2, Division 1 of the Code. A consequence of this is that it becomes subject to the operation of existing section 22 of the Code. This section prohibits a credit provider from entering into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. 43


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 3.60 A breach of this requirement will attract a criminal penalty of 100 penalty units and is an offence of strict liability. 3.61 The imposition of a strict liability offence is considered appropriate since: · a credit provider can easily determine or control whether those matters are to be included in their contract documents; and · it enhances ASIC's ability to enforce this requirement. 3.62 A credit provider is prohibited from both entering into a reverse mortgage, or subsequently changing the terms of a reverse mortgage contract, to allow them to commence enforcement proceedings against the debtor for any of the following categories of default: · the debtor: - failing to inform the credit provider that someone else lives in the property, or failing to provide evidence they or a nominated person occupies the property; - leaving the property unoccupied (but only whilst it is still their principal place of residence) or; - failing to pay a cost they are required to pay apart from the contract (for example, council rates or insurances); · a provision which does not make clear what the debtor must do to comply with the obligation; · a cross default (for example, the debtor defaulting on another credit contract with the same credit provider); or · any act or omission by the debtor prescribed by regulations. [Schedule 2, item 13, section 18A] 3.63 As a result of the exclusion of these terms from reverse mortgage contracts borrowers should not be in default (and at risk of enforcement action) because of minor oversights or for reasons which bear no relationship to the risk to the credit provider from the default. 3.64 Section 18A will be inserted into Part 2, Division 1 of the Code and will therefore also attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that 44


Reverse mortgages contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. Therefore, a breach of this item will attract a criminal penalty of 100 penalty units and is an offence of strict liability. 3.65 The imposition of a strict liability offence is considered appropriate since: · a credit provider can easily take steps to ensure those matters are not included in their contract documents; and · it enhances ASIC's ability to enforce this requirement. 3.66 If a proposed reverse mortgage contract does not provide residency protection provisions for person other than the debtor, a person must inform the proposed debtor of this before providing credit services to them in relation to the contract. [Schedule 2, item 13, subsections 18B(1) and (2)] 3.67 This disclosure will enable the consumer to make a fully informed decision about whether a particular reverse mortgage contract is suitable for their requirements in respect of the consequences for non-title holding residents (such as a partner whose name is not on the title of the property). If the borrower wants to protect this person, they would then be on notice and could choose to find a credit provider who offers reverse mortgages with the appropriate protections. 3.68 Credit providers must also meet this requirement before entering into a contract for a reverse mortgage. [Schedule 2, item 13, subsection 18B(4)] 3.69 This disclosure must occur in writing in the form prescribed by the regulations (if any). [Schedule 2, item 13, subsections 18B(2) and (4)] 3.70 A breach of this requirement will attract a criminal penalty of 50 penalty units and is an offence of strict liability. The imposition of a strict liability offence is considered appropriate since it will significantly enhance ASIC's ability to enforce this requirement. 3.71 The Enhancements Bill will enable regulations to be made that may regulate or prohibit a credit provider from entering into a reverse mortgage without the debtor having received legal advice. [Schedule 2, item 13, section 18C] 3.72 Section 18C will be included in Part 2, Division 1 of the Code, and therefore attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. Therefore, a breach of this section will 45


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 attract a criminal penalty of 100 penalty units and is an offence of strict liability. 3.73 The deferral of this obligation until a commencement date has been prescribed is to enable the provision to come into force when the Government can have certainty that there are appropriately accredited solicitors available to provide legal advice. 3.74 The imposition of a strict liability offence is considered appropriate since it significantly enhances ASIC's ability to enforce this requirement. 3.75 Items 14, 15, 16 and 17 amend subsection 22(3) and 26(5) and paragraphs 33(2)(a) and (b) make consequential amendments to the Code as follows: · item 14 amends subsection 22(3) to provide that a contravention of section 18B attracts the penalties under subsections 18B(4) and (5) rather than section 22 [Schedule 2, item 14, subsection 22]; · item 15 amends subsection 26(5) to provide that section 26, which relates to debtors making payments before they are due, does not apply to payments made in accordance with section 86A (which specifically addresses the ability of a borrower to make payments which terminate their reverse mortgage) [Schedule 2, item 15, section 26]; and · items 16 and 17 amend subsection 33(2) to provide that in the case of a reverse mortgage (whether it be a continuing credit contract or not) the maximum period for a statement of account period is 12 months [Schedule 2, items 16 and 17, subsection 32(2)]. 3.76 A purported change to a reverse mortgage contract is void to the extent that it: · removes a provision required to be in the contract by subsection 17(15A) [Schedule 2, item 18, paragraph 67A(a)]; or · varies the contract so as to limit the ability of a debtor to nominate to the credit provider a person who is to be allowed to occupy the property or varies the rights they are provided under the contract (so that if a debtor entered into the contract because they had the right to later be able to nominate a non-title-holding resident, that right cannot be taken away). [Schedule 2, item 18, paragraph 67A(b)] 46


Reverse mortgages Subdivision B -- Ending of reverse mortgage by credit provider receiving value of reverse mortgaged property 3.77 The Enhancements Bill inserts Subdivision B which relates to the debtor's accrued liability upon the conclusion of the reverse mortgage credit contract, whether by the sale of the reverse mortgaged property or other payment by the debtor. 3.78 As a result of the introduction of this Subdivision, there is a need to amend the heading to Division 1, and to introduce an additional heading, specifying that sections 82 to 86 of the Code are included in Subdivision A. [Schedule 2, item 19 , Division 1 of Part 5 (heading)] 3.79 The Subdivision introduces a statutory `no negative equity' guarantee, so that the debtor cannot be required, subject to specific exceptions, to pay more than the market value of any property that is mortgaged to the credit provider. 3.80 In summary, the Subdivision introduces requirements so that where the credit provider receives an amount equal to the adjusted market value of the property that is secured under the reverse mortgage: · the effect of such a payment will be to discharge the debtor's liability to the credit provider; · the credit provider must not demand or accept payments in excess of the adjusted market value, and must refund any such payments; and · exceptions to these restrictions are introduced (for example, where the debtor deliberately damaged the secured property). 3.81 Where a credit provider receives an amount at least equal to the adjusted market value of the reverse mortgage property, the debtor's obligations and the mortgage securing those obligations is discharged. [Schedule 2, item 20, sections 86A and 86B] 3.82 A credit provider may receive those amounts either as a payment from the debtor or the proceeds of the sale of the reverse mortgaged property [Schedule 2, item 20, subparagraphs 86A(b)(i) and (ii)]. 3.83 This allows a debtor to voluntarily pay out a reverse mortgage contract if they repay an amount at least equal to the property's market value. 47


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 3.84 The effect of a payment of the adjusted market value is to discharge all the debtor's liabilities and the mortgage over their property. [Schedule 2, item 20, subsection 86B(2)] 3.85 Regulations may be made to determine how the adjusted market value of a property is to be worked out or adjusted. This will enable a mechanism to be introduced to address situations where there may be a dispute about how this figure should be calculated or determined. [Schedule 2, item 20, subsection 86A(2)] 3.86 Where a reverse mortgage credit contract has been terminated under section 86A, a credit provider must refund any payments received in excess of the adjusted market value, and must not demand or accept further payments under the credit contract. [Schedule 2, item 20, sections 86C and 86D] 3.87 There are specific circumstances where the payment of an amount equal to the adjusted market value will not terminate the credit contract and that the credit provider may seek further payment from the debtor. These circumstances are: · where the market value of the reverse mortgaged property was reduced due to deliberate damage caused by the debtor or a person who occupied the property with the debtor's consent; · where the debtor engaged in fraud, or made a misrepresentation relating to the reverse mortgage; or · any other circumstance prescribed in the regulations. [Schedule 2, item 20, section 86E] 3.88 The regulation-making power will allow flexibility in accommodating other situations that may be identified where it would be appropriate for the credit provider to be able to demand and receive an amount in excess of the adjusted market value. 3.89 Before commencing enforcement proceedings against a debtor or mortgagor under a reverse mortgage, a credit provider must either contact or make reasonable attempts to contact the debtor or mortgagor (or their lawyer, or a person who has a power of attorney over their financial affairs). [Schedule 2, item 21, subsection 88(1) and (2)] 3.90 This contact must occur between when the credit provider issues a default notice under section 88 of the Code and the 30 day period required under default notices for the recipient to rectify the default. The contact must be in person or by telephone, with the credit provider 48


Reverse mortgages required to confirm whether the debtor or mortgagor received the default notice and to also inform them of the consequences of failing to remedy the default. 3.91 These additional requirements in relation to contacting debtors and mortgagor about defaults recognises the impact age and declining health may have on this class of borrowers, their reliance on others to assist or advise them, and the consequent need for greater requirements on credit providers in respect of potentially senile delinquents. For example: · many reverse mortgage borrowers may better understand that they are in default and how to remedy it when this is disclosed to them verbally, rather than in writing; and · a default occurring during a period that a debtor is temporarily absent from the reverse mortgaged property due to circumstances such as illness or hospitalisation, is more likely to be resolved when the credit provider attempts to personally contact the debtor. 3.92 A breach of this requirement will attract a criminal penalty of 50 penalty units. [Schedule 2, item 21, subsection 88(1) and (2)] 3.93 Under section 18A a credit provider is prohibited from specifying in a reverse mortgage contract that certain types of conduct will constitute a default. If a credit provider issues a notice relating to a reverse mortgage for an alleged default of the contract because the debtor or mortgagor has not complied with a contract term prohibited under section 18A, the notice is not a default notice for the purposes of subsections 88(1) and (2) or section 93 of the Code. [Schedule 2, item 22, subsection 88(7A)] 3.94 However, the notice will still be effective as a default notice for the purposes of sections 89, 94 or 95 of the Code. [Schedule 2, item 22, subsection 88(7B)] 3.95 Section 93A applies to reverse mortgages where the liability of the debtor or mortgagor to the credit provider can exceed the adjusted market value because one of the exemptions in section 86D applies. 3.96 If a credit provider is required under Section 88 of the NCCP Act to give a debtor or mortgagor a default notice before beginning enforcement proceedings, the default notice sent by the credit provider must include the following additional matters: · the amount received by the credit provider; 49


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · the debtor's liability under the reverse mortgage contract just before that amount was received; and · the ground or grounds under section 86D under which they are seeking payments in excess of the adjusted market value (such as deliberate damage or fraud or misrepresentation by the debtor). [Schedule 2, item 23, subsection 93A(2)] 3.97 The Code currently provides that contravention of particular provisions of the Code will be a breach of a key requirement under section 111, with the credit provider liable for additional penalties in accordance with Part 6 of the Code. 3.98 Section 111 is amended to provide that a breach of section 17(15A) will be a breach of a key requirement under section 111. [Schedule 2, items 24 and25, subsections 111(1) and (2)] 3.99 Credit providers that allow a debtor to nominate a person who may occupy the reverse mortgaged property on the same terms of the debtor (as discussed in paragraphs 1.28 to 1.33 above), must keep records of any nomination or revocation of a nomination by a debtor. [Schedule 2, item 26, subsection 185A(1)] 3.100 A breach of this requirement will attract a criminal penalty of 50 penalty units. [Schedule 2, item 26, subsection 185A(2)] 50


Chapter 4 Small amount credit contracts Outline of chapter 4.1 The Consumer Credit and Corporations Legislation (Enhancements) Bill 2011 (Enhancements Bill) introduces new requirements for credit providers and persons who provide credit assistance in relation to small amount credit contracts. 4.2 Small amount credit contracts are defined, in general terms, as contracts where the amount of credit provided is less than $2,000 and the term is less than 2 years. 4.3 The following obligations will apply in relation to small amount credit contracts: · licensees who have websites where they offer credit assistance in relation to small amount credit contracts, or where consumers can apply for or inquire about a small amount credit contract, will need to meet disclosure requirements (to be prescribed by the regulations); and · licensees will be prohibited from offering or arranging concurrent small amount credit contracts, refinancing an existing small amount credit contract into a new small amount credit contract, or from increasing the credit limit of a small amount credit contract. Context of amendments 4.4 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth. 4.5 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 51


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 4.6 Under Phase Two, COAG agreed the Commonwealth would consider additional reforms to the regulation of credit, including whether or not to introduce measures to address practices in relation to small amount credit contracts. 4.7 The Enhancements Bill introduces specific obligations in relation to this class of credit contracts because of the particular risks that arise to consumers from their use. In particular there are risks that the repeated or continued use of credit provided through these this form of credit result in consumers entering into multiple contracts where the overall level of indebtedness increases over time so that: · an increasing proportion of their income will need to be used to meet the repayments; and · the capacity of the borrower to use the credit for purposes that can improve their standard of living is diminished. 4.8 The Enhancements Bill addresses these issues by: · new disclosure requirements -- so that consumers are alerted to alternatives that may avoid the need to enter into a small amount credit contract; and · prohibitions on repeat and multiple borrowing -- to address the risk of the debtor's liability escalating through entering into a number of small amount credit contracts. Summary of new law 4.9 The Enhancements Bill introduces website disclosure requirements for licensees in relation to small amount credit contracts. 4.10 These obligations will apply to: · licensees who have a website where they represent that they are able to provide credit assistance in relation to small amount credit contracts; and · licensees who have a website that can be used by a consumer to apply for or make an inquiry about a small amount credit contract (where the licensee would be the credit provider). 4.11 The regulations will prescribe the disclosure requirements. It is proposed the disclosure requirements will consist of a short, high impact 52


Small amount credit contracts statement advising the availability of both sources of assistance and alternative no cost or low cost sources of credit. 4.12 The Enhancements Bill will also introduce prohibitions to repeated and continued use of credit provided through small amount credit contracts (the multiple contract prohibitions). 4.13 Licensees will be prohibited from providing credit assistance by either suggesting that a consumer apply for, or assisting a consumer to apply for: · a small amount credit contract, if they know or are reckless as to whether the consumer is already a party to a small amount credit contract; or · an increase to the credit limit of a small amount credit contract. 4.14 Licensees who are credit providers will be prohibited from: · entering into a small amount credit contract, if they know or are reckless as to whether the consumer is already a party to a small amount credit contract; · entering into a small amount credit contract, if some or all of the credit provided under that contract will be used to refinance some or all of the credit provided under another small amount credit contract; or · increasing the credit limit of a small amount credit contract. Comparison of key features of new law and current law New law Current law Specific obligations will be The NCCP Act currently does not introduced on persons engaging in include any specific requirements credit activities in relation to small relation to disclosure obligations or amount credit contracts to: prohibitions in relation to multiple · disclose alternatives to credit; and small amount credit contracts that apply to persons engaging in credit · comply with the multiple contract activities. prohibitions. 53


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Detailed explanation of new law 4.15 Schedule 3 of the Enhancement Bill introduces a number of additional conduct obligations for persons engaging in credit activities in relation to small amount credit contracts. 4.16 The obligations in Schedule 3 commence on 1 July 2012, immediately after the commencement of Part 2 of Schedule 2 to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011. [item 3 in the table in subsection 2(1)] 4.17 A definition of small amount credit contract will be included in section 5 of the NCCP Act. It is defined as a credit contract: · that is not a continuing credit contract; · where the credit provider is not an Authorised Deposit-taking Institutions (ADI); · that is not secured by a mortgage (over any type of property); · where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations); · where the term of the contract is 2 years or less (or any term prescribed by the regulations); and · where the contract meets any other requirements that may be prescribed by regulations. [Schedule 3, item 1, subsection 5(1)] 4.18 A power to change aspects of the definition under the regulations has been introduced to allow flexibility in the application of the consequent obligations. Credit providers may adopt different legal structures in relation to their contracts according to whether or not they consider it preferable for their contracts to be subject to the obligations applying to small amount credit contracts. The regulation-making power will allow the Commonwealth to respond more promptly to such responses, where necessary. 4.19 Additional conduct obligations are to be included in the NCCP Act as follows: · obligations that apply to licensees who are providing credit assistance will be set out in a new Division 7 to Part 3-1; and 54


Small amount credit contracts · obligations that apply to licensees who are credit providers under small amount credit contracts will be set out in a new Part 3-2C. 4.20 There is a consequential change to the Guide to Part 3-1 in section 111 (to refer to the new Division 7), while section 133C will introduce a Guide to Part 3-2C. [Schedule 3, items 2 and 4, sections 111 and 133C] 4.21 The effect of section 112 of the NCCP Act is that the obligations that will apply to licensees who are providing credit assistance in Division 7 will not apply to licensees where they are providing credit assistance in relation to a credit contract where they would be the credit provider under that contract. Division 7--Small amount credit contracts 4.22 A licensee who has a website that represents that they are able to provide credit assistance in relation to small amount credit contracts must ensure the website complies with requirements specified by the regulations. [Schedule 3, item 3, section 124A] 4.23 It is proposed to implement, through the regulation-making power, a requirement for licensees to include on their websites a short high impact statement disclosing the availability of, first, sources of assistance (such as financial counselling services and specialist consumer legal advice services), and, second, alternative and cheaper sources of credit. For example, the last decade has seen the development of alternative no or low cost loan schemes specifically designed for low-income consumers. 4.24 It is expected that the disclosure will be generic, that is, it will have the same content for all licensees. 4.25 A licensee will be prohibited from providing credit assistance by suggesting that a consumer apply for, or assisting the consumer to apply for, a small amount credit contract if the licensee knows or is reckless as to whether the consumer is already a party to a small amount credit contract. [Schedule 3, item 3, section 124B] 4.26 The licensee will have a defence where they reasonably believe that the consumer is not a debtor under a small amount credit contract. It is expected it would usually be established through the licensee being able to demonstrate the inquiries they made or the basis they had for believing the debtor was not already a party to a small amount credit contract, when in fact this was the case. The provision therefore places the onus on the 55


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 licensee to establish the facts or circumstances on which this belief is based. [Schedule 3, item 3, subsection 124B(3)] 4.27 A licensee must not provide credit assistance by suggesting that a consumer apply for, or assisting them to apply for an increase to the credit limit of a small amount credit contract. [Schedule 3, item 3, section 124C] Part 3-2C--Licensees that are credit providers under credit contracts: additional rules relating to small amount credit contracts Division 2 -- Small amount credit contracts 4.28 Part 3-2C will insert new obligations on licensees that are credit providers under small amount credit contracts. 4.29 A licensee that has a website that can be used to apply for, or make an inquiry about, a small amount credit contract (where the licensee would be the credit provider), must ensure that the website complies with the requirements in the regulations. [Schedule 3, item 4, section 133CA] 4.30 It is expected that, first, the disclosure have the same content for all licensees, and, second, the requirements will be triggered where the consumer makes an application or inquiry in a way that is readily identifiable (so that licensees can have certainty when the obligation arises). 4.31 It is expected that the regulations will prescribe a short high impact statement disclosing the availability of both sources of assistance and alternative no cost or low cost sources of credit. 4.32 A licensee will be prohibited from entering into, or offering to enter into, a small amount credit contract if the licensee knows or is reckless as to whether the consumer is already a party to a small amount credit contract. [Schedule 3, item 4 , section 133CB] 4.33 The licensee will have a defence where they reasonably believe that the consumer is not a debtor under a small amount credit contract. The defence would therefore require the licensee to demonstrate the inquiries they made or the basis they had for believing the debtor was not already a party to a small amount credit contract, when in fact this was the case. The provision therefore places the onus on the licensee to establish the facts or circumstances on which this belief is based. [Schedule 3, item 4, subsection 133CB(3)] 4.34 A licensee will be prohibited from entering into, or offering to enter into, a small amount credit contract if some or all of the credit 56


Small amount credit contracts provided under the contract would refinance some or all of the credit provided to the consumer under another small amount credit contract. It is irrelevant whether or not the other credit contract is with the same credit provider or a third party. [Schedule 3, item 4, section 133CC] 4.35 The licensee will have a defence where they reasonably believe that the consumer is not a debtor under a small amount credit contract (so that the defence would not be available where the earlier credit contract was with that credit provider). As with the defence in subsection 133CB(2), the licensee will be in the best position to make out the grounds that establish the defence, for example, by demonstrating the inquiries they made that led them to believe the debtor was not already a party to a small amount credit contract. [Schedule 3, item 4, subsection 133CC(3)] 4.36 A licensee who is a party to a small amount credit contract is prohibited from increasing the credit limit of that contract. [Schedule 3, item 4, section 133CD] 4.37 Section 180 of the NCCP Act is amended to provide additional remedies to consumer against a provider of credit assistance or a credit provider for breaches of the multiple contract prohibitions. For example, a consumer will be able to seek a remedy such as recovery of any fees paid to the provider of credit assistance or commissions earned as a result of the transaction. This remedy would be at the discretion of the court. [Schedule 3, item 5, paragraph 180(1)(b)] 4.38 Section 180 of the NCCP Act has been extended as: · the disclosure requirements and the multiple contract prohibitions are intended to assist debtors who are particularly vulnerable (principally because of their low incomes and inability to access alternative sources of mainstream credit); and · experience under State and Territory legislation has been that credit providers and providers of credit assistance can enter into commercial arrangements designed to maximise the costs that can be charged to this class of debtors. 57


Chapter 5 Caps on costs etc. for credit contracts Outline of chapter 5.1 The Consumer Credit and Corporations Legislation (Enhancements) Bill 2011 (Enhancements Bill) introduces new obligations to provide for a tiered cap on the costs that can be charged under credit contracts. 5.2 The key elements of these obligations are: · credit providers under small amount credit contracts (in general terms, contracts where the amount of credit is less than $2,000 and the term is less than 2 years) will only be able to charge the following amounts: - an establishment fee that can be a maximum of 10 per cent of the adjusted credit amount (defined as, in practice the amount of credit the debtor receives in their hand); - monthly fees that can be a maximum of 2 per cent of the adjusted credit amount; - fees payable in the event of default; and - any government fee, charge or duty payable in relation to the contract; · all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent; and · the introduction of penalties against credit providers for breaching either cap, and penalties against providers of assistance for suggesting credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap. 59


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Context of amendments 5.3 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth. 5.4 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 5.5 Under Phase Two, COAG agreed the Commonwealth would consider whether or not to regulate the costs that can be charged under credit contracts. 5.6 The Enhancements Bill introduces caps on credit contracts to address specific risks of financial detriment or harm to consumers, through the use of relatively high-cost credit. 5.7 The risk to a consumer of this financial detriment increases according to the following factors: · the borrower's income -- the lower the income the greater the reduction in income that will result from having to meet repayments under a credit contract (noting that a significant percentage of borrowers who use these products will have very low incomes); · the term of the credit contract -- the shorter the term the less income the borrower can expect to receive from other sources while they need to repay it, so that there is less opportunity for a borrower to receive sufficient income to either repay the debt or avoid an immediate need for additional credit to meet expenses temporarily deferred in order to make that repayment; · the number of credit contracts -- the more credit contracts that the borrower takes out within a short period of time (whether concurrently or successively), the more likely it is that income is being diverted to meet repayments, rather than ongoing expenses; and · the level of costs charged by the credit provider -- there can be significant differences in the level of costs charged by credit providers, in part reflecting the difficulties some debtors have in being able to obtain credit from other credit 60


Caps on costs etc. for credit contracts providers (with the result they enter into contracts irrespective of the costs being charged). 5.8 The combination of these factors can result in such a reduction in income that the borrower may, in a very short period, be placed in a position where the debt cannot be repaid, or can only be repaid through a significant drain on the borrower's financial resources. 5.9 The tiered approach to the cap on costs reflects the need to allow credit providers to receive a greater return for small amount credit contracts, given the relatively higher establishment costs they may incur. Summary of new law 5.10 Schedule 4 of the Enhancements Bill introduces new obligations in relation to the restricting the maximum amount that can be charged in under both small amount credit contracts and all other credit contracts regulated by the Code. 5.11 The obligations will commence on 1 January 2013. 5.12 Schedule 4 will introduce the following obligations: · a cap on small amount credit contracts so that the maximum cost (other than in the event of default) will be the total of: - 10 per cent of the amount of credit the debtor receives in their hand; - monthly fees of 2 per cent of this amount; and - any government fees, charges or duties payable in relation to the contract; · all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent; · credit providers are liable to penalties for breaching either cap; · providers of assistance who suggest credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap are liable to penalties (including being required to refund any fees or charges paid by the consumer); and 61


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · a number of provisions are introduced to address specific avoidance practices that have developed in response to the operation of similar caps currently in force in some Australian States and the Australian Capital Territory. Comparison of key features of new law and current law New law Current law Specific obligations will be The NCCP Act currently does not introduced: regulate the maximum amount that · to restrict the maximum amount can be charged under credit contracts. that credit providers can charge In the Australian Capital Territory, under a credit contract; and New South Wales and Queensland, · to ensure compliance through there is currently in force a cap of complementary obligations on 48 per cent which includes interest, persons providing credit fees and charges. In Victoria there is assistance. a 48 per cent interest rate cap excluding fees and charges. There is no cap in place in the Northern Territory, South Australia, Tasmania or Western Australia. Detailed explanation of new law Schedule 4 -- Caps on costs etc. for credit contracts 5.13 The obligations in Schedule 4 will commence on 1 January 2013. [item 3 in the table in subsection 2(1)] 5.14 The definition of small amount credit contract will be included in section 5 of the NCCP Act. It is defined as a credit contract: · that is not a continuing credit contract; · where the credit provider is not an Authorised Deposit-taking Institutions (ADI); · that is not secured by a mortgage (over any type of property); · where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations); 62


Caps on costs etc. for credit contracts · where the term of the contract is 2 years or less (or any term prescribed by the regulations); and · where the contract meets any other requirements that may be prescribed by regulations. [Schedule 3, item 1, subsection 5(1)] 5.15 Section 17 of the Code prescribes disclosure requirements for credit providers. The changes proposed in relation to small amount credit contracts means that credit providers will only be able to impose an upfront establishment fee and monthly fees (and not interest charges in respect of this class of contracts. As a result, there is a consequent need to exempt providers of small amount credit contracts from the disclosure requirements that relate to annual percentage rates and interest charges. [Schedule 4, item 1, subsections 17(4) to (6)] 5.16 Section 23A will introduce prohibited monetary obligations that only apply to small amount credit contracts. As a result amendments are introduced to, first, change the heading for section 23 (to clarify the distinction between that section and section 23A), and, secondly, to amend section 23 so that it does not apply to small amount credit contracts. [Schedule 4, items 2 and 3, section 23 and subsection 23(1)] 5.17 Section 23A will introduce a prohibition on a provider of a small amount credit contract from charging, under the contract, the following amounts: · interest charges (irrespective of whether there has been a default by the debtor); · fees and charges prohibited by the Code (which would not include the establishment fee and monthly fees permitted under section 31A); or · an amount that is greater than the amount of a permitted fee and charge (for example, overcharging a government fee). [Schedule 4, item 4, section 23A] 5.18 Subsection 23A(2) provides a specific penalty for contravention of this requirement. A credit provider who, under a small amount credit contract, imposes a prohibited liability will lose their entitlement to all fees and charges (including the establishment fee and monthly fees). The credit provider is therefore not only required to refund the amount of any excess fee, charge or cost, but cannot retain any amounts, including those that would otherwise be permitted under section 31A. The debtor can recover any such amounts as a debt. [Schedule 4, item 4, subsection 23A(2)] 63


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 5.19 The purpose of this provision is to create a greater financial incentive for credit providers to comply with the prohibition. The nature of small amount credit contracts means that if credit providers charge amounts in breach of the prohibition they are likely to be relatively low in dollar terms. Allowing a penalty whereby the consumer can recover all fees and charges that were imposed will therefore encourage stricter compliance. 5.20 Section 24 of the Code will be amended to introduce a criminal penalty of 100 penalty units for a breach of section 23A, or for a credit provider requiring or accepting payments in breach of the prohibition. [Schedule 4, items 6 and 7, subsections 24(1A) and (2)] 5.21 The effect of this amendment is that a credit provider who breaches the prohibition in section 23A will have committed an offence under subsection 24(1A), with the contravention also being an offence of strict liability under subsection 24(2). A contravention of section 23A will be an offence of strict liability to encourage credit providers to maintain rigid compliance with the cap on costs (given that the amount they charge in respect of a small amount credit contract is within their control). 5.22 In order for the caps on small amount credit contracts to be effective it is considered necessary to introduce strict penalties against providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap. This will address situations where small amount credit provider have commercial relationships with brokers who may direct consumers to that credit provider irrespective of the cost, or where the credit provider has adopted a legal structure that they consider avoids the cap, but where the broker may not be willing to assume the same risks as the credit provider. [Schedule 4, item 8, section 24A] 5.23 The introduction of section 24A has resulted in a need to change the heading of section 24, to clarify that the two sections apply to prohibited monetary obligations in relation to credit providers and providers of credit assistance respectively. [Schedule 4, item 5, section 24] 5.24 Part 2 Division 3 of the Code prescribes requirements in relation to the charging of interest under credit contracts. The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to exempt small amount credit contracts from this Division. [Schedule 4, item 9, section 27A] 64


Caps on costs etc. for credit contracts 5.25 Section 31 of the Code provides a power to make regulations prohibiting credit providers from imposing particular credit fees of charges, or particular classes of such fees or charges. The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose any credit fees of charge other than those expressly permitted under section 31A. There is a consequent need to amend this provision so that the regulation-making power does not apply to small amount credit contracts. [Schedule 4, items 10 and 11, section 31] 5.26 Section 31A prohibits a provider of a small amount credit contract from charging fees and charges other than: · an establishment fee that can be a maximum of 10 per cent of the adjusted credit amount; · monthly fees that can be a maximum of 2 per cent of the adjusted credit amount; · fees payable in the event of default; and · a government fee, charge or duty payable in relation to the contract. [Schedule 4, item 12, section 31A] 5.27 The adjusted credit amount is defined in section 204 of the Code as the first amount of credit that is to be provided under the contract (excluding fees). The meaning of this term is discussed in detail at paragraph 5.56, but in substance it refers to the amount of money that the debtor will receive under the contract. 5.28 The prohibition applies to all fees and charges imposed or provided for under the contract. It is therefore not restricted to credit fees and charges as defined in section 204 of the Code. The use of the broader term is deliberately used to restrict the debtor's liability under a small amount credit contract, by only allowing credit providers to charge those amounts specifically listed in subsection 31A(1). 5.29 The Enhancements Bill introduces a different cap on costs for all other contracts other than small amount credit contracts. Section 32A will introduce a prohibition on a credit provider entering into a credit contract where the annual cost rate exceeds 48 per cent. [Schedule 4, item 13, subsection 32A(1)] 5.30 As with the caps on small amount credit contracts, strict penalties are introduced for providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless 65


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 as to whether the cost charged under that contract will exceed the cap. [Schedule 4, item 13, subsections 32A(2) and (3)] 5.31 The 48 per cent cap does not apply in the following circumstances: · where the credit provider is an ADI (to give this class of credit providers certainty where they may otherwise inadvertently breach the cap, particularly in relation to contracts where both credit and debit facilities are provided); · where the credit contracts is a small amount credit contracts (as the cap in section 31A will apply); or · where the credit contracts is a bridging finance contract (where a combination of a short term and relatively high upfront costs may result in the 48 per cent cap being exceeded). [Schedule 4, item 13, subsection 32A(4)] 5.32 A definition of a bridging finance contract is included in the Enhancements Bill. It is defined as a contract where: · at the time the contract is made the debtor: - reasonably expects to receive a lump sum before the end of the contract; and - intends to use that sum as far as possible to meet their obligations under the contract; and · if the regulation prescribe any conditions, those conditions are meet. [Schedule 2, item 5, subsection 204(1)] 5.33 Section 32B sets out the formula for calculating whether or not the 48 per cent annual cost rate has been exceeded. This formula largely adopts the model currently in force in New South Wales, pursuant to Division 2 of the Credit (Commonwealth Powers) Act (NSW) 2010. [Schedule 4, item 13, section 32B] 5.34 The use of an existing formula avoids the need for changes by credit providers who currently have developed practices to comply with the New South Wales cap on costs. 66


Caps on costs etc. for credit contracts 5.35 Section 32B will, however, allow for amounts to be prescribed by regulation that would need to be taken into account in calculating the annual cost rate. The introduction of this regulation-making power will enable the Government to quickly respond to attempts to circumvent the objective of these reforms. [Schedule 4, item 13, paragraph 32B(3)(c)] 5.36 This power is provided in recognition, in the Australian jurisdictions that have a cap on costs, of the development of a range of methods of charging the borrower additional amounts that do not meet the definition of costs to be included in calculating the cap in State or Territory legislation. Credit providers have adopted a range of practices in order to be able to generate a return of more than 48 per cent while still complying with the cap. 5.37 A contravention of the annual cost rate requirement in section 32A will be a consequential breach of the current prohibition in section 23 on credit providers charging amounts in excess of those allowed under the Code. 5.38 Subsection 34(6) of the Code prescribes requirements in relation to the disclosure of interest charges in a statement of account. The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to exempt small amount credit contracts from subsection 34(6). [Schedule 4, item 14, subsection 34(6)] 5.39 A credit provider under a small amount credit contract (or any person prescribed by the regulations) will be prohibited from receiving any part of the amount of the credit provided under the contract. [Schedule 4, item 15, subsection 39A(1)] 5.40 Any amount of credit provided under the contract retained or paid to the credit provider or to any person prescribed by the regulations is defined as a prohibited credit amount. [Schedule 4, item 25, subsection 204(1)] 5.41 The intention of this prohibition is to address existing practices that have developed following the introduction of similar caps on credit contracts in some States and the Australian Capital Territory. The purpose of the provision is to prevent credit providers from increasing the amount that must be paid by the debtor under the contract through, for example, practices such as requiring the debtor to also purchase goods or services at inflated prices, with the cost of those goods or services included in the amount of credit provided under the contract. 5.42 This practice enables a credit provider to obtain a higher return in two ways: first, the debtor must pay an inflated price for the goods 67


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 relative to the cost to the credit provider of providing them; and, second, the debtor pays interest on the cost of the goods or services. 5.43 Similar arrangements between credit providers and third parties have developed to avoid the restriction on costs, so that the amount of credit is increased by fees or amounts payable to those third parties (with commercial arrangements between those parties in relation to the charging of the fees or costs). The regulation-making power, that will enable payments to prescribed third parties to be included in the prohibited credit amount, will enable the Government to respond promptly to any such practices. [Schedule 4, item 15, paragraph 39A(1)(b)] 5.44 Subsection 39A(2) provides that this prohibition does not apply to the permitted establishment and monthly fee, government fees or charges or to any types of payments permitted by regulations (so that credit providers can include those charges in the amount of credit provided (although subject to other restrictions). [Schedule 4, item 15, subsection 39A(2)] 5.45 The regulation-making power will enable exemptions from from the prohibition to be made where it would be appropriate for the credit provider to pass on the cost to the debtor. [Schedule 4, item 15, paragraph 39A(2)(c)] 5.46 The effect of Section 39B is to cap the amount the credit provider can charge by way of default fees, by specifying that the maximum amount that can be recovered under a contract in the event of default by the borrower must not exceed an amount that is twice the adjusted credit amount. [Schedule 4, item 15, subsection 39B] 5.47 The effect of this provision is that the total of the permitted establishment and monthly fees and the default fees can, at most, only be equal to twice the adjusted credit amount. For example, in relation to a small amount credit contract where the adjusted credit amount was $1000 and the period of the contract was four months, the total of the establishment and monthly fees would be $180. If the debtor then defaulted the total amount the credit provider could recover would be $1000, or a maximum of $820 in default fees. 5.48 If a term of a small amount credit contract allows the credit provider to recover default fees in excess of the maximum amount, that term or provision is void to the extent it authorises the credit provider to collect the excess. The credit provider would, however, still be allowed to receive or retain default fees up to the maximum amount. [Schedule 4, item 15, subsection 39B(2)] 68


Caps on costs etc. for credit contracts 5.49 The rate at which default fees can be charged is not regulated by the Enhancements Bill. However, credit providers would be subject to other requirements that apply more broadly (including common law principles that the default fees must reflect their loss from any default by the debtor). 5.50 The restriction on the maximum amount that can be recovered under a contract -- so that this figure must not exceed an amount that is twice the adjusted credit amount -- does not apply to enforcement expenses. [Schedule 4, item 15, subsection 39B(3)] 5.51 The Code already regulates the way in which enforcement expenses can be charged, and expressly provides, in section 107, that the amount must not exceed those reasonably incurred by the credit provider. 5.52 The amendments will provide that a contravention of the annual cost rate requirement in section 32A will be a breach of a key requirement under section 111. The effect of this amendment is that it enables a debtor or guarantor to seek a penalty up to a maximum of all credit charges, and also enables ASIC to seek a penalty of up to $500,000. The amount of the penalty depends on a range of factors, and, in this context, would be likely to include the number of contracts affected, whether the overcharging was deliberate or not, and the steps taken by the credit provider to rectify the situation. For example, if the cap was regularly exceeded because the credit provider deliberately elected to overcharge debtors, the penalty could be expected to be greater than if the overcharging was an isolated occurrence. [Schedule 4, items 16 and 17, subsection 111(1) and paragraph 111(2)(f)] 5.53 There are a number of key requirements that a credit provider can breach other than in relation to prohibited monetary obligations. 5.54 The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to modify section 114, which sets out the orders a court can make where a credit provider has breached a key requirement in relation to a small amount credit contract. 5.55 The Enhancements Bill therefore makes consequential amendments to section 114 as follows: · small amount credit contracts are excluded from subsection 114(1) (which enables orders to be made in relation to interest charges payable under a credit contract); and · subsection 114(1A) is inserted, which provides that the maximum penalty that a court may impose is the total of the permitted establishment and monthly fees payable under the contract. [Schedule 4, items 18 and 19, subsections 114(1) and (1A)] 69


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 5.56 The term adjusted credit amount is relevant to calculating the permitted establishment and monthly fees (as discussed in paragraph 5.27). A definition of this term is to be included in section 204 of the Code as the amount of credit that is to be provided under the contract, excluding the following amounts: · the permitted establishment and monthly fees; · any amount of credit provided under the contract retained or paid to the credit provider or to any person prescribed by the regulations, in breach of the prohibition in section 39A; and · any other amount that may be prescribed by the regulations. [Schedule 4, item 20, subsection 204(1) 5.57 The Enhancements Bill will insert a number of `signpost' definitions, referring to terms that are central to the operation of these provisions and specifying the sections in which they appear. These terms are annual cost rate, credit cost amount, permitted establishment fee, permitted monthly fee, prohibited credit amount and small amount credit contract. [Schedule 4, items 21, 22, 23, 24, 25 and 26] 70


Chapter 6 Consumer Leases Outline of chapter 6.1 The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill) introduces new requirements for persons who engage in credit activities in relation to consumer leases. The key amendments relate to: · the form of consumer lease documents; · obligations on the lessor to provide statements of account -- both ongoing and at the end of the lease; · changes to obligations under a consumer lease; · changes on the grounds of hardship and on the grounds the consumer lease was unjust; · the rights of the lessor in regards to repossessing goods under a consumer lease; · terminating a consumer lease; · enforcement procedures and expenses; · the liability of lessors for misrepresentations by suppliers of the leased goods; and · offences for false or misleading representations and for harassment in relation to consumer leases. Context of amendments 6.2 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection. 71


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 6.3 In phase one, the National Consumer Credit Protection Act 2009 (the NCCP Act) introduced a Commonwealth statutory framework for the regulation of lenders and brokers. Under phase two, COAG agreed the Commonwealth would consider reforms to the regulation of consumer leases under the National Credit Code (the Code). 6.4 Leases that contain a right or option to purchase are functionally the same as a credit contract and are therefore deemed to be credit contracts by the Code in section 9. 6.5 Part 11 regulates consumer leases where there is no right or obligation to purchase the leased goods. However, due to the regulatory difference between leases and other credit contracts, there have been instances of inappropriate uses of consumer lease arrangements to avoid the Code completely. 6.6 The difference in regulation of consumer lease arrangements and other consumer credit contracts stems from the different nature of the products. However, in respect of some of the obligations under the Code, there is little rationale for varying treatment. 6.7 Some of the main regulatory differences between the two include: · the form of consumer leases; · the obligation to provide an information statement or statement of account; · the content of the disclosure requirements; · liability for conduct such as false and misleading representations; and · the rights of lessees and lessors in respect of enforcement proceedings. 6.8 The regulatory arbitrage in this context may lead to avoidance behaviour and adverse competitive impacts on suppliers of credit contracts relative to suppliers of consumer leases. Due to these differences, lessees have a lower level of rights relative to other consumers of credit. 6.9 Furthermore, in the context of consumer leases, lessees are particularly vulnerable to unscrupulous behaviour including: 72


Consumer leases · lessees mistakenly believing that they have an ability to buy the goods when they do not; and · the amount paid under the lease may be significant (that is, greater than that paid under a credit contract to purchase similar goods) but the lessee has no right to the goods when the lease ends. Summary of new law 6.10 Schedule 3 of the Enhancements Bill addresses the current risks arising from the regulatory arbitrage arising from the lower level of obligations applying to lessors. It extends, as appropriate, the consumer protection measures that currently apply to credit contracts to consumer leases. A comparison table of the provisions of the Code which are being applied to consumer leases is included at the end of this Explanatory Memorandum at paragraph 5.81. 6.11 Schedule 3 of the Enhancements Bill introduces the following amendments in relation to consumer leases: · amendments to Division 2: form of and information to be included in consumer leases; · introduction of a new Division 4: fees and charges under a consumer lease; · introduction of a new Division 5: the lessor's obligation to account including the provision of ongoing statements of account, and end of lease statements; · introduction of a new Division 6: certain transactions not to be treated as consumer leases; · introduction of a new Division 7: changes to obligations under consumer lease arrangements including changes by agreement, as well as changes on the grounds of hardship and unjust transactions; · introduction of a new Division 8: repossession of goods, termination of a consumer lease and enforcement procedures · introduction of a new Division 9: introducing the concept of linked lessors and the liability of the lessor for a suppliers' misrepresentation; 73


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · introduction of a new Division 10: regulate specific conduct relating to consumer leases -- namely, false or misleading representations and harassment; · introduction of a new Division 11: relocating the deeming provision which extends Part 12 relating to miscellaneous matters to consumer leases · amendments to Part 13 of the Code: introduce new defined terms to reflect the new obligations imposed by the Amendment Bill; and · minor technical amendments to the Code. 6.12 The Enhancements Bill will also introduce consequential and technical changes to the provisions applying to credit contracts. Comparison of key features of new law and current law New law Current law A consumer lease: A consumer lease must be in writing · must be in written form; and signed by the lessee under section 173. · must be signed by both the lessor and lessee; · may be made up of multiple documents; and · may be made in a form other than in writing. A unilateral alteration of a lease No equivalent for consumer leases. document by the lessor will be void, The requirement only applies to unless the lessee agrees to the change. credit contracts under section 19 of the Code. The new law will prohibit lessors No equivalent for consumer leases. from overcharging fees payable under The requirement only applies to a consumer lease. credit contracts under sections 31 and 32 of the Code. Lessors are required to provide: No equivalent for consumer leases. · an ongoing statement of account if The obligation to provide an ongoing requested by the lessee; and statement of account only applies to credit contracts under section 33 of · an end of lease statement. the Code. Consumer leases can be changed on Part 4 Division 3 previously applied the grounds of hardship or on the to consumer leases by virtue of the former deeming provision in section 74


Consumer leases New law Current law basis the transaction is unjust. 177(1)(a) (except section 78). Imposes an obligation on the lessor to No equivalent for consumer leases. provide a statement of the amount The obligation only applies to credit payable on termination. contracts under section 83 of the Code. Imposes an obligation on the lessor to No equivalent for consumer leases. inform the lessee when a direct debit The obligation only applies to credit default occurs. contracts under section 87 of the Code. Lessee have a right to terminate a A lessee may terminate the lease after lease in two different circumstances: goods have been provided by · before the goods have been returning the goods under section 179 provided; and of the Code. · after the goods have been There is no equivalent obligation provided. under the old law to provide a statement of account. The lessor is also required to provide a statement of account to the lessee upon termination. The following enforcement matters Those enforcement matters only are extended to consumer leases: apply to credit contracts: · enforcement proceedings; · enforcement proceedings under · postponement of enforcement sections 88, 89 and 93 proceedings; · postponement of enforcement · procedures for goods hired under proceedings under sections 94 to a consumer lease; and 97 · recovery of enforcement expenses · enforcement procedures for goods from the lessee. mortgaged under sections 98 to 101 · recovery of enforcement expenses under section 107 Sections 98 to 101 currently apply to consumer leases by virtue of the deeming provision section 177. Lessors are liable for a suppliers' No equivalent for consumer leases. misrepresentation. Credit contracts are regulated in The new law also imposes a criminal relation to linked credit providers and penalty on a lessor or supplier for false or misleading representations harassment. under sections 125 to133. 75


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Detailed explanation of new law Part 11 -- Consumer leases 6.13 Items 1 to 9 make minor consequential amendments to the NCCP Act. These are outlined below in Consequential Amendments at paragraphs 5.84 to 5.87. Amendments to Division 2 -- Form of and information to be included in consumer leases Form of consumer lease 6.14 The Enhancements Bill makes a number of amendments to Division 2 of Part 11 of the Code. This Division currently regulates both the form and content of consumer leases. 6.15 Lessors will be required to ensure that a consumer lease is in the form of a written document and that it is signed by both the lessor and the lessee. [Schedule 5, item 14, subsection 173(1)]. 6.16 The amendments also allow a lessor to have a consumer lease that is made up of multiple documents [Schedule 5, item 14, subsection 173(1A)]. In these instances, the lease will be regarded as signed in accordance with subsection 173(1) if one of the documents is signed, and the other documents are referred to in that document [Schedule 5, item 15, subsection 173(2A)]. 6.17 The amendments will allow for regulations to be made which authorise consumer leases to be formed other than by a party signing a contract, such as by specified conduct [Schedule 5, item 16, section 173A]. Under the Code, credit contracts can also be formed by conduct and this same power is being extended to consumer leases. This will allow flexibility in relation to the way in which consumer lease contracts can be formed to reflect changes in practice (for example, by potentially allowing contracts to be formed by the consumer accepting goods). 6.18 Finally, there are restrictions on consumer lease documents being altered that operate in a similar manner to the way credit contracts are regulated under the Code. A lessor will be prohibited from making unilateral changes to a lease document (other than alterations that reduce the liabilities of the lessee) unless the lessee agrees to the change in writing. [Schedule 5, item 17, section 174A] 76


Consumer leases Division 4 -- Fees and charges 6.19 A new Division 4 is introduced which reflects the provisions of the Code in respect of fees and charges that currently apply to credit contracts. The Code will allow for consumer lease fees and charges to be prohibited by regulation. [Schedule 5, item 18, section 175A] Division 5 -- Lessor's obligation to account Subdivision A -- Statements of account 6.20 A new Division 5 is introduced into the Code to impose obligations on the lessor to provide statements which provide information in relation to the history of the lessee's account. Credit providers are obliged under the Code to provide statements of account, and the Enhancements Bill extends similar requirements to lessors. The underlying policy considerations for requiring a statement of account for credit contracts equally extends to lessees under a consumer lease arrangement, primarily in that it provides an opportunity for the consumer to review their account and identify any discrepancies. 6.21 The Enhancements Bill will introduce obligations on the lessor to provide statements of account both every 12 months and in response to a request by the lessee [Schedule 5, item 18, section 175C and 175E]. The information that must be included in the statements of account will be prescribed in the regulations [Schedule5, item 18, section 175D]. It is anticipated that regulations will be made requiring the lessee to provide information such as a record of ongoing payments over a specified period of time, and the remaining term of the lease. 6.22 Failure to provide a statement of account annually, or upon the request of the lessee, will be an offence of strict liability [Schedule 5, item 18, section 175C]. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences. The offence also attracts a criminal penalty of 100 penalty units. The rationale for this penalty is historic as the penalty provision for the offence under section 33 which applies to credit contracts was carried over from state legislation. As this new provision is intended to mirror the current provisions that apply to credit contracts, to maintain consistency, the same penalty is also applied to lessors. 6.23 In the event the lessor does not provide a statement of account within the timeframes specified, the lessee can apply to a court to order provision of the statement or itself determine the amounts under the statement. [Schedule 5, item 18, section 175F] 77


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 6.24 The Code enables a lessee to seek written explanations from the lessor, as the trigger for the mechanisms to resolve disputes. A lessor is required to give a lessee a written explanation where a lessee disputes a particular liability, within 30 days of receiving the statement of account. A lessor must not commence enforcement action until at least 30 days after the written explanation is provided. Where the court has been asked to determine liability within 30 days of the lessor's explanation, the lessor must not commence enforcement proceedings without leave of the court. Failure to observe this requirement is a strict liability offence with a maximum penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence. [Schedule 5, item 18, section 175G] Subdivision B -- End of lease statement 6.25 Section 175H makes it an offence of strict liability if a lessor fails to provide a statement to the lessee at least 90 days before the end of the term of the consumer lease. The information that must be included in the statement will be prescribed by the regulations [Schedule 5, item 18, section 175H]. It is anticipated this will include information in relation to the lessee's options about whether or not they can negotiate to purchase the goods at the end of the lease. The regulations will also outline circumstances where the requirement would not apply (which could cover, for example, situations where the notice is unnecessary). [Schedule 5, item 18, subsection 175H(2)] 6.26 Failure to provide an end of lease statement within the prescribed time frame is an offence of strict liability and will attract a criminal penalty of 100 penalty units. The provision imposes 100 penalty units to maintain consistency with the other offence provisions related to statements of accounts. The penalty is necessary because of the importance of the lessee being given information before the lease ends, that will maximise the opportunity for the lessee to begin negotiations in relation to the leased goods prior to the termination of the lease. Example 6.1 In January, a lessee enters into a 12 month contract to lease a washing machine. Before the end of September, the lessor is obliged to provide an end of lease statement which outlines the costs remaining under the lease. It is expected the statement will notify the lessee that the lease is coming to an end soon. This will give the lessee an opportunity to negotiate terms to purchase the washing machine for a reduced price. This helps mitigate the risk of the situation arising where the lessee continues paying for the goods as long as she retains possession of them, even after the lease has ended. 78


Consumer leases Division 6 -- Certain transactions not to be treated as new consumer leases 6.27 Section 175J provides that certain types of changes to a consumer lease will not be regarded as creating a new consumer lease. 6.28 These changes are: · the provision of further goods; · the deferrals or waiver an amount under an existing consumer leases; and · a postponement relating to an existing consumer lease. 6.29 The effect of section 175J is that the requirements in relation to making new consumer leases will not apply in those three situations. [Schedule 5, item 18, section 175J] Division 7 -- Changes to obligations under consumer leases Subdivision A -- Changes by agreement of parties 6.30 The Enhancements Bill will set out notice requirements where a lease is changed as a result of an agreement between the contracting parties. Notice of any such change to the lease must be given to the lessee not later than 30 days after the agreement. It will be a strict liability offence not to comply with the appropriate procedure and noncompliance attracts a maximum penalty of 100 penalty units. [Schedule 5, item 18, subsection 177A(1)] 6.31 The notice requirements in subsection 177A do not apply where the change defers or reduces the obligations of the lessee for a period of not more than 90 days. [Schedule 5, item 18, subsection 177A(2)] 6.32 This is a strict liability offence. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences. The offence also attracts a criminal penalty of 100 penalty units. The rationale for this penalty is historic as the penalty provision for the offence under section 71 which applies to credit contracts was carried over from state legislation. As this new provision is intended to mirror the current provisions that apply to credit contracts, to maintain consistency, the same penalty is also applied to lessors. 6.33 It is anticipated that regulations will be made, which replicate those that currently apply to credit contracts in the same context, requiring the following information to be contained in the written notice provided in relation to the changes: 79


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · the date of the changes to the consumer lease; · current and future payment details; and · any proposed increase in the term of the consumer lease and new expiry date for the lease. 6.34 These notice provisions do not apply to changes made on the grounds of hardship or where the change was the result of the transaction giving rise to the consumer lease being found to be unjust. [Schedule 5, item 18, subsection 177A(3)] Subdivision B -- Changes on grounds of hardship and unjust transactions 6.35 The Code mirrors the hardship variation and unjust transactions provisions that currently apply to credit contracts under Part 4 Division 3 of the Code, and extends the regulation to leases. The Enhancements Bill has repealed the former paragraph 177(1)(a) which extended these provisions to consumer leases in a shorthand way [Schedule 5, item 21]. The Code now sets out in detail the way in which these provisions apply to consumer leases. 6.36 The operation of the hardship provisions has been changed, consistent with the changes made to the equivalent provisions in respect of credit contracts to make it simpler for lessees to seek a variation of the terms of their contract. 6.37 The procedures for making and resolving hardship applications are: · where a lessee considers they will be unable to meet their obligations under the consumer lease arrangement, they are entitled to notify the lessor, in writing or orally, and request a change to the lease [Schedule 5, item 18, subsection 177B(1)]; · the lessor will have an obligation to respond to the lessee's notice within 21 days by either: - notifying the lessee that they are prepared to negotiate a change [Schedule 5, item 18, paragraph 177B(2)(a)]; or - where they refuse to change the contract, providing a written notice setting out the reasons why they do not agree to the change and provide details of the external dispute resolution scheme and the rights the lessee will have under that scheme [Schedule 5, item 18, paragraph 177B(2)(b)]; 80


Consumer leases · a lessor who is prepared to initially negotiate a change and who subsequently decides not to change the contract must send a written notice (containing the same information referred to in the previous paragraph), and must do so within 21 days of giving the notice required under paragraph 177B(2)(a) (so that in practice a lessor can have up to 42 days to obtain relevant information about the lessee's circumstances and then decide whether to vary the contract) [Schedule 5, item 18, subsection 177B(3)]. 6.38 A contravention of subsection 177B(2) will also be an offence of strict liability. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences, so that lessees are clearly and promptly informed of the options available to them where they are unable to meet their obligations under a lease. [Schedule 5, item 18, subsection 177B(4)] 6.39 If a lessor refuses to change the lease, the lessee may apply to a court for changes to the terms of the lease. The court may make orders to change the terms of the lease after giving the lessee and lessor a reasonable opportunity to be heard. The court is also empowered to stay enforcement proceedings and to make other orders until it determines the application. A lessor is also entitled to apply to the court to vary the original order. [Schedule 5, item 18, sections 177D and 177E] 6.40 Sections 177F to 177K cover a court's power to reopen unjust transactions. A court can reopen transactions giving rise to a lease (or a variation of a lease) if it is satisfied that the circumstances in which the lease was entered into or changed were unjust. [Schedule 5, item 18, subsection 177F(1)] 6.41 Unjust is defined in subsection 204(1) to include unconscionable, harsh or oppressive. The following principles apply to the interpretation of the term `unjust' and the phrase `unconscionable, harsh' and `oppressive': · they should be given a construction consistent with the beneficial policy intentions of the legislation; · the meanings of each concept may overlap but each word may also have an independent operation (so that a contract may be unjust because a term is oppressive or burdensome but not unconscionable); · the phrase is inclusive so that a consumer lease can still be unjust even if it is not unconscionable, harsh or oppressive; and 81


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · the reference to `unconscionable' encompasses both common law and statutory unconscionability. 6.42 Section 177F also sets out criteria which assist the court in determining whether or not the lease or change in the lease was unjust [Schedule 5, item 18, subsection 177F(2)]. 6.43 A contract, mortgage or guarantee will not necessarily be unjust because one or more of these criteria applies to the transaction. Conversely it may still be unjust even where none of these factors is made 6.44 The application of the unjust contract provisions requires a two stage inquiry. First, the court must determine whether the contract is unjust and, second, where this is the case, the court must decide what relief if any is appropriate. [Schedule 5, item 18, subsection 177F(5)] 6.45 Different considerations may apply in relation to each stage, so that, for example, the conduct and knowledge of the lessee may not prevent the consumer lease being found to be unjust, but may result in a lesser remedy, or no remedy, being provided to the lessee. 6.46 Where a transaction is reopened as unjust, the court is given power to make a range of orders that allow it flexibility in reshaping the bargain. [Schedule 5, item 18, section 177G] Division 8 -- Repossession, termination and enforcement of consumer leases Subdivision A -- Repossession of goods under consumer lease 6.47 Item 20 will make a technical amendment to the heading of Division 8 to refer to the repossession, termination and enforcement of consumer leases. [Schedule 5, item 20] 6.48 The existing requirement in section 178 of the Code, for lessors to give notice before repossessing goods subject to the lease, is retained. Section 178 requires the lessor to give 30 days written notice of an intention to repossess goods which are the subject of a consumer lease. Failure to do so is a strict liability offence with a maximum penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence. This is important as a lessee should be given sufficient opportunity to rectify a default. 6.49 The existing exceptions to this requirement are also retained, so that notice is not required where: 82


Consumer leases · repossession at the end of the term is a right under a fixed term lease; · the lessor believes on reasonable grounds that the lessee has, or intends to dispose of leased goods; · the lessor cannot locate the lessee, having made reasonable attempts; · the lessee becomes insolvent after entering into a consumer lease; or · the court authorises repossession. Subdivision B -- Termination of consumer lease by lessee 6.50 Section 178A will introduce a right for the lessee to terminate a lease by written notice if the leased goods have not yet been provided. The lessor is still entitled to demand payment of fees or charges which were incurred before the lease was terminated (but not, for example, amounts in relation to rental payments). The amount charged by lessors for these fees will be subject to regulation by the unfair contract terms provisions in the Competition and Consumer Act 2010. This complements the lessor's existing right to terminate a lease under section 179. [Schedule 5, item 22, section 178A] 6.51 The existing requirement in section 179 enables lessors to end a consumer lease at any time by returning the goods hired under the lease. However, the heading has been changed to clarify the distinction between this provision, and the right to terminate in section 178A. [Schedule 5, item 23, section 179] 6.52 Section 179A imposes an obligation on the lessor to provide a statement summarising the amounts payable by the lessee on termination. The lessee may make a request for such a statement at any time. Failure to provide a statement of the amounts payable upon termination of the lease is an offence of strict liability that attracts a criminal penalty of 50 penalty units [Schedule 5, item 24, section 179A]. The rationale for the penalty being strict liability is that lessees should be promptly informed about the amount necessary to be paid to end a lease, rather than incurring additional liabilities where there is a delay. 6.53 In the event the lessor does not provide a payout figure, a lessee has a right to apply to a court to determine the amount payable. [Schedule 5, item 24, section 179B] 6.54 The Enhancements Bill will also impose an additional obligation on the lessor to notify lessees about direct debit defaults. Lessees 83


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 commonly arrange to meet their repayments under a lease by authorising the lessor to deduct amounts by a direct debit from an account held by the lessee. Direct debits generally occur automatically at pre-arranged intervals (for example, monthly). If a lessee has insufficient funds in their account, they may not become aware that they are in default for some time. This may result in the lessee accruing charges and fees to third parties before they become aware of the default. 6.55 Section 179C addresses this issue by requiring the lessor to give the lessee a notice within 14 days of the first direct debit payment failing in relation to a direct debit instruction. Failure to do so is an offence of strict liability which gives rise to a criminal penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences. [Schedule 5, item 24, section 179C] Subdivision C -- Enforcement of consumer leases 6.56 The Code sets out notice procedures a lessor must follow before they can begin enforcement proceedings against a defaulting lessee. Before commencing enforcement proceedings, the lessor must give a default notice, which provides the lessee a period of 30 days from the date of the notice to remedy the default. Failure to do so amounts to a strict liability offence with a maximum penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence to protect the lessee's interests. The default notice must contain a number of matters under subsection 179D(2) including information prescribed by the regulations; this information is expected to ensure the person in default has relevant information relating to the default itself, the date after which enforcement action may begin, and the lessee's rights. [Schedule 5, item 24, section 179D] 6.57 The provisions also outline certain circumstances where a default notice is not required, such as where the lessor has made reasonable attempts to locate the lessee without success or the court has authorised the start of enforcement proceedings. [Schedule 5, item 24, subsection 179D(3)] 6.58 A lessee will have the right to remedy any default within the period specified in a default notice. This ensures that the lessee has the opportunity, where they are able to do so, of avoiding enforcement action, and then continuing to comply with their obligations under the consumer lease. [Schedule 5, item 24, section 179E]; 6.59 Section 179F limits the capacity of a lessor to begin enforcement proceedings against a lessee where the lessee gives a hardship notice under section 179D [Schedule 5, item 24, subsection 179F(1)]. The effect of section 179F is that a lessor cannot commence enforcement proceedings 84


Consumer leases against a lessee until 14 days from when they have provided the lessee with their reasons for refusing to negotiate a change to the lease [Schedule 5, item 24, subsection 179F(2)]. However, there is an exception to this restriction where a lessor had previously received a hardship notice from the lessee in the last 4 months and the lessee reasonably believes the basis for the most recent notice is not materially different from any earlier notices. Failure by the lessor to comply with subsection 179F(2) is a strict liability offence which incurs a penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences, because of the effect enforcement proceedings can have on the lessee's rights. 6.60 However, provision is also made to allow the lessor to take possession of the goods in a situation where it is necessary to protect the goods (for example, if the lessor believes the lessee may be intending to remove or dispose of the goods). [Schedule 5, item 24, subsection 179F(3)] 6.61 Some consumer lease contracts may contain acceleration clauses that enable the lessor to require the lessee to pay a lump sum to terminate the lease. Subsection 204(1) defines an acceleration clause as a clause that allows the lessor, either on default, or at the lessor's discretion, to require repayment, therefore requiring the lessee to pay the outstanding balance under the lease immediately. [Schedule 5, item 25, subsection 204(1)]; 6.62 Where a lessor has included an acceleration clause in their contract (enabling the lessor to require the lessee to pay the outstanding balance as a lump sum), the Code restricts the operation of such clauses so that the lessor cannot demand an acceleration in payments until a default notice is provided. The Code specifies circumstances where this restriction does not apply (for example, where the lessor is unable to locate the lessee). [Schedule 5, item 24, section 179G] Subdivision D -- Postponement of enforcement proceedings 6.63 The lessee has the right to request the lessor to postpone enforcement proceedings where the lessee has been provided with a default notice. The lessor must respond to the request within 21 days, and if they do not agree to the request, they must give reasons for their decision to the consumer. This is an offence of strict liability and failure to comply attracts a penalty of 30 penalty units [Schedule 5, item 24, section 179H]. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence. The section will also outline the procedures that must be satisfied before a lessor is entitled to begin enforcement proceedings against the lessee following a postponement request. However, provision is also made to allow the lessor to take possession of the goods in a situation where it is necessary to protect the 85


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 goods (for example, if the lessor believes the lessee may be intending to remove or dispose of the goods). [Schedule 5, item 24, subsection 179H(4)] 6.64 Section 179J sets out the consequences where a postponement is negotiated. The default notice is taken to not have been given if the lessee complies with the conditions of postponement. A lessor must give written notice of the agreed conditions no later than 30 days after the agreement is reached. This is also an offence of strict liability and failure to comply attracts a penalty of 100 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence and give the parties certainty as to their varied obligations. [Schedule 5, item 24, section 179J] 6.65 A lessee may also apply to a court for a postponement if they are unable to negotiate a postponement with the lessor [Schedule 5, item 24, section 179K]. The lessor may also subsequently apply to the court for a variation to a court order made under this Subdivision. [Schedule 5, item 24, section 179L] Subdivision E -- Enforcement procedures for goods hired under a consumer lease 6.66 The provisions regarding enforcement procedures for goods hired under a consumer lease are intended to provide the same protections as those which apply in relation to mortgaged goods under a credit contract. These provisions previously applied to consumer leases by virtue of paragraph 177(1)(b) of the Code . This Enhancements Bill repeals that provision and instead the Code now sets out in detail the obligations that apply in relation to consumer leases. 6.67 The provisions: · require the lessee to inform the lessor of the location of the goods hired under the consumer lease. If the goods are no longer in their possession, the lessee must give any information that would assist the lessor in tracing the goods. This is a strict liability offence, and non-compliance attracts a penalty of 50 penalty units (because of the importance of the lessee being able to establish the location of their property) [Schedule 5, item 24, section 179M]; · restrict lessees from entering residential premises to seize the goods, unless the occupier has given written consent to enter or the Court has authorised entry. The regulations may also prescribe procedures for obtaining and giving consent (with it anticipated the regulations will provide for similar requirements to those that apply to credit providers in regulation 87 of the National Consumer Credit Protection 86


Consumer leases Regulations 2010). This is a strict liability offence, and non-compliance attracts a penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence and recognises the importance of the lessee's rights over their property [Schedule 5, item 24, section 179N]; · allow a court to order entry to residential premises to allow the lessor to take possession of the goods hired under a consumer lease [Schedule 5, item 24, section 179P]; and · allow a court to order a person to deliver the goods hired under the consumer lease to a lessor at a specified time or place or within a specified period [Schedule 5, item 24, section 179Q]. Subdivision F -- Enforcement expenses 6.68 Section 179R prohibits a lessor from recovering any amount greater than reasonable enforcement expenses from a lessee. A penalty is imposed if the lessor does not comply. The court may determine a dispute about the amount of enforcement expenses that may be recovered by the lessor. [Schedule 5, item 24, section 179R] Division 9 -- Linked lessors and tied leases Subdivision A -- Interpretation and application 6.69 A new Division 9 is introduced into the Code which addresses the relationships between linked lessors and suppliers of goods. These provisions address the situation where a consumer's primary or exclusive contact in relation to a lease will be with a supplier of goods, but the goods are ultimately supplied to the consumer by a third party, the lessor (with the supplier arranging for title to pass to the lessor). 6.70 Section 179T will provide the consumer with a remedy for specified conduct where the lessor is linked to the supplier. This approach, which already applies in relation to linked credit contracts, recognises that the lessor may be in a commercial relationship with the supplier where they largely regulate or supervise their conduct, but where common law principles of agency may not necessarily provide the consumer with a remedy against the lessor for the conduct of the supplier. 6.71 The Enhancements Bill introduces definitions for the terms `a linked lessor' and `a tied consumer lease'. A linked lessor means a lessor: · with whom the supplier has a contract, arrangement or understanding relating to the goods; 87


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · to whom the supplier regularly refers persons for the purpose of providing a consumer lease; · whose contracts and application forms are made available to potential lessees by the supplier (by arrangement with the lessor); or · with whom the supplier has a contract, arrangement or understanding under which contracts or applications for a consumer lease may be signed by persons at the supplier's premises. [Schedule 5, item 24, subsection 179S(1)] 6.72 A tied consumer lease is defined as a consumer lease which is entered into where the goods hired under the consumer lease are supplied by a supplier to the lessor, and the lessor is a linked lessor of that supplier [Schedule 5, item 24, section 179S(2)]. Subdivision B -- Liability of lessors for suppliers' misrepresentations 6.73 Under section 179T, a linked lessor will be held liable for a supplier's misrepresentations about the leased goods, the lease itself or services, supplied or arranged by the lessor, that are incidental to the hire of goods under the lease. A lessor is liable for any representations, warranties or statements made by the supplier of the goods to the lessee in relation to the tied consumer lease. Example 6.2 The lessor is a linked lessor with a supplier of computers and software. Consumers sign leases at the premises of the supplier and have no direct contact with the lessor. The supplier misrepresents both the quality of the software and the terms of the service warranty provided with the lease. The consumer would have a remedy against the lessor as a linked lessor. 6.74 The lessor is entitled to be indemnified by the person who made the representation, warranty or statement and any person on whose behalf it was made. Because of their ongoing commercial relationships it is usually anticipated that there would be contract between the lessor and the supplier which would specifically address the liability of the supplier to indemnify the lessor in these circumstances. [Schedule 5, item 24, section 179T] 88


Consumer leases Division 10 -- Conduct relating to consumer leases 6.75 The Enhancements Bill also creates two new offences in relation to consumer lease arrangements. These offences are: · making false or misleading representations [Schedule 5, item 24, section 179U]; and · harassing a person into entering a consumer lease arrangement [Schedule 5, item 24, section 179V]. 6.76 Section 179U creates an offence for making false or misleading representations. The offence applies to any person who makes representations about matters material to entry into a consumer lease or a related transaction, or attempts to induce a person to enter such a consumer lease or transaction. It therefore applies to lessees and persons providing credit services, and also to third parties. A maximum fine of 50 penalty units applies. [Schedule 5, item 24, section 179U] 6.77 For example, if a person represented to the consumer that they had the right to purchase the goods at the end of the lease (when this would not be the case because of the definition of a consumer lease) then this would be ordinarily be a representation within both paragraphs (a) and (b) of section 179U. 6.78 The Code also contains a prohibition in section 179V on lessors or suppliers harassing a person in attempting to have them apply for, or enter, a consumer lease or related transaction. A maximum criminal penalty of 100 penalty units applies [Schedule 5, item 24, section 179V]. 6.79 The criminal penalties under sections 179U and 179V are consistent with the penalties under sections154 and 155, which in turn reflect those that previously applied under State and Territory legislation. Division 11 -- Other Code provisions applicable to consumer leases 6.80 The Enhancements Bill repeals section 177 [Schedule 5, Item 21]. Previously, section 177 extended Part 4 Division 3 (except for section 78), sections 98, 99, 100 and 101 and the miscellaneous provisions in Part 12 of the Code to consumer leases. The Enhancements Bill now has provisions in respect of the matters covered by these sections that specifically apply to consumer leases. It is therefore no longer necessary to deem these provisions to apply to consumer leases. Section 179W provides that both Part 12 of the Code, and the definition of `associated' in subsection 204(2), extend to consumer leases. [Schedule 5, Item 24, section 179W] 89


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Comparison table 6.81 The table below outlines the provisions which have been extended to apply to consumer leases. Table 6.1 Credit Contracts Consumer Leases Topic Section 14 Subsection 173(1) Form and expression of contract document Section 15 Section 173A Contract documents in a form other than writing Section 18 Subsection 173A(1A) One or more separate documents Section 19 Section 174A Unilateral changes to a contract document Section 31 Section 175A Regulation of fees and charges Section 32 Section 175A Prohibits the overcharging of fees and charges Section 33 Section 175C Obligation to provide an ongoing statement of account Section 34 Section 175D Information to be contained in statements of account Section 36 Section 175E Statement of account on request Section 37 Section 175F Court ordered statement of account Section 38 Section 175G Disputed accounts Section 40 Section 175J Certain transactions not treated as consumer leases Section 71 Section 177A Changes by agreement Section 72 Section 177B Changes on the grounds of hardship and unjust transactions Section 73 Section 177C Under the old law, these matters applied to Section 74 Section 177D consumer leases by virtue of the former deeming provision in Section 75 Section 177E 90


Consumer leases Credit Contracts Consumer Leases Topic 177(1)(a): Section 76 Section 177F · Changes on grounds of hardship · Notice of change Section 77 Section 177G · Changes by court · Applying for Section 79 Section 177H variation of change · Court may reopen Section 80 Section 177J unjust transactions · Orders on reopening Section 81 Section 177K of transactions · Applications by ASIC · Time limit · Joinder of parties Section 83 Section 179A Obligation to provide statement of amount payable on termination Section 84 Section 179B Court may also determine the amount payable on termination Section 87 Section 179C Obligation to notify about a direct debit default Section 88 Section 179D Enforcement proceedings: Section 89 Section 179E · Requirements before enforcement · Defaults may be No equivalent Section 179F remedied · Extra requirements Section 93 Section 179G before lessor can enforce · Enforcing acceleration clauses Section 94 Section 179H Postponement of enforcement proceedings: Section 95 Section 179J · Postponement of exercise of rights Section 96 Section 179K · Effect of negotiated postponement 91


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Credit Contracts Consumer Leases Topic Section 97 Section 179L · Postponement by court · Applying for variation of postponement order Section 98 Section 179M Enforcement proceedings for goods mortgaged Under the old law, these Section 99 Section 179N matters applied to consumer leases by paragraph 177(1)(b) of the former deeming Section 100 Section 179P provision: · Information about the location of mortgaged goods Section 101 Section 179Q · Entry into residential property to take possession of goods · Court may order entry · Order for possession Section 107 Section 179R Recovery of enforcement expenses Section 127 Section 179S Definitions for linked lessor and tied consumer lease Section 128 Section 179T Liability for linked contracts Section 154 Section 179U False or misleading representations Section 155 Section 179V Harassment Part 13 -- Principal definitions General definitions 6.82 Section 204 contains definitions of words and expressions used in the Code. In some cases, the definition expands the usual meaning of the word. The Enhancements Bill will introduce new terms, as well as repeal and substitute existing terms, into the general definitions. These are: 92


Consumer leases · Acceleration clause (item 13 removes the definition from section 92 of the Code, and the definition is reproduced in the general definitions) [Schedule 5, items 13 and 25, subsection 204(1)]; · Bulk electronic clearing system (item 12 removes the definition from subsection 87(6) of the Code, and the definition is reproduced in the general definitions) [Schedule 5, items 12 and 25, subsection 204(1)]; · Consumer lease fees or charges (inserts a new definition into the general definitions) [Schedule 5, item 32, subsection 204(1)]; · Default notice (inserts a new definition into the general definitions) [Schedule 5, item 27, subsection 204(1)]; · Direct debit (item 12 removes the definition from subsection 87(6) of the Code, and it is reproduced in the general definitions) [Schedule 5, item 28, subsection 204(1)]; · Enforcement proceedings (the definition is clarified to take into account consumer leases) [Schedule 5, item 29, subsection 204(1)]; · Hardship notice (inserts a new definition into the general definitions) [Schedule 5, item 30, subsection 204(1)]; · Lessee (the definition is removed from the section 5 dictionary in the NCCP Act and reproduced in the general definitions) [Schedule 5, item 31, subsection 204(1)]; · Lessor (the definition is removed from the section 5 dictionary in the NCCP Act and reproduced in the general definitions) [Schedule 5, item 32, subsection 204(1)]; · Linked lessor (as discussed above in paragraph 5.71) [Schedule 5, item 33, subsection 204(1)]; · On demand facility (the definition is removed from section 92 and reproduced in the general definitions) [Schedule 5, item 34, subsection 204(1)]; · Postponement request (inserts a new definition into the general definitions) [Schedule 5, item 35, subsection 204(1)]; · Tied consumer lease (as discussed above in paragraph 5.72) [Schedule 5, item 36, subsection 204(1)]; and 93


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · Unjust (as discussed above in paragraph 5.41) [Schedule 5, item 37, section 204]. The definition of unjust in subsection 76(8) is also repealed [Schedule 5, item 11, subsection 76(8)]. 6.83 These definitions are necessary to reflect the amendments that have been made to the NCCP Act and the Code under this Enhancements Bill. Consequential amendments 6.84 Under items 1 to 10, minor technical amendments are made to the NCCP Act under these amendments. This is to ensure consistency between the provisions of the NCCP Act and the amendments to the Code. Item 1 amends the definition of lessor in the NCCP and replace it with a reference to the section 204 in the Code [Schedule 5, item 1, subsection 5(1)]. The Enhancements Bill will amend the text for the definition of value of a credit contract, mortgage, guarantee or consumer lease in subsection 5(1) to ensure consistency in the Code [Schedule 5, item 2 and 3, subsection 5(1)]. Subsection 199(3) will similarly be amended so that the text refers to a credit contract, mortgage, guarantee or consumer lease [Schedule 5, item 9, subsection 199(3)]. 6.85 The Enhancements Bill will also amend subsection 147(7) which outlines a defence for suggesting an unsuitable consumer lease. Paragraph 147(7)(b) is amended to refer to the new sections 177B and 179H which outline the procedures for consumers in hardship, instead of sections 72 and 94 of the Code [Schedule 5, item 4, subsection 147(7)]. Amendments are also made to repeal Note 2 as the reference to sections 72 and 94 is no longer relevant [Schedule 5, items 5 and 6, subsection 147(7)]. 6.86 Item 7 and 8 will make amendments to the table in subsection 199(2) to reflect the new sections introduced into the Code in relation to consumer leases [Schedule 5, items 7 and 8, subsection 199(2)]. Similarly, Item 10 amends paragraph 200(1)(b) to include references to sections 177D and 179K [Schedule 5, item 10, paragraph 200(1)(b)]. 6.87 Item 19 will repeal section 176 which relates to further goods and deferrals or waivers under consumer leases [Schedule 5, item 19]. 94


Chapter 7 Application provisions Schedule 6 -- Applications provisions Part 2 -- Schedule 1 (enhancements) to the amending Act 7.1 Schedule 6 of the Consumer Credit and Corporations Legislation (Enhancements) Bill 2011 (Enhancements Bill) sets out the application provisions in relation to the amendments introduced by the other Schedules. 7.2 Schedule 6 provides that the following amendments in Schedule 1 will only apply to credit contracts, mortgages and guarantees (as relevant) that were entered into on or after the commencement of the amendment: · changes to clarify the operation of provisions in relation to prohibited fees and charges (section 32 and 40 of the Code as amended) and to specifying that certain transactions will not be new credit contracts (section 40 of the Code as amended); · changes to the provisions in relation to changes on the grounds of hardship, default notice requirements and postponement requests (sections 72, 73, 74, 88 and 94 of the Code as amended); and · changes to the effect of hardship notices on enforcement proceedings introduced by section 89A of the Code. 7.3 Schedule 6 provides that the following amendments in Schedule 1 will only apply as follows: · changes to section 128 of the NCCP Act (as amended) in relation to the liability of linked lessors for representations made by suppliers will only apply to representations made on or after the commencement of the Schedule; and · the remedy for unfair or dishonest conduct by providers of credit services introduced in section 180A will only apply in 95


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 relation to credit services provided on or after the commencement of the Schedule. 7.4 Schedule 6 provides that section 124 of the Code (as amended) will apply to applications made on or after the commencement of Part 5 of Schedule 1 (whether the contraventions occurred before, on or after that commencement date). 7.5 The effect of the amendment to section 124 is not to make a conduct that was previously not a contravention of the Code a contravention. The effect is to increase the remedies available to a consumer from a contravention, and to also allow ASIC to have standing in relation to conduct that is a contravention of the Code (irrespective of whether the contravention has a civil effect or not). Part 3 -- Schedule 2 (reverse mortgages) to the amending Act 7.6 Schedule 6 provides that the following amendments in Schedule 2 will only apply to credit contracts that were entered into on or after the commencement of the Schedule: · a presumption that under certain circumstances a court must consider orders appropriate if the order will let the plaintiff reside in their residence to prevent or reduce loss or damage suffered or likely to be suffered by the plaintiff vacating the residence (subsection 179(6) and (7)); · arrangements relating to the residency protections given to a person nominated by the debtor under a credit contract for a reverse mortgage (subsection 17(15A)); · credit contract for a reverse mortgage must not prohibit an early repayment of an amount that is more than (or at least equal to) the adjusted market value of a reverse mortgaged property (subsection 26(6)); · certain purported changes to a credit contract for a reverse mortgage relating to arrangements for nominated residents are void; and · the requirement for credit providers to keep records of a debtor's nominations that another person be allowed to occupy the reverse mortgaged property. 7.7 Schedule 6 provides that section 18A of the Code will only apply to entry into, and changes to credit contracts on or after the commencement of the Schedule. The effect of section 18A is that credit 96


Application provisions providers are prohibited from entering into a credit contract for a reverse mortgage that provides a basis for enforcement proceeding in certain events such as the debtor breaching another credit contract with the credit provider. 7.8 Schedule 6 provides that paragraphs 33(2)(aa) and (ab) of the Code will only apply to credit contracts entered into, before, on or after commencement of the Schedule. The effects of these paragraphs are that the maximum period for a statement of account for a credit contract for a reverse mortgage is 12 months. 7.9 Schedule 6 provides that the following amendments in Schedule 2 will only apply to credit contract and mortgages that were entered into before, on or after commencement of the Schedule: · requirements that apply when a credit provider receives a payment which ends a reverse mortgage; · circumstances under which a notice is not to be taken as a default notice; and · notice requirements a credit provider must provider a debtor of a credit contract for a reverse mortgage if the credit provider seeks to enforce the debtor's liability above the value of the reverse mortgaged property. 7.10 Schedule 6 provides that subsection 88(1) and (2) only applies to credit contracts and mortgage entered into before, on or after commencement of the Schedule. These subsections relate to requirements on credit providers before they can begin enforcement proceedings against a debtor in relation to a credit contract or credit contract for a reverse mortgage. Part 4 -- Schedule 3 (small amount credit contracts) to the amending Act 7.11 Schedule 6 provides that the following amendments to the NCCP Act apply in relation to small amount credit contracts entered into on or after commencement of Schedule 3: · a prohibition on licensees suggesting, or assisting with, credit limit increases under a small amount credit contract (section 124C); and · a prohibition on credit providers for increasing the credit limit under a small amount credit contract (section 133CD). 97


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Part 5 -- Schedule 4 (caps on costs etc. For credit contracts) to the amending Act 7.12 Schedule 6 provides that the following amendments to the NCCP Act apply in relation to small amount credit contracts entered into on or after the commencement of the Schedule: · prohibited monetary obligations that only apply to small amount credit contracts (section 23A); · a prohibition on providers of a small amount credit contracts from charging fees and charges other than certain prescribed charges (section 31A); · limits on the application of amount of credit provided under a small amount credit contract (section 39A); and · limits in the amount that may be recovered if there is a default under a small amount credit contract (section 39B). Part 6 -- Schedule 5 (consumer leases) to the amending Act 7.13 Schedule 6 provides that subsection 199(2) of the NCCP Act only applies to consumer leases entered on or after commencement of the Schedule. This subsection relates to proceedings which can be dealt with under a small claims procedure. 7.14 Schedule 6 provides that the amendments in relation to Part 11 of the Code apply in relation to consumer leases entered into on or after the commencement of Schedule 5. 98


Chapter 8 Voting at AGMs of Public Companies Context of amendments 8.1 Currently, the Corporations Act 2001 (Corporations Act) requires listed companies to prepare a remuneration report, and put the report to a non-binding shareholder vote at the annual general meeting. 8.2 Recently, the Government enacted reforms to prohibit key management personnel (KMP) from voting in remuneration resolutions, although it provided an exception where shareholders give an undirected proxy to the chair of an annual general meeting, and the shareholder provides their informed consent for the chair to exercise the proxy. This exception for the chair is contained in sub-section 250BD(2) of the Corporations Act. Some confusion has arisen as to whether this exception applies in respect of the non-binding vote required under section 250R. Summary of new law 8.3 The new law clarifies that the chair of an annual general meeting, who is a member of the KMP or a closely related party of a KMP, is able to vote undirected proxies in the non-binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy. Comparison of key features of new law and current law New law Current law The new law clarifies that a chair of KMP and their closely related parties the meeting, who is also a KMP or a are able to vote undirected proxies on closely related party of a KMP, is remuneration related resolutions able to vote undirected proxies in the when they are the chair of the non-binding vote if the shareholder meeting and the shareholder has provides express authorisation for the expressly given their informed chair to exercise the proxy. consent, under section 250BD. However, there is uncertainty as to whether the exception for the chair applies to the non-binding vote required under section 250R. 99


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Detailed explanation of new law 8.4 Under subsection 250R(4) of the Corporations Act, a KMP or their closely related party must not cast a vote in the non-binding resolution on the remuneration report. However, the Corporations Act provides an exception to this requirement, under subsection 250BD(2), where a shareholder gives an undirected proxy to the chair and the shareholder provides their express authorisation for the chair to exercise the proxy. 8.5 However, confusion has arisen over whether this exception applies in respect of the non-binding vote required under section 250R, which was silent on the exception for the chair. 8.6 For the avoidance of any doubt, the new law clarifies this issue by stating that the chair of an annual general meeting, who is a member of the KMP or a closely related party of the KMP, is able to vote undirected proxies in the non-binding vote required under section 250R where the shareholder provides express authorisation for the chair to exercise the proxy. [Schedule 7, Item 1, subsection 250R(4)] Application and transitional provisions 8.7 The measure applies in relation to voting on or after the day after this Act receives the Royal Assent. 100


Chapter 9 Regulation impact statement PHASE TWO OF THE NATIONAL CONSUMER CREDIT REFORMS: CONSUMER LEASES AND ENHANCEMENTS TO THE NATIONAL CREDIT CODE JUNE 2011 Executive summary 9.1 In 2008, the Council of Australian Governments (COAG) agreed to transfer responsibility for the regulation of consumer credit from the States and Territories to the Commonwealth under a two phase implementation plan. Phase One of the National Consumer Credit Protection Reforms 9.2 Phase One of the National Consumer Credit Protection Reforms substantially commenced on 1 July 2010, through requirements introduced by the National Consumer Credit Protection Act 2009 (Credit Act). The main features of Phase One were that it introduced: · a comprehensive licensing regime for all providers of consumer credit and credit related brokering and intermediaries in the industry; · responsible lending conduct requirements on all licensees to not provide credit products and services that are unsuitable, either because they do not meet the consumers' requirements or because the consumer does not have the capacity to meet the repayments, either at all or only with substantial hardship; · improved sanctions and enhanced enforcement powers for the sole national regulator the Australian Securities and Investments Commission (ASIC); · expanded redress for consumer protection through universal external dispute resolution membership for licensees, streamlined court arrangements, and remedies for consumers for licensee misconduct; and 101


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · a largely replicated version of the key state-based legislation, the Uniform Consumer Credit Code (UCCC), as the National Credit Code (Code). Phase Two of the National Consumer Credit Protection Reforms 9.3 At its meeting of 19 April 2010, COAG endorsed a two part implementation plan for Phase Two of the credit reforms, under which there is a longer timeframe to consider more complex topics (such as the need to regulate the provision of credit to small business or lending for investment purposes). 9.4 Part One consists of: · changes to the obligations applying to consumer leases; · enhancements to particular provisions of the Code; · extending the regulation of credit for personal use; · small-amount short-term lending; and · improvements to the regulation of reverse mortgages and credit cards. 9.5 It is intended that legislation to give effect to part one will be in place in 2011, and for part two by mid-2012 at the latest. This Regulation Impact Statement (RIS) considers reforms in relation to the first two topics. 9.6 In August 2010, the Government announced election commitments in relation to the regulation of credit cards under the Fairer, Simpler Banking policy, and to the regulation of equity release products under the Delivering for Seniors policy. These commitments will be implemented in Part One of Phase Two of the credit reforms, and have been addressed in separate Regulatory Impact Statements (RISs). The reforms in relation to credit cards have are being progressed through the introduction of the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011, introduced into the House of Representatives on 24 March 2011. 9.7 The following summary analyses the reasons for pursuing reforms in relation to consumer leases and enhancements to the Code. 102


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms Consumer Leases 9.8 There are significant differences in the application of the Credit Act to credit contracts and to consumer leases. This disparity results in the following problems for consumers: · The lesser obligations applying to consumer leases regulated under the Credit Act has created opportunities for regulatory arbitrage, and contributes to consumers being misled before entering into a contract. - Different regulatory outcomes arise according to whether or not the consumer will be able to own goods at the end of a lease. This creates a tension for lessors between seeking to avoid regulation (by utilising a lease for this purpose), and not discouraging customers (who may only enter into a contract where they believe they will own the goods at the end of the contract). This causes an inherent structural tendency for consumers to be either actively mislead or not fully informed. · There are information asymmetries in relation to: - whether or not the consumer will have ownership of the goods at the end of the contract, and consequently on the impact this legal distinction will have on the consumer's rights under the contract (as there are no statutory obligations for lessors to disclose this information); and - the capacity of consumers to determine the cost of a consumer lease relative to a credit contract. · Classes of consumers who are particularly vulnerable may be targeted by fringe operators who use leases to finance the provision of goods because of the absence of regulation, and offer leases on terms where the benefit is minimal relative to the costs incurred. - Consumers may be particularly susceptible where they are on pensions or low incomes, and have few or no other alternative sources of finance. · Consumers have more difficulty in obtaining redress (because they either have fewer statutory rights where they enter into a consumer leases rather than a credit product, or because the type of lease is completely unregulated by the Credit Act). 9.9 It is proposed to address these problems by: 103


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · amending the Credit Act to ensure greater regulatory consistency between leases and credit contracts (including developing options for allowing more effective comparison on price and disclosing whether or not the consumer will own the goods); and · using existing financial literacy programs to deliver specific information to consumers in relation to the uses of leases as a means of acquiring goods. 9.10 These reforms would make a significant difference for consumers in that: · Consumers will be able to make more effective purchasing decisions, as they will be able to more readily compare the costs of entering into a consumer lease with the cost of entering into a credit contracts, and be better informed about whether or not they own the goods at the end of the contract. · Consumers will have greater access to remedies in the event they suffer loss or damage. · Vulnerable consumers will be at less risk of being targeted by fringe operators as those operators will need to hold an Australian credit licence, and therefore meet the standards of conduct applicable to licensees (or else cease offering these products). Fringe operators have been associated with problems such as the use of pressure selling tactics; failure to deliver leased goods or delivery of goods other than those specified in the lease; and the use of itinerant, untrained labour with poor levels of compliance. 9.11 These reforms would have the following impact on industry: · Lessors who currently offer consumer leases (a product already regulated by the Credit Act) would incur relatively low compliance costs. They would find themselves able to compete more effectively with providers of exempt leases, but, in turn, would no longer have the benefit of their current competitive advantages relative to credit contracts (and may have to reduce the cost of their products in order to maintain their market share). · Lessors who currently offer products unregulated by the Credit Act would incur higher compliance costs, and it could be expected some would cease offering these products (particularly those fringe operators who operate without any business infrastructure). · Credit providers who offer regulated products that are more competitive than leases may increase market share due to greater 104


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms transparency in pricing, and the enhanced capacity of consumers to assess the relative merits of competing products. These providers will not incur any new compliance costs. Enhancements to the National Consumer Credit Protection Regime 9.12 During the course of Phase One of the National Consumer Credit Protection reforms, concerns were raised by various stakeholders about possible improvements to specific provisions in the State-based 1 UCCC, which have been replicated in the National Credit Code. It was agreed these issues would be considered during Phase Two of the credit reforms and were the topic of Chapter 7 of the Green Paper. The following issues have been identified in relation to the operation of the Code where the UCCC did not adequately address problems for consumers: · The provisions enabling borrowers to request a variation of their credit contracts or consumer leases on the grounds of financial hardship (whether before or after enforcement action) are highly prescriptive, and subject to a restriction in that they only apply to persons who have borrowed up to $500,000. This restricts the capacity of borrowers to obtain a variation, even where they only need a variation to address a short-term change in their circumstances. · There is no general remedy provided for unjust conduct by brokers or other intermediaries (as the Code only provides a remedy where there has been unjust conduct by lenders). This creates a gap as consumers otherwise need to rely on general prohibitions that may not always provide a remedy where they have suffered loss because of the conduct of a broker. · The Code does not prohibit or restrict the use of particular words or phrases. In the credit context, some words or phrases have an emotional resonance with consumers (for example, `impartial' or `interest free'). Consumers may be more susceptible to entering into contracts where brokers or lenders have used these terms in advertising, even where they may not be strictly correct or are subsequently qualified, and where therefore the contract is inconsistent with the use of these words. 1 The Code (and the UCCC before it) regulates credit provided to natural persons for personal, domestic and household purposes. From 1 July 2010, the Code also regulates credit provided to natural persons for investment in residential investment property. 105


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · The Code only contains a partial prohibition against door-to-door canvassing of credit. The prohibition does not apply where goods are being sold on credit or provided through a lease. Given the range of alternative distribution channels available today, door-to-door selling in this way is largely associated with targeting of vulnerable consumers, and often with high-pressure or manipulative sales tactics. 9.13 It is proposed to address these problems by: · simplifying the procedures for consumers to obtain a variation of the repayments under their contract due to financial hardship, removing the restriction so that a consumer can rely on the statutory procedures irrespective of the amount they have borrowed, and provide borrowers with an additional opportunity to rectify defaults prior to their lender being able to take enforcement action; · extending the existing remedy for consumers for unjust conduct by lenders to also include conduct by brokers and intermediaries; · prohibiting lenders and lessors from selling goods and services on finance through unsolicited door-to-door canvassing; and · restricting the capacity of lenders and brokers to use certain words or phrases (for example, claiming to be `independent' where they receive commissions). 9.14 It is expected that consumers will benefit from these changes as: · they will have a reduced the risk of default in the event of a short-term change to their financial circumstances. Therefore, they will not need to refinance (incurring transaction costs) or risk losing security for the debt; · they will have an enhanced capacity to make brokers and intermediaries accountable for unjust conduct; · they will be at less risk of entering into contracts for the supply of goods as a result of high-pressure or manipulative sales tactics, or without actively seeking out credit for financing the purchase of goods; and · they will be at less risk of being misled by advertising claims. 9.15 It is expected that these changes will have the following impact on industry: 106


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms · Greater and simplified capacity to seek hardship variations: - For those lenders who have voluntarily adopted a code of conduct with similar obligations and are already fully complying with the code -- the change to their business would be minimal; and - For those lenders who are not signatories to such a code, or who are complying inconsistently with it -- the introduction of these obligations in law would introduce greater accountability and responsibility for non-compliance, and could be expected to result in greater internal changes to their practices to ensure they were now meeting these requirements. · Introduction of a remedy for unjust conduct by providers of credit services: - It would have no impact on credit providers or lessors. - It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct. · Prohibition on door-to-door canvassing: A relatively small number of businesses who engage in unsolicited selling practices may need to change their business practices (noting that only 67 persons who had applied for an ACL with ASIC by 31 December 2010 nominated their function as `Door-to-Door or Phone Sales'). · Restricted use of specified terms: The only class of providers who would be affected would be those who currently use any of these terms, who would need to decide between ceasing to use a restricted term or changing their business model so that they meet the conditions to be able to use it. Consultation 9.16 The Government has conducted extensive consultations in the consideration of issues under Phase Two of the credit reforms through the following consultation groups: · The primary vehicle for consultation with stakeholders was the Industry and Consumer Representatives Consultation Group (ICRCG). Its membership comprised of representatives of the banking, financial services, mortgage and finance brokers industries, consumer credit legal services, consumer advocates, 107


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 ASIC, and the Department of the Treasury. All major industry bodies are on this group, and are able to disseminate information to their members and provide their feedback. · Consultation with this group has generally occurred on a monthly basis. Between January 2010 and October 2010, 7 meetings were held in relation to the Phase Two reforms. The usual structure for these meetings was for Commonwealth Treasury staff to circulate papers on Phase Two topics, with the topics then discussed in detail at the meetings. This format allowed members of the group to provide comments and feedback at all stages of the development of options canvassed in this RIS, and also enabled differences in views to be explored in detail. This structure enabled prompt and detailed exploration of issues with stakeholders and was important in the refinement and development of different options. · The Financial Services and Credit Reform Implementation Taskforce (FSCRIT), comprises representatives from State and Territory departments and agencies, ASIC and the Department of the Treasury. Its main role in relation to Phase Two is to ensure proposals are developed in accordance with the COAG timetable. FSCRIT consultations have been conducted on a monthly or bimonthly basis, according to need. 9.17 A full membership list of each of the consultation groups is provided at Attachment A. 9.18 In addition, to ensure a broader level of public consultation, the Government released the Green Paper National Credit Reform -- Enhancing confidence and fairness in Australia's credit law in July 2010. The Green Paper set out a range of options in relation to each of the Phase Two topics. It enabled interested parties to provide their views directly to the Government. Approximately 60 submissions were received, enabling the Government to more fully assess the impact of the options canvassed in the Green Paper in developing its reforms (as noted in this RIS in relation to particular topics). To facilitate consultation with small businesses, the Green Paper was also released on the Australian Government business consultation website. 9.19 Draft chapters of the Phase Two Green Paper were also circulated to the ICRCG, ERCWG and FSCRIT for their comment. Implementation 9.20 Phase Two of the Credit Reforms will be implemented by legislation to be introduced in the 2011 and 2012 sittings of Parliament. Regulations to support the legislation may also be made. ASIC will 108


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms continue to act as the national regulator of consumer credit and will be responsible for administering and monitoring compliance with the Credit Reforms. 9.21 Changes to deliver financial literacy messages to consumers will need to be developed through those programs. Some of these changes will be contingent on the passage of the legislation to implement the reforms; for example, the ASIC website already has information in relation to consumer leases, but the reforms will enable consistent, simpler and more effective information and messages to be provided. These messages could also include information about possible alternative sources of funding in certain circumstances, such as Centrelink products and non-commercial microfinance schemes. 9.22 The Government will continue to consult with stakeholders regarding implementation timeframes and transitional issues, particularly through the ICRCG and ERCWG groups (as regular meetings of these groups will continue). In addition, the Commonwealth Treasury also has well developed links with ASIC and industry bodies that ensure complex issues can be identified early, allowing prompt responses to be provided. The effectiveness of these relationships was demonstrated throughout Phase One, where a range of transitional and implementation issues were able to be addressed in relatively short periods of time, resulting in both the registration and licensing processes working smoothly for industry players. Review 9.23 The terms of the National Credit Law Agreement agreed by the Commonwealth and all States and Territories in 2009, require the Commonwealth to commence a review of the operation of the National Credit Law, no later than two years from commencement. 109


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Regulation of consumer leases Background 9.24 Differences in the way a lease (a hiring of goods) is structured will determine whether or not it is regulated by the Credit Act, and, if so, the extent of the regulation. There are two threshold requirements that must be met in order for the Code to apply to a lease: · The hired goods must be used predominantly for personal, domestic or household purposes. · The total amount payable by the consumer exceeds the cash price of the goods. 9.25 Assuming these requirements the different categories of leases and their regulatory treatment can be summarised as follows: · Leases deemed to be a sale by instalments: This occurs if the person who hires the goods has a right or obligation to purchase the goods, and where the total amount payable exceeds the cash price of the goods. The lessor is required to meet all of the disclosure and conduct requirements that apply to credit contracts; the rationale being that this type of lease will have the same commercial outcome as a sale of goods by instalments, in that the only difference is whether the consumer will have ownership of the goods at the beginning of the finance contract, or at its end. - This RIS will not examine leases that are deemed to be sale by instalments as they do not present consumers with the problems or risk of harm that can arise in relation to consumer leases and exempt leases. · Consumer leases: The hiring of goods is a consumer lease where the person who hires the goods does not have a right or obligation to purchase the goods and where the total amount payable exceeds the cash price and the lease is not exempt. Part 11 of the Code regulates consumer leases and sets out requirements, including disclosure requirements, which are significantly less extensive than the analogous obligations applying to credit contracts. - For example, if a car is rented for six months and the total amount of rental payments is less than the cash price of the car, the lease will not be regulated under the Code. Alternatively, if 110


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms a television is hired for 36 months and the total rent payable is more than the cash price of these goods, the transaction will be a consumer lease. · Exempt leases: Notwithstanding that some specific categories of leases may otherwise meet the criteria above they have been exempted from the Credit Act, under section 171 of the Code. The categories of exempt leases are leases for 4 months or less, leases for an indefinite period and employment-related leases. The discussion below primarily concentrates on leases that are exempt because they run for an indefinite period, or where the initial term is for a fixed period of less than 4 months in order to take advantage of the exemption, but both the lessor and the consumer anticipate that the contract will be rolled over on a regular basis. 9.26 The following table summarises the different types of leases, and their regulatory outcomes. Characteristics of Lease Regulatory Outcome 1. Consumer has a right or obligation Deemed to be a sale of the goods over to purchase the leased goods at the time pursuant to section 9 of the end of the contract. Code, and the provider must meet the same requirements as a person offering credit contracts. 2. The total amount payable by the consumer exceeds the cash price of The cost to the consumer is the the goods (that is, the reasonable amount by which the total amount market value).. payable exceeds the cash price.. 1. Consumer has no right or Regulated as a consumer lease under obligation to purchase the leased Part 11 of the Code. goods at the end of the contract. More limited disclosure and conduct 2. The contract is for a fixed period obligations apply to the lessor relative of more than 4 months. to leases deemed to be a sale of goods. 3. The total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value). 1. Consumer has no right or Exempted from regulation under the obligation to purchase the leased Code by subsection 171(2). goods at the end of the contract. 2. The contract is for an indefinite period, or for an initial term of less than four months. 3. The total amount payable by the consumer exceeds the cash price of 111


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 Characteristics of Lease Regulatory Outcome the goods (that is, the reasonable market value). 9.27 There are two different types of retail outlets that offer consumer leases: · In mainstream retail outlets, including national or multi-store operations that only provide household goods through consumer leases. · Smaller retail outlets, often with only a single store, that largely rely on local custom. 9.28 As at July 2010, 52 entities had registered with ASIC as providing consumer leases. Nearly all of the 52 entities who registered with ASIC as providing leases would fall into the last category, as there are only four major lessors. 9.29 In addition, industry sources estimate that exempt lessors have 20 per cent of the market share (based on the number of contracts rather than the value of those contracts). 9.30 There are a number of situations where leases are regularly used: · In mainstream retail outlets, where consumers may be offered a choice for financing goods between credit contracts, particularly continuing credit contracts, and consumer leases. · Smaller retail outlets where the consumer is only given the choice of financing the acquisition of goods through consumer. These goods include refrigerators, washing machines and other household electrical goods. These leases are often used to finance the provision of goods to lower income consumers (particularly those who are unable to afford to pay either through cash or the use of credit cards). · Consumer leases and exempt leases have been used by a number of different operators in door-to-door marketing of household goods to indigenous communities, particularly in rural New South Wales and the Northern Territory. · Some car dealerships offer consumer leases rather than credit contracts as a means of consumers obtaining possession of a motor vehicle. 112


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms 9.31 A significant number of lessors bundle the leased goods with other services. These services include: · Warranties for the service or repair of the leased goods; · Products that address the risk of the goods being stolen while they are in the possession of the lessee. · Products similar to unemployment or disability insurance, where the lessee's liability to make rental payments may be extinguished or reduced if they become disabled or unemployed). 9.32 These products are typically automatically included in the agreement; that is, the consumer is not charged a separate cost for them and the consumer has no choice whether or not to accept them. It is therefore not possible to assess the price being charged to the consumer relative to the value of the services being provided. Problem identification Introduction 9.33 The differences in regulatory treatment between credit contracts and consumer and exempt leases can cause the following problems for consumers: · The current regulatory differences between credit contracts, consumer leases and exempt leases create an information asymmetry in relation to: - The terms of the contract, and, in particular, whether or not the consumer has the right to own the goods, and the consequences this has in respect of their rights under the contract; and - The cost of the contract (with consumers unable to assess the cost of a lease except in dollar terms). · Fringe operators may use the absence of regulation to exploit the vulnerabilities of particular classes of consumers (particularly Indigenous communities). They are more likely to use leases for an indefinite term, where the benefit to the consumer is minimal relative to the costs incurred (as the consumer must pay for the goods as long as they retain possession, even where they are household items such as beds or tables). 113


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · Consumers have more difficulty in obtaining redress (whether because they have lesser rights attaching to consumer leases rather than a credit product, or because the Code does not apply at all). 9.34 Some of the analysis below is based on a 2007 report into consumer leases by the Micah Law Centre, titled `A loan in lease clothing: problems identified with instalment based rent/purchase 2 contracts for household goods' (Micah Report). The Micah Report states that the research for the study is based on the direct experience of consumers from 20 case studies sourced from community legal centres and financial counselling services, and from reviews of the operation of lessors in retail outlets in Melbourne. Information asymmetry in relation to terms of the contract 9.35 Leases differ from credit contracts in that the consumer does not have a right to retain ownership of the goods at the end of the contract. Consumers are therefore only paying for the use of the goods during the period of the contract rather than the cost of purchasing them outright over time. 9.36 Where the consumer does not have a right or obligation to purchase the hired goods and the lease is regulated by the Code the following obligations apply: · they are under no statutory requirement to specifically inform the consumer that under the lease the consumer will not own the goods; and · the lessor is only required to provide a copy of the contract document to the consumer after they enter into the contract, and, therefore, after they make a purchasing decision. The consumer may therefore only be informed that they are only renting the goods when they receive a copy of the contract, and when this information does not need to be highlighted in the contract. 9.37 Persons offering leases for an indefinite period are under no statutory obligations as to how they inform consumers about the fact that the payments they make will not result in them owning the goods. 9.38 As noted in the above table in the background section, the distinction between a sale by instalments and a consumer lease is based on a technical distinction, as to whether or not the contract gives the 2 The Micah Law Centre is a not-for-profit outreach law firm in Victoria, established to provide advice and advocacy for disadvantaged individuals and groups. 114


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms consumer the right or obligation to purchase the goods at the end of the term of the contract. In practice therefore financiers can elect to avoid the higher level of regulation imposed on credit contracts by not giving the consumer the right or obligation to purchase the leased goods. 9.39 This dynamic has created two problems for consumers. The first is that consumers will enter into leases because of a regulatory preference of the provider, and will do so in situations where it is reasonable to expect that the consumer's purpose is to own the goods at the end of the contract. 9.40 There are two situations where consumers will prefer to own the goods at the end of the contract, according to: · The nature of the goods being supplied -- the goods are of a type where they usually are used by consumers for a period longer than the term of the (for example, beds or tables, or fridges where the term of the contract may only be a period of three years or less, but where the consumer has paid more than the cash value of the goods). · The financial circumstances of the consumer -- low-income consumers are more likely, because of their financial constraints, to want to continue using the goods at the end of the term, rather than wanting to upgrade to newer or replacement goods. This particularly applies to contracts under which they lease cars for periods such as three years, without having an asset at the end of the contract that they can continue using or can trade in order to be able to upgrade. 9.41 The use of a lease is therefore an economically inefficient way of the consumer having these goods in these circumstances. Generally these consumers would not need to use leases if they were either able to access other mainstream options to pay the relatively modest amounts necessary to own the items outright, particularly either by purchasing the goods for cash, or obtain credit through other retailers utilising the widespread `interest free' options that they can facilitate. Conversely, the smaller retail outlets have a niche market and have broad assessment criteria that that allows leases to be approved to consumers can often be 3 pensioners or Centrelink recipients. 9.42 Low-income consumers are more likely to use leases to acquire goods because they do not meet the eligibility criteria of lenders who offer credit contracts. However, this class of persons is also more likely to be 3 Micah Report, page 12. 115


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 renting cheap or basic household goods where it is more reasonable to expect them to want to own the goods at the end of the contract (rather than return them or continue paying for them). There is therefore a systemic risk of these consumers being misled or not properly informed, and entering into lease contracts where they believe they will be able to 4 own the goods. 9.43 The second problem that arises for consumers from the use of leases relative to credit contracts is that they receive fewer statutory protections. Consumers are generally unable to make informed choices when choosing between these products as they neither appreciate both the differences between the two types of products and the differences in regulation. 9.44 The key areas in which there are differences are: · The lessor may not be liable for misrepresentations by a third party at the point of supply of the goods -- this is particularly important given, as noted above, the structural risk of the consumer being misled prior to entering into the contract. · The consumer may be charged significant sums of money in order to retain possession of the goods once the contract has expired (either a one-off payment or continued payments until the goods are returned) -- with the consumer not having ownership after meeting the payments specified in the lease contract. · The consumer does not receive any benefit for early payments -- as the contract is a rental agreement the consumer does not receive any financial advantage from making payments in addition to the regular repayments (unlike a credit contract where the amount of interest payable is reduced), nor do they receive any statements or information from the lessor that would alert them to this adverse consequence. 9.45 The problems identified above are exacerbated where exempt or indefinite term leases are used. The extent of the use of this model is significant, and is estimated at 20 per cent of the total lease market. The adverse financial consequences to consumers where they enter into such a lease believing they will own the goods are greater, as in effect they are 4 Consumer advocates consistently identify individual case studies that demonstrate this dynamic in operation, from situations where retailers were actively misled about the nature of the contract they were entering into to examples of consumers being unaware that they would have to keep making payments once the contract had expired if they wanted to retain possession of the goods. 116


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms required to make payments for an indefinite period, as long as they retain possession of the goods. There is no `trigger' to alert consumers to this, unlike consumer leases where payments cease at the end of the term of the contract; consumer groups have reported instances of lessees making payments for items such as beds or tables for five to eight years under these types of leases, and paying several times the market value of the goods. 9.46 Lessors who currently provide exempt leases also do not have to comply with the responsible lending obligations (as these requirements only apply to lessors where they enter into leases regulated by the Credit Act). As a result, these lessors do not need to undertake credit checks or test the capacity of the consumer to meet the payments due under the contract. Consumers are therefore at greater risk of defaulting, and being liable for additional costs and charges. 9.47 Where the consumers are in remote or regional areas, and have entered into the lease as a result of a visit by the lessor to their locality they face an additional difficulty. In practice, returning the goods to the lessor will be impractical, with the result that consumers are required to maintain payments even if the goods are no longer required or perhaps even working. Information asymmetry in relation to price 9.48 The following disclosure requirements in relation to the cost of their products apply to lessors: · If they are providing consumer leases: - The only disclosure the lessor is required to make is the cost in dollar terms of each repayment, and the total amount of the repayments. - The lessor is not required to separately disclose charges for other services (such as warranties for the service or repair of the leased goods or quasi-insurance products, where the lessee's liability to make rental payments may be extinguished or reduced if they become disabled or unemployed). - The information about the cost in dollar terms only needs to be included in the contract (not in any pre-contractual document) and the lessor is not required to provide the contract to the consumer before they enter into it except for the purposes of signing it (or, therefore, make their purchasing decision) but only within 14 days of the consumer entering into the lease. 117


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · If they are providing exempt leases -- the timing and content of disclosure is unregulated. 9.49 By comparison credit providers are required to provide pre-contractual disclosure of a range of matters relevant to the consumer's decision, including an interest rate and information in relation to fees and charges payable under the contract. They are also required to use a comparison rate (calculated according to a uniform formula) when advertising the cost of their products, to ensure consumers compare the cost based on the same assumptions. Credit providers are also required to disclose the amount of credit being provided; this means that a credit provider cannot bundle services with goods in the same way, and the cost 5 of the services would be reflected in the annual percentage rate. 9.50 These differences in the content and timing of disclosure in relation to cost result in an information asymmetry between lessors and consumers. This creates two distinct problems for consumers: · A cost of finance can be charged that is so high it would be discouraging or prohibitive to consumers if disclosed in a way comparable to an interest rate. · Consumers can be encouraged to use leases because of the availability of services bundled with the goods, without the cost of those services being separately disclosed (or, in some cases, promoted as free). · Consumers cannot readily compare the cost of different finance options, and may choose more expensive finance arrangements, or may be steered towards them by suppliers of goods where their conduct is influenced by commission payments. 9.51 These problems arise because the lessor is only required to disclose the total amount to be repaid in dollar terms. In order to assess the cost of making payments over time relative to purchasing the item for cash the consumer needs to undertake a two-step process. They initially need to determine the cash price of the goods, and then assess the amount being charged in excess of that figure and the time they are being given to pay it. 9.52 Neither of these steps may be straightforward. Determining the cash price of the goods according to the advertised or nominated price by the retailer may not reflect or be broadly consistent with their market 5 The requirement is in subsection 17(3) of the Code. 118


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms value.6 Assessing the cost of paying over time is an even more complex calculation. 9.53 The bundling of additional services with the leased goods, and their promotion as benefits, can also make it harder for the consumer to assess the overall cost of the package they are being presented with. This practice reduces the likelihood of the consumer declining to proceed with the transaction because the overall cost is high relative to the market value of the goods. 9.54 These limitations mean that consumers are unable to make informed judgements before entering into a consumer lease, and the absence of such disclosure means that consumers are less likely to reject finance where the cost is high and to seek alternative cheaper finance. 9.55 The impact of this information asymmetry in practice is demonstrated by the charges levied by some lessors; consumers can pay amounts for the use of goods at a cost equivalent or greater than interest rates in excess of 40 per cent (if the cost of the lease was calculated as if 7 the transaction was a credit contract). The following table, which summarises information from the Micah report, sets out the total amount payable under the lease by consumers for three common household items, and the equivalent interest rate. Goods and Cash Value Cost-charged by lessor (interest rate) 81cm LCD TV ($1,600) $2,800 over 36 months (41%) 260L Fridge ($700) $1,552 over 36 months (62%) Washing machine ($598) $2,020 over 36 months (109%) 9.56 These interest rates are consistent with the experience of ASIC which has also identified lessors providing finance at rates at over 40 per cent, particularly in relation to leases of goods to remote Indigenous communities. 9.57 By contrast, there are no providers offering credit contracts for the purchaser of goods who regularly charge consumers interest in excess of 40 per cent. It is considered that the ability of some lessors to provide finance at this cost is evidence of a non-competitive market, primarily 6 For example, a small number of dealers inflate the value of cars to make the cost of finance seem low. 7 The interest rate would be higher where the consumer also has to pay an additional amount to buy the goods at the end of the contract. 119


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 because consumers are unable to readily discern the cost of the finance, and therefore are prevented from making more efficient purchasing decisions. 9.58 Consumer Credit Legal Centre (NSW) has also identified the use of consumer leases in one business model in order to avoid the UCCC disclosure requirements in relation to the cost of credit. This model was utilised by a financier that, in 2008, had over 30 staff, and over $10 million of finance. This model had the following features: · the consumer would sell goods they owned to the lessor, and receive a lump sum equivalent to their financial needs (rather than the cash value of the goods); · the lessor would then lease these goods to the consumer and receive payments over a period of time greater than the sum paid to the consumers; and · complex documentation was used that disguised the nature of the transaction to the consumer. 9.59 While this model is not indicative of practices in the mainstream it is consistent with these practices in the sense that the use of a lease avoids a need for the more detailed disclosure requirements attaching to credit contracts, and increases. 9.60 The second situation in which consumers are disadvantaged is where they may choose more expensive finance arrangements because they cannot readily compare the cost of different finance options. This risk is particularly likely to arise where an intermediary has arrangements with financiers so that they can offer consumers either a credit contract or consumer lease. The lack of any requirement to disclose costs in a comparable way can allow the lessor to pay higher commissions to the intermediary to promote their product to consumers , even though it may be more expensive (in part because the consumer is paying for the cost of these commissions through the charges on the finance product). This channelling of consumers by intermediaries to higher cost products is known as `reverse competition' where competition among providers for access to distribution channels can drive up the price paid by the consumer. 9.61 It is accepted that there are situations in which a consumer will prefer a lease for reasons other than cost (for example, other features of the contract that may result in a higher price). However, this demonstrates the need for an informed discussion to allow the consumer to assess the competing features of the products, including the cost of other features that may attach to a lease. 120


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms 9.62 The risk of consequent financial detriment to the consumer is that they will pay a higher amount for the goods. This amount will vary according to the cost of credit under a consumer lease relative to a credit contract. 9.63 The precise extent of steering as a result of reverse competition is not measurable in any way, and is therefore unknown. However, it has been identified as a significant concern in a number of the submissions to the Green Paper, suggesting the commission-driven nature of the conduct means the problem is structural in nature. Where consumers are therefore paying higher amounts to finance goods through a lease, when they would be eligible for alternative forms of cheaper credit, the current regulatory arrangements are lessening competition in markets for the supply of goods. 9.64 Consumers who enter into indefinite leases are particularly disadvantaged in respect of cost, as the cost is potentially both greater than that for a fixed term contract, and not readily comparable with other finance options. Consumers are required to keep making payments for as long as they retain possession of the goods. This can be for a period that can be open-ended. Use of leases in targeting vulnerable communities 9.65 Both consumer leases and exempt leases have been utilised by door-to-door traders marketing goods in Indigenous communities. The analysis below is based on information obtained by ASIC and on the 8 reported experience of some consumers. 9.66 Some operators target these communities in that they only, or almost only, solicit consumers in areas with high Indigenous populations. This practice means they do not have a model in which they need to compete on price or service with mainstream providers, and rely on sales only to a relatively vulnerable group. They are therefore not subject to the same competitive pressures as mainstream providers. 9.67 The communities are commonly located in remote or regional Australia, and its members usually have very few alternatives for finance, or, therefore, for obtaining even basic household goods, such as beds or tables. Individual borrowers are commonly in receipt of Centrelink payments and the operator relies on payment through direct debit arrangements that are rarely cancelled in practice. As a result, the 8 See Unconscionable Conduct and Aboriginal and Torres Strait Islander Consumers Research Report, by Indigenous Consumer Assistance Network Ltd. 121


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 operator will continue to receive payments notwithstanding that it may result in financial hardship for the consumer. 9.68 Further, irrespective of whether a consumer lease or an indefinite lease is used, it will usually be the case that the lessor can continue charging the consumer for hire of the goods until the goods are returned. This can be difficult or impractical for consumers in remote areas. In this situation the lessor has a financial incentive not to advise the consumer, before they enter into the contract, that they will not own the goods or that they will have to keep making payments while they have possession. If the consumer was advised of these matters upfront they would be more likely not to enter into the contract, either at all or on those terms. 9.69 The conduct of these types of operators has been associated with the following problems: the use of pressure selling tactics; incomplete or incorrect documentation (including contracts with no specified terms for the repayments); failure to deliver goods or delivery of goods other than those specified in the lease; failure to service damaged items; and the use of itinerant, untrained agents with poor levels of compliance. 9.70 Consumers suffer financial harm in that: · They enter into contracts as a result of high pressure tactics; · They can pay significantly more, particularly where they are required to make ongoing payments because it is not practical to return the goods; · They are paying for goods they have not received or that are different from those they are contracted for. 9.71 The broader problems resulting from unconscionable or exploitative conduct are an indirect consequence of the use of leases in that operators deliberately elect to use a product which does not require them to meet the entry standards to hold an Australian credit licence (ACL), and where ASIC is unable to ban them from providing those products, irrespective of the nature of the conduct they engage in. They also gain commercial advantages from using leases, as outlined in more detail previously; for example, they do not need to disclose an interest rate (this is particularly relevant where the cost is high enough to discourage purchasers if they were informed of the cost); and there are fewer or no statutory obligations (for example, where exempt leases are utilised the lessor does not need to be licensed or be a member of an EDR scheme, or assess the borrower's capacity to meet repayments without substantial hardship). 122


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms Inadequate remedies 9.72 As noted above, consumers may enter into leases without necessarily appreciating the differences between leases and other forms of credit. There are particular risks that consumers will only become aware of problems at the end of the lease or after they have been making payments for a significant period of time. Consumer are only likely to identify problems at this time when they realise or are informed, contrary to their expectations, that they will only be able to keep the goods if they make additional payments. 9.73 Where this is the case, or where consumers have suffered financial loss in relation to a consumer lease or an exempt lease, the Code currently provides fewer and less adequate remedies to assist them in seeking compensation, compared to a credit contract. 9.74 Consumers also have fewer remedies against the conduct of an intermediary if they obtain goods by way of a consumer lease rather than a sale by instalment. This is because under the Code, some of the provisions in relation to liability apply only to credit contracts (for example, the remedy for false and misleading representations in sections 128 and 154). 9.75 Lessors who only provide exempt leases are completely unregulated by the Credit Act. In addition to the gaps identified in relation to consumer leases, they also are not required to be a member of an EDR scheme. As a result, consumers can experience significant difficulty in resolving complaints unless they take court action. This is often not a viable option, particularly for low-income consumers. 9.76 This lack of accountability can encourage lower standards of conduct and supervision on the part of lessors, as they can deny liability for misconduct by third parties who have arranged the lease with the consumer, or do not even need to respond to complaints unless the consumer instigates court proceedings. Objectives of Government action · To reduce the occurrence of the detriment suffered by consumers that, to a large extent, is unnecessary and avoidable. · To improve consumer choice by ensuring that they are provided with relevant information in a form and manner that increases their capacity be able to make comparisons between consumer leases and other functionally similar products. 123


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · To achieve consistency in the regulation of products that are different in form but which have similar commercial outcomes, and further competition between providers of these products. · To minimise the impact of any changes on industry, and reduce the regulatory burden resulting from any such changes. Options Option 1: Maintain the status quo 9.77 Under this option, no changes would be made to the regulation of consumer leases, sale by instalments and exempt leases under the Code. 9.78 This option would also take into account the potential impact that the introduction of new obligations (in respect of licensing and responsible lending) under the Credit Act would have on persons who offer consumer leases (but not those who offer exempt leases). Impact analysis 9.79 There will be no changes to existing practices. 9.80 This option would meet the fourth objective. It would only partially meet the first objective to the extent that the introduction of responsible lending obligations and licensing requirements under the Credit Act reduce the occurrence of the detriment suffered by consumers from consumer leases. However, this in turn may simply result in a greater use of exempt leases (particularly leases for an indefinite period) to avoid these legal responsibilities completely rather than changing their business models to comply with them. This risk is greatest with fringe operators. 9.81 The risk of continuing consumer detriment appears significant given that the differences and gaps in the current regulatory framework have been in existence since the commencement of the UCCC in 1996 and have been utilised by some operators to facilitate outcomes that benefit them but result in financial harm to consumers. Some providers have demonstrated a specific election to provide finance through leases because of the competitive advantages, which suggests this position is unlikely to change in the absence of regulatory intervention. 9.82 To the extent that consumers who hire goods via consumer leases are generally low income consumers with fewer choices, the impact of poor financial decisions is more pronounced. It is important for 124


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms persons on limited incomes to be able to make more suitable choices when entering into arrangements to hire goods. This is especially so given that low-income consumers generally have fewer finance choices available for the purchase of basic household items. They are therefore less able to bear or adjust to relatively low levels of loss, which therefore have the capacity to cause significant financial hardship. 9.83 In summary, there are no advantages to consumers under this proposal, while lessors will continue to benefit, particularly through being able to charge higher prices because of the lack of competition. Option 2: Regulate consumer leases and exempt leases in a way that acknowledges the functional similarity of these products to credit contracts 9.84 This option would result in: · New obligations being imposed on consumer leases; and · Leases for an indefinite period being regulated by the Code. Consumer leases 9.85 Under this option the following two categories of new obligations would apply to consumer leases: · extending to leases existing and well understood requirements in the Code that currently only apply to credit contracts, either in their current from where these are applicable to consumer leases and where their introduction would address the problems identified above, or in a modified way where the different structure of leases requires this (particularly in relation to the ownership of goods); and · introducing new obligations to allow for disclosure of the cost of finance in a way that allows for comparison with credit contracts. 9.86 The obligations in the Code that, under the first proposal above, would be applied to leases include: · the provisions in the Code applying to mortgages and guarantees where the lessee's obligations under the lease are supported by a mortgage (over goods or property other than the leased goods) or guarantees; 125


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · requirements in relation to variations to consumer lease contracts (other than those providing for hardship variations, as these obligations already apply); · requirements in respect of providing statements of account (including enabling a consumer to dispute the contents of these statements) and in relation to enforcement practices (including regulating enforcement expenses); and · extending the liability of a lessor for conduct by an intermediary at the point of sale. 9.87 Disclosure obligations would be introduced that are likely to assist consumers in making a better judgement about consumer lease products before deciding whether to use them. These obligations would include: · providing for a high impact short form disclosure of key information about the contract prior to the contract being entered into (with the details of this requirement to be developed in a further RIS discussing disclosure in respect of all products regulated by the Credit Act); · disclosure of the cost of a lease using consistent assumptions that enable a comparison to be made with credit contracts; · disclosure of the amount in dollar terms required to be paid for each dollar of the market value of the hired goods (which would enable consumers to assess the amount they are paying relative to purchasing the goods for cash or using an interest free option, where this is available); and · disclosure of the cost of services provided with the lease, to enable consumers to make informed decisions of each element of a bundled transaction. 9.88 This RIS also identified an issue in relation to the lack of comparative disclosure where an intermediary has arrangements with financiers so that they can offer consumers either a credit contract or consumer lease. This issue may be further addressed in a RIS that considers the role of these point of sale intermediaries in detail. Leases for an indefinite term 9.89 Section 171(1) currently exempts leases that are for an indefinite period or that have a fixed term of less than 4 months. This option would result in the removal of these exemptions, so that these categories of 126


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms leases become regulated as consumer leases under the Credit Act. Persons who currently only offer these types of leases would therefore need to meet all the obligations under the Credit Act, including meeting the requirements to hold an ACL, and also meeting the responsible lending obligations. Impact analysis Consumers 9.90 Consumers would particularly benefit from being able to more readily compare the costs of entering into a consumer lease and a sale by instalments and other credit contracts, and make more effective purchasing decisions. They would also benefit from a reduction in cost, where lessors lower their prices because of the need to meet enhanced competition from persons offering credit contracts. 9.91 They would also benefit from: · greater regulation of indefinite leases, which may result in these products only being offered where they meet the consumer's needs, rather than as a way of committing the consumer to making indefinite payments; · exclusion of players who engage in regular misconduct from the industry; and · having greater access to remedies in the event they suffer loss or damage, and this in turn could be expected to promote better standards of conduct by the lessor (to reduce the costs associated with responding to complaints, particularly complaints to an EDR scheme). 9.92 Consumers who currently obtain goods through unregulated providers are likely to have continued access to some goods through lessors who are currently regulated by the Credit Act. The application of the responsible lending requirements, and the need to ensure consumers have the capacity to meet repayments, may mean that they are unable to access the same volume or quality of goods. That is, as a result of those reforms, those consumers who are on low incomes or unable to access other forms of credit, are still likely to be able to obtain goods through leases, but that either: · the goods they can lease would be lower in value; or · the total cost would be reduced, because the individual repayments would be lower. 127


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · The risk of the consumer defaulting, and incurring consequent costs, will be reduced, as a result. Lessors offering regulated products 9.93 Lessors would incur increased costs, as discussed in detail below. However, consumers will have a better capacity to understand the relative costs of different products and therefore lessors may not be able to pass on any increase in costs where, as a result of the reforms, the lessor will need to compete with cheaper credit contracts. 9.94 The impact on those lessors who are already required to comply with the Credit Act would be relatively low, as they are already required to comply with the Act (including the licensing and responsible lending obligations). The main changes would be: · introduction of new pre-contractual disclosure requirements -- these may result in one off costs of between $10,000 and $20,000 for the lessor to change their existing documents so that they comply with the new requirements; and · changes to their internal procedures in order to comply with obligations in the Credit Act -- these costs would not be significant in that the substantive nature of these obligations is well understood as they have been in force in relation to credit contracts, through the UCCC, since 1996. Lessors offering unregulated products 9.95 Those lessors providing unregulated products would need to decide whether to exit the market or apply for an Australian credit licence (ACL). It could be expected that the majority of these would decide to leave the industry, as the use of exempt leases is particularly prevalent among those who are targeting vulnerable consumers and have no interest in establishing a broader or mainstream presence, or therefore in meeting the range of legal obligations associated with holding an ACL. If they cease offering leases they could still be rsubject to limited egulation while they are receiving payments under existing leases (adapting the existing regulatory approach in the Credit Regulations 2009 for lenders who choose not to apply for an ACL following the commencement of the Credit Act). 9.96 The lessors who decide to seek a licence will incur costs in relation to entry requirements, ongoing conduct standards and responsible lending conduct obligations. If the lessor sought legal advice for this purpose they could expect to incur costs of $60,000 to $180,000 in order 128


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms to be `regulator-ready'. The cost would vary according to factors such as the range and type of products being provided and the extent to which existing procedures need to be changed. 9.97 A lessor would also incur costs to third parties as follows: · Costs payable to ASIC in connection with the licence, that is, an 9 application fee, and an annual fee. For lessors, the amount of the fee is based on the amount of rental payments under contracts arranged and can range from $450 to $21,000 (although most 10 lessors are likely to be at the lower end of the scale). · EDR membership: application fee $165 -- $220; membership fee (calculated according to membership type and the size and nature 11 of business) and complaint fees. 9.98 Lessors would also incur costs in changing their practices in order to ensure they are complying with the new obligations. While there would be one off costs in documenting these new practices and training staff, there would be little difference in ongoing costs once the new procedures have been introduced, as they would be replacing existing practices. Providers of credit contracts and government 9.99 Credit providers who offer regulated products more competitive to leases may increase their market share due to greater transparency in pricing. These providers will not incur additional compliance costs. 9.100 The amount of revenue generated for government by fees associated with, in all likelihood, a small number of lessors applying for an ACL is unquantifiable but insignificant. 9.101 In summary, this option would have the following costs and benefits: · Lessors who currently offer consumer leases (a product already regulated by the Credit Act) would incur some compliance costs in relation to changes in documentation; however, these would be significantly lower than the costs they have incurred in obtaining an ACL or complying with the responsible lending obligations. They 9 See ASIC Info Sheet 108 How much does a credit licence cost? 10 National Consumer Credit Protection (Fees) Regulations 2010, Schedule 1, item 1.1 11 See http://www.cosl.com.au/Member-Fees; http://www.fos.org.au/centric/home_page/members/apply_for_membership.jsp 129


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 would find themselves able to compete more effectively with providers of exempt leases, but, in turn, would no longer have the benefit of their current competitive advantages relative to credit contracts (and may have to reduce the cost of their products in order to maintain their market share). · Lessors who currently offer products unregulated by the Credit Act would incur significant costs as they would need to meet the standards and obligations applying to all licensees. It could be expected some would cease offering these products (particularly those fringe operators who operate without any business infrastructure). · Credit providers who operate business models in which their products compete with credit contracts would no longer be at a competitive disadvantage and, where their products were cheaper than consumer leases, could be expected to benefit through increased market share. · Consumers would benefit in a range of different ways, principally through being able to select the cheapest finance option, and also through better protections from fringe operators. These changes would particularly benefit low-income consumers. Option 3: Use financial literacy programs and materials to educate consumers as to the differences between credit contracts, regulated leases and unregulated leases 9.102 This option would see existing education or financial literacy programs used to provide lease-specific information to consumers, to encourage better decision-making by consumers in relation to the use of credit contracts, regulated leases and unregulated leases. It is noted that ASIC already has information comparing leases and other forms of credit on its website, but that this option contemplates more extensive and targeted information, delivered through additional mechanisms. 9.103 It could include the dissemination of information through existing financial literacy avenues, including school programs and government websites. The differences between these products are, as set out above, largely based on technical features of the contracts between the financier and the consumer, and the educational materials would therefore need to reflect this. 9.104 This approach would not prevent persons from offering consumer leases or exempt leases on the same terms as is currently the case, until any education campaign changed consumer behaviour sufficiently to require them to reassess their products. 130


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms Impact analysis Consumers 9.105 It is unlikely that an education campaign would have an immediate impact on consumer behaviour as the use of leases is linked to a desire by the consumer to obtain goods. In these circumstances the consumer's initial concern is on selecting these goods from a retailer, and then responding to the finance options presented by the retailer. The difference between leases and credit contracts, as presented in the abstract, will not necessarily assist a consumer to identify whether the form of finance they are being offered is a lease or a credit contract. 9.106 An education campaign would therefore also need to assist consumers to be assertive in their dealings with the providers of goods, and to specifically inquire what form of finance would be used. This restricts the extent to which an education campaign will be effective, particularly where consumers may have limited choices available to them and are offered a lease as the only source of finance (on a `take it or leave it' basis). 9.107 This option would have no immediate impact on providers of leases or on their competitors. It may have a limited impact over time, as consumers adjust behaviour in response to a greater awareness of the consequences of different choices. This long-time benefit would, however, depend on continued education programmes to inform each new generation of consumers. 9.108 This approach would be unlikely to meet the government's objectives, other than the fourth objective. 9.109 In summary, this option would have the following costs and benefits: · Lessors would not incur any costs, except as over time consumer decision-making changed to indicate a preference for credit contracts over consumer leases. · Some consumers, who assimilate the messages of the education campaign, would either avoid leases or enter into lease contracts with a better understanding of how they work. Consumers who do not respond to these messages or who do not have alternative finance choices available to them would continue to be at risk of suffering the financial disadvantages identified in this RIS. 131


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 · Credit products who operate business models in which their products compete with credit contracts would continue to be at a competitive disadvantage. Consultation 9.110 The Government has conducted extensive consultations in the consideration of enhancements to the regulation of consumer leases via the Green Paper and the Industry and Consumer Representatives Consultation Group. 9.111 In addition, the Government has formed a specialist group on this topic, given the technical issues associated with leases. This group comprises lessors (represented directly rather than through an industry body), consumer representatives with significant experience in the area, the Financial Ombudsman Service (FOS) (because of its experience with complaints in respect of leases) and providers of credit contracts. The level of expertise within this group has resulted in a frank and detailed analysis and exchange of information that has informed this RIS and is expected to assist in the implementation of the proposals. 9.112 The views of stakeholders are set out below. Consumer and legal representatives 9.113 The option of applying the protections provided to consumers using credit contracts under the Credit Act to users of consumer leases is supported by a range of consumer and legal group stakeholders, including the Brotherhood of St Laurence, Consumer Action Law Centre, National Legal Aid, and the Wesley Community Legal Service. In particular, these stakeholders agree that providing consumers with disclosure regarding the cost of the consumer lease and being provided with enhanced disclosure that improves the consumers' ability to compare the cost of a consumer lease with a credit contract are key necessary reforms. 9.114 These groups also agree that the different levels of regulation applying to credit contracts and consumer leases creates regulatory arbitrage and is allowing lease providers to reduce disclosure and other requirements under the Code by structuring their products as a lease, rather than a credit contract. Industry representatives and professional bodies 9.115 Several industry and professional body representatives including GE Capital, the Mortgage & Finance Association of Australia and Min-it 132


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms Software have expressed various concerns regarding practices under current regulation including competitive bias and regulatory arbitrage. These stakeholders agree that greater regulation of consumer leases is required. 9.116 Several industry and professional body representatives including Flexigroup, the Australian Finance Conference and the Finance Brokers Association of Australia consider that there is insufficient evidence to determine that additional regulation of consumer leases is warranted. 9.117 To the extent they acknowledge there may be regulation their primary concern is that leases are not regulated in a way in which ownership of the goods passes to the consumer. This approach has not been contemplated in this RIS. Dispute resolution provider 9.118 The Financial Ombudsman Service considers that consumer leases should be subject to the same disclosure requirements as sales by instalments and credit contracts. Recommended option 9.119 Options 2 and 3 are the preferred options. It is considered the combination of these two options will operate in a complementary way to deliver both benefits to consumers both in the short-term and the medium-term. 133


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 ENHANCEMENTS TO THE NATIONAL CONSUMER CREDIT PROTECTION REGIME Background 9.120 During Phase One of the National Consumer Credit Protection reforms, stakeholders raised concerns about certain aspects of the UCCC 12 which have been replicated in the Code. 9.121 It was agreed that improvements to the Code would be considered during Phase Two of the credit reforms and were the topic of Chapter 7 of the Green Paper. The following issues have been identified: · The provisions allowing borrowers to request a variation of their credit contract on the grounds of financial hardship (whether before or after enforcement action) are highly prescriptive, and subject to a restriction in that they only apply to persons who have borrowed up to $500,000. This restricts the capacity of borrowers to obtain a variation, even where they only need a variation to address a short-term change in their circumstances. Three different aspects of this topic are considered below. · There is no general remedy provided for unjust conduct by brokers or other intermediaries (as the Code only provides a remedy where there has been unjust conduct by lenders). This creates a gap as consumers otherwise need to rely on general prohibitions that may not always provide a remedy where they have suffered loss because of the conduct of a broker. · The Code does not prohibit or restrict the use of particular words or phrases. In the credit context, some words or phrases have an emotional resonance with consumers (for example, `impartial' or `interest free'). Consumers may be more susceptible to entering into contracts where brokers or lenders have used these terms in advertising, even where they may not be strictly correct or are subsequently qualified, and where therefore the contract is inconsistent with the use of these words. 12 The Code (and the UCCC before it) regulates credit provided to natural persons for personal, domestic and household purposes. From 1 July 2010, the Code also regulates credit provided to natural persons for investment in residential investment property. 134


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms · The Code only contains a partial prohibition against door-to-door canvassing of credit. The prohibition does not apply where goods are being sold on credit or provided through a lease. Given the range of alternative distribution channels available today, door-to-door selling in this way is largely associated with targeting of vulnerable consumers, and often with high-pressure or manipulative sales tactics. Issue One -- Types of hardship variations that can be requested Background Rights of Borrowers under the National Credit Code 9.122 Under the Code borrowers have a statutory right to request certain variations to their contract where they are unable reasonably, due to illness, unemployment or other reasonable cause to meet their obligations where the value of their contract is under the monetary 13 threshold. This right is subject to a number of limitations, primarily that the borrower must specifically ask their credit provider to change the contract in one of the three following ways: · extending the period of the contract, and reducing repayments accordingly; · a repayment holiday (without extending the period of the contract); or · a repayment holiday and extending the period of the contract. 9.123 If the borrower formulates the request in some other way (for example, they simply ask for a variation without putting forward any proposal of their own) this will not be a `request' within the meaning of the Code, and therefore the credit provider is under no statutory obligation to respond in accordance with the Code. 9.124 The wording of the current provision therefore focuses attention on a relatively narrow set of options for varying the contract, rather than directing the parties involved to consider the substantive issue, namely whether a variation (of any type) would resolve the borrower's situation 13 Section 72 of the Code 135


Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 and void them defaulting, while still being able to repay the amount borrowed. 9.125 In relation to a request that falls within one of the three categories above, a lender must a respond in writing within 21 days, and set out the reasons for denying the request (if this is the outcome). A request can be legitimately denied where the credit provider does not reasonably expect the consumer to be able to meet their obligations despite a variation. 9.126 A debtor can apply to the court to change the contract if the credit provider refuses a hardship request. If successful, a court has power 14 to order a variation as described above. Consumers may also apply to the credit provider's external dispute resolution (EDR) scheme to reconsider a request for a hardship variation. 9.127 Changes to a contract can also be negotiated by agreement 15 between the parties. There are no limitations on what variations can be made under this provision. However, if a request to amend a contract which is made outside of the hardship provision in the Code is refused by the credit provider, the consumer has no statutory recourse to a court (or EDR) for review. These variations are therefore within the discretion of the credit provider. 9.128 Some credit providers have elected to become signatories to a 16 voluntary industry code. These types of codes include requirements that signatories will assist consumers in financial hardship beyond meeting the statutory obligations required by the Code. While there is no statutory recourse to a court for review, the jurisdiction of EDR schemes can include monitoring compliance with industry codes. 9.129 In April 2009 the Treasurer announced an agreement between the Government and the four major banks, to assist borrowers who are experiencing financial difficulty as a result of the global financial crisis by temporarily adopting expanded principles on hardship. By June 2009, all 144 retail banks, building societies and credit unions had agreed to adopt the expanded principles. Under the expanded principles, these institutions work with borrowers, irrespective of the value of their loan, to determine the most appropriate assistance option. In practice, nearly all of these institutions were already signatories to a voluntary code containing similar obligations, and this agreement therefore did not significantly change the 14 Section 74 of the Code 15 Section 71 of the Code 16 Such as the Australian Bankers' Association Code of Banking Practice, the Mutual Banking Code of Practice and the Mortgage & Finance Association of Australia Code of Practice. 136


Regulation Impact Statement: Phase two of the National Consumer Credit Reforms way in which they operated. However, there are differences in approach between lenders in relation to compliance with these voluntary obligations (as discussed in detail below). 9.130 In the discussion of this issue below the term `credit' is used to refer to both credit contracts and consumer leases. Levels of debt and financial hardship in Australia 9.131 Between March 2000 and March 2010, total outstanding consumer credit (owner-occupied housing credit and other personal credit) increased from $277.2 billion to $913.5 billion. This equates to an average annual growth rate of 12.7 per cent. Total outstanding credit in the economy, which includes consumer credit, grew at an average rate of 17 11.1 per cent over the same period. 9.132 The growth in the volume of consumer credit has also resulted in an increase in the level of debt stress amongst Australian households (exacerbated in the last two years by the global financial crisis). This has resulted in a greater number of borrowers at risk of defaulting under their credit contracts, and an increase in the number who need or are seeking 18 variations to their credit contracts on the grounds of financial hardship. The Treasurer's announcement from April 2009 was a reflection of this situation. 9.133 During 2008-09 there were 6,731 new disputes relating to credit lodged with the Financial Ombudsman Service (FOS), an ASIC-approved EDR scheme. This was `up 36 per cent on the previous financial year and reflects the deteriorating economic condition of 2008-2009 and the 19 hardship experienced by many consumers'. 9.134 The Credit Ombudsman Service Ltd (COSL), another ASIC approved EDR scheme, reported that `enquiries increased by 21 per cent in 2008/2009' while `complaints increased by 19 per cent in 2008/2009'. `Issues relating [to] financial hardship alone accounted for a significant 22 per cent 137