CONSUMER CREDIT AND CORPORATIONS LEGISLATION AMENDMENT (ENHANCEMENTS) BILL 2012 Explanatory Memorandum
CONSUMER CREDIT AND CORPORATIONS LEGISLATION AMENDMENT (ENHANCEMENTS) BILL 2012
2010-2011-2012
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CONSUMER CREDIT AND CORPORATIONS LEGISLATION AMENDMENT
(ENHANCEMENTS) BILL 2011
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments to be moved on behalf of the Government
(Circulated by the authority of the
Minister for Financial Services and Superannuation and Minister for Employment and
Workplace Relations, the Hon Bill Shorten MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Amendments to the Consumer Credit and
Corporations Legislation Amendment
(Enhancements) Bill 2011 ............................................. 5
Chapter 2 Amendments to the Australian Consumer Law............ 29
Chapter 3 Statement of Compatibility with Human Rights ............ 31
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ACL Australian Consumer Law (Schedule 2 to the
Competition and Consumer Act 2010)
Enhancements Bill Consumer Credit and Corporations
Legislation Amendment (Enhancements)
Bill 2011
CCA Competition and Consumer Act 2010
Code National Credit Code (Schedule 1 to the
National Consumer Credit Protection
Act 2009)
TPA Trade Practices Act 1974
Credit Act National Consumer Credit Protection
Act 2009
1
General outline and financial impact
Amendments to the Consumer Credit and Corporations
Legislation Amendment (Enhancements) Bill 2011
The Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011 (the Enhancements Bill) was introduced into
Parliament on 21 September 2011. The Bill was subsequently referred to
the Parliamentary Joint Committee on Corporations and Financial
Services and the Senate Economics Legislation Committee. These
committees reported on 2 December and 7 December 2011 respectively.
The amendments to the Enhancements Bill respond to recommendations
contained in these committee reports. They also respond to developments
which have occurred since introduction of the Enhancements Bill and
make other minor technical amendments.
The amendments affect changes to:
· the commencement dates of the provisions;
· hardship applications under the National Credit Code (Code);
· arrangements for employer payment authorisations;
· the regulation of reverse mortgages;
· the provisions in Schedules 3 and 4 of the Enhancements Bill in
relation to short-term and small amount credit contracts, and to the
caps on costs; and
· the Australian Consumer Law (ACL), to correct a minor error by
replacing references to `consumer goods' with `goods' or `goods
supplied to a consumer' (as appropriate), in the lay-by and repair
notice provisions.
Date of effect: The amendments take effect as below:
· provisions dealing with the protection against negative equity in the
regulation of reverse mortgages and transitional and application
arrangements commence on the day after the Enhancements Bill
receives the Royal Assent;
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
· provisions dealing with the cap on costs commencing on 1 July 2013;
· amendments to the ACL commence upon proclamation, or 12 months
after Royal Assent if they are not proclaimed by that time; and
· all other remaining amendments commence on 1 March 2013.
Proposal announced: The reforms to reverse mortgages are part of the
Government's Delivering for Seniors package, announced on
7 August 2010.
The remaining reforms implement Part One of Phase Two of the
Government's commitment to assume responsibility for the regulation of
consumer credit as announced by the Council of Australian Governments
on 26 March and 2 October 2008.
Financial impact: The amendments do not affect the financial impact
statements included in the explanatory memorandum to the Enhancements
Bill.
Human rights implications: The amendments to the Enhancements
Bill 2011 do not raise any human rights issue; see the Statement of
Compatibility with Human Rights -- Chapter 3, paragraphs 3.1 to 3.4.
Compliance cost impact: A regulatory impact statement is included in the
explanatory memorandum to the Enhancements Bill. The amendments to
the ACL have been exempted from the requirement for a regulatory
impact statement.
4
Chapter 1
Amendments to the Consumer Credit
and Corporations Legislation
Amendment (Enhancements) Bill 2011
Detailed explanation of new law
Changes to commencement dates
1.1 The long title of the Enhancements Bill states that the Bill
amends law relating to consumer credit and corporations legislation.
Items 1 and 2 amend this to state that the Enhancements Bill will amend
laws relating to consumer protection (consequent on the changes
discussed in Chapter 2) and delete the reference to corporations.
1.2 Items 3 to 6 change the commencement dates in the
Enhancements Bill, given that the expected date of passage of the Bill has
been changed. In summary:
· the commencement date for the substantive obligations in Schedule 1,
Schedule 2 (other than as noted below) and Schedules 3 and 5 is
changed from 1 July 2012 to 1 March 2013;
· the commencement date for the substantive obligations in respect of
the protection against negative equity in Schedule 2 is now the day
after the Enhancements Bill receives the Royal Assent;
· the application and transitional provisions in Schedule 6 commence on
the day after the Enhancements Bill receives the Royal Assent;
· the commencement date of the provisions in Schedule 4 in relation to
the caps on costs for credit contracts is 1 July 2013; and
· the commencement date to the amendments to the Australian
Consumer law (ACL) commence upon proclamation, or 12 months
after Royal Assent if they are not proclaimed by that time.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
Changes on grounds of hardship
1.3 Item 7 amends the provisions in the Enhancements Bill in
relation to debtors making hardship applications. In summary, the
amendment changes the procedures so that they operate as follows:
· if the debtor considers themselves unable to meet their obligations
under a credit contract, they can give the credit provider notice of their
inability to meet their obligations;
· the credit provider elects whether or not to request further information
from the debtor;
· the credit provider and the debtor may negotiate to change the contract;
and
· within a specified period, the credit provider must send the debtor a
notice stating whether or not the contract is to be changed.
1.4 Relative to the procedures in the Enhancements Bill these
changes:
· simplify the operation of the hardship variation procedures, by only
requiring the credit provider or lessor to send one notice to the
consumer, advising whether or not they will vary the contract (rather
than an additional notice, stating whether or not they were prepared to
negotiate on a variation to the contract);
· introduce a legal obligation on consumers to respond to requests for
information from the credit provider, in order for it to decide whether
to vary the contract; and
· change the penalties applying to credit providers and lessors for failing
to comply with the requirements for hardship variations from a
criminal penalty to a civil penalty, and removing the strict liability
offence provision.
1.5 The obligations on a credit provider are triggered when a debtor
who considers that they are unable to meet their obligations under a credit
contract, gives the credit provider notice (a hardship notice) of their
inability to meet the obligations. A debtor can therefore give a hardship
notice either orally or in writing.
1.6 The obligation only applies where the debtor is unable to meet
their obligations, for example, because of illness or unemployment. They
would not apply in situations where the debtor has sufficient disposable
income to meet their repayments and wilfully refuses to do so.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
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1.7 After the debtor has given the hardship notice to the credit
provider, the credit provider then has two choices:
· they can request further information from the debtor; or
· they can assess the application without requiring further information
from the debtor.
1.8 If the credit provider requests further information from the
debtor they have 21 days from receiving the hardship notice to make the
request. The request must be limited to relevant information that will help
the credit provider to decide whether to change the credit contract.
1.9 The debtor has 21 days to provide the specified information.
1.10 It is then expected that ordinarily the credit provider and debtor
would enter into negotiations in relation to varying the terms of the credit
contract, although there is no legal obligation on the credit provider to
vary the contract.
1.11 The reforms do not introduce any criteria a credit provider must
consider in deciding whether or not to vary a contract, but only establish a
process for resulting in consideration of this question. For example, the
credit provider could reject the request if they do not believe that there is a
reasonable cause to do so, such as illness or unemployment, or reasonably
believes that the debtor would not be able to meet their obligations under
the credit contract, even if it were changed.
1.12 If the credit provider and the debtor agree to change the credit
contract, the credit provider must give the debtor notice of this. This
notice must be in the form prescribed by the regulations (if any are made),
and must record the fact that the credit provider and the debtor have
agreed to change the credit contract.
1.13 If the credit provider does not agree to change the credit
contract, the credit provider must give the debtor a notice. This notice
must be in the form prescribed by the regulations (again, only if any are
made), and record:
· the fact that the credit provider and the debtor have not agreed to
change the credit contract;
· the reasons why they have not agreed;
· the name and contact details of the approved external dispute
resolution scheme of which the credit provider is a member; and
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
· the debtor's rights under that scheme.
1.14 The credit provider must give a notice as described in
paragraphs 1.12 or 1.13 by a specified deadline, as follows:
· if the credit provider did not require further information from the
debtor, this notice must be given 21 days after receiving the hardship
notice from the debtor;
· if the credit provider required further information from the debtor but
did not receive any information in compliance with the requirement,
this notice must be given 28 days after the day of making the
requirement; and
· if the credit provider required further information from the debtor and
received information in compliance with the requirement, this notice
must be given 21 days after receiving the information.
1.15 If the credit provider does not comply with these requirements
they are liable for a civil penalty of 2,000 units.
1.16 A regulation-making power is introduced to allow the
regulations to prescribe a smaller amount of days than is proposed in the
amendments for various actions to be completed. This is to allow,
pending further consultation, shorter time periods to be specified for
different classes of contracts (particularly small amount credit contracts).
Effect of hardship notices on enforcement
1.17 The changes to the operation of the hardship provisions in item 7
result in consequential amendments to amend two cross-references in
section 89A (item 6 in Schedule 1 of the Enhancements Bill).
Section 89A requires credit providers to postpone enforcement
proceedings for a specified period after a hardship notice has been
received and determined.
1.18 Items 8 and 9 replace two current references in section 89A to
the notices provided under paragraph 72(2)(b) with references to the
notices to be provided under paragraph 72(4)(b). The effect is that a
credit provider will be unable to commence enforcement action until
14 days after it has sent a notice under paragraph 72(4)(b), that is, a notice
stating that the credit contract will not be changed. This period of time is
provided to allow the debtor to further consider their options.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
Restrictions on representations in relation to eligibility to enter credit
contracts or consumer leases
1.19 Part 3 of Schedule 1 of the Enhancements Bill introduces a
prohibition on licensees, unless they have completed a suitability
assessment, from representing to a consumer that they are eligible to enter
into a credit contract or consumer lease with the licensee, or that the credit
limit of an existing credit contract will be able to be increased.
1.20 Items 10, 11 and 12 amend the operation of the prohibition by
making it explicit that it will only be infringed if the representation is
unconditional. Licensees can therefore make representations as to the
possibility that a future contract or credit limit increase may be provided,
so long as such statements are appropriately qualified or have caveats (for
example, by a credit provider using a term such as `pre-approved'
provided they also indicate the steps to be taken before approval of the
loan will be finalised).
Authorisation for deductions by employer of debtor or lessor
1.21 Items 13 and 14 introduce regulation-making powers in relation
to the use of authorisations signed by the debtor or lessee, enabling
payments to be made directly from their salary to the credit provider or
lessee (employer payment authorisations).
1.22 The use of these authorities was identified as an area of concern
in the course of the review of the Enhancements Bill by the Senate
Economics Committee and the Joint Parliamentary Committee on
Corporations and Financial Services.
1.23 The use of these authorisations is generally straightforward
where they are relied upon from the outset of the contract. However,
some credit providers or lessees may require the consumer to sign an
employer payment authorisation when they enter into the contract, and
then only seek to rely on it to obtain payments directly from the employer
when the consumer is in default.
1.24 There is no current requirement for employer payment
authorisation to specify a particular amount to be deducted. The absence
of any nominated dollar amount can permit the credit provider or lessor to
subsequently seek payment from the employer of an amount higher than
the repayments under the contract (following default by the consumer).
1.25 The use of employer payment authorisations may therefore
exacerbate the consumer's financial difficulties (by at least temporarily
limiting them from paying their debts according to the priority they give
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
them so that, for example, the consumer could be left with insufficient
funds to pay their rent after the unforeseen use of an employer payment
authorisation results in a deduction being made from their salary).
1.26 Item 13 amends the Guide to Part 3-6A, to include a summary of
the operation of the new Division 4 in relation to employer payment
authorisations for deductions.
1.27 Item 14 creates a new Division in Part 3-6A of the
Enhancements Bill. This Division contains provisions that enable notices
to be prescribed in relation to the use of employer payment authorisations
as follows:
· a credit provider or lessor must give an employer a statement with the
employer payment authorisation if the credit contract or consumer
lease is of a kind prescribed by the regulations; and
· a credit provider or lessor must give a debtor or lessee at least 7 days'
notice, in a form prescribed by the regulations (if any), of the intention
of the credit provider or lessor to give the employer payment
authorisation to the employer.
1.28 The amendments will allow for regulations to be made to
introduce notice requirements to address these risks, noting that it is
expected further consultations would be undertaken to ensure the effective
operation of such requirements, and that the design and content of any
forms maximises their effectiveness.
1.29 In each case, should the requirement apply as a result of
regulations being made, then if the credit provider or lessor does not
comply the civil penalty is 2,000 units.
1.30 Any requirements that may be prescribed in relation to employer
payment authorisations will not extend to credit contracts provided to
purchase goods or services as part of a consumer's remuneration package.
The exemption will apply to salary packaging arrangements which can
include payments from a consumer's pre- and post-tax salary. The
potential application of a form in such circumstances would be confusing
and unnecessary.
Reverse mortgage definition
1.31 Item 2 in Schedule 2 of the Enhancements Bill currently defines
a reverse mortgage as including an arrangement involving a credit
contract under which the debtor's total liability under the contract or
mortgage may exceed the maximum amount of credit that may be
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
provided under the contract without the debtor being obliged to reduce
that liability to less than that maximum amount.
1.32 Item 15 revises this definition so that a credit contract will not
be a reverse mortgage if the debtor's total liability may exceed the
maximum loan amount without the debtor being obliged to reduce their
liability to the maximum amount or below the maximum amount (rather
than just to an amount less than the maximum loan amount).
1.33 This amendment is necessary to ensure that the reverse mortgage
definition does not unintentionally capture credit products such as lines of
credit that are provided to a different market.
Bridging finance contract definition
1.34 Item 5 in Schedule 2 of the Enhancements Bill defines a
bridging finance contract as a credit contract where the debtor reasonably
expects, when the contract is made, to receive a lump sum before the end
of the contract and to use that sum to discharge their obligations under the
contract.
1.35 Item 16 revises this definition to include a requirement that the
contract must also be for a term of two years or less. Where the term is
any longer than this period it is indicative of a degree of uncertainty in the
timing for repayment of the contract such that the exemption for bridging
finance contracts should not apply.
Giving projections of equity before providing credit assistance or
entering credit contract
1.36 An amendment is proposed to provide for greater flexibility in
relation to the options available to licensees for providing consumers with
projections of their future equity under different scenarios.
1.37 Item 17 allows the licensee to not only show the consumer in
person, but to also give the consumer the projections in a way prescribed
by regulations under section 133DB(1)(a). This is to permit the use of
options resulting from advances in technology and communication
methods that allow for the effective communication of this information.
Provisions that must not be included in credit contract for reverse
mortgage
1.38 Amendments are proposed to narrow the scope of the terms that
cannot be relied upon by reverse mortgage providers as defaults under the
contract with the consumer.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
1.39 Item 18 provides greater clarity to paragraph 18A(3)(b) of the
Enhancements Bill by establishing that the provision applies to a debtor
who occupies a reverse mortgaged property.
1.40 Item 19 amends paragraph 18A(3)(d) of the Enhancements Bill
to provide that a credit provider must not enter into a reverse mortgage
contract which provides a basis for enforcement proceedings because a
debtor has failed to pay a cost to a third party within three years after the
payment of the cost has become due.
Example 1.1
After the Enhancements Bill has commenced, a licensee would be
prohibited from entering into a reverse mortgage contract which
provides that if the debtor fails to pay council rates charged to the
reverse mortgaged property, the credit provider can begin enforcement
proceedings. However, they may enter into the contract if the relevant
term provides that enforcement proceedings can begin if the rates are
not paid for three years or more.
Circumstances in which the protection against negative equity will not
apply
1.41 Paragraph 86E(a) in item 20 of Schedule 2 of the Enhancement
Bill currently provides that the negative equity protection under
section 86A will not apply if the market value of the reverse mortgaged
property was reduced by deliberate damage by the borrower.
1.42 Item 20 deletes this paragraph as it is proposed to address the
issue of specifying how the market value is to be determined by
regulations made under section 86A (as this definition is relatively
complex in this context, and may need to be adjusted over time).
Amendments to Schedule 3 -- short-term and small amount credit
contracts
1.43 Item 21 substitutes Schedule 3 of the Enhancements Bill. The
revised Schedule 3 of the Enhancements Bill addresses the conduct of
persons in relation to small amount credit contracts and short-term credit
contracts.
1.44 The amendments take into account consultations with various
consumer and industry groups, and the recommendations made by the
Parliamentary Committees. They introduce targeted and flexible
mechanisms to address specific concerns in the short-term and small
amount credit contract market.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
Short-term credit contracts
1.45 Item 1 of Schedule 3 inserts a definition of short-term credit
contract into Schedule 3. A short-term credit contract is defined as being
a contract that is not a continuing credit contract, where the credit
provider is not an ADI, the credit limit of the contract is $2,000 or less
and the term of the contract is 15 days or less.
1.46 This definition may also include any other requirements
prescribed by regulations. This prescription is required to address any
potential avoidance of the definition that would otherwise prevent a
licensee from entering into short-term credit contracts (see items 9 and
17).
1.47 A contract that is a short-term credit contract is excluded from
the definition of small amount credit contract to address specific
problems in relation to loans with a very short repayment period of
15 days or less.
1.48 The use of short-term credit contracts is considered to be high
risk, where the amount of the repayments is dictated by the need to repay
the loan balance within a short period (rather than the borrower's capacity
to meet those repayments).
1.49 There is a concern that a significant percentage of consumers
who currently enter into short-term credit contracts are on low incomes,
and that the short period of the loan means that the repayment will
consume a disproportionate amount of the borrower's income, resulting in
a risk of repeat use or financial hardship. Accordingly, items 7 and 13 in
Schedule 3 prohibit licensees from:
· entering into a short-term credit contract (section 133CA);
· increasing the credit limit of a short-term credit contract
(section 133CA); and
· suggesting that a consumer apply, or assisting the consumer to apply,
for a short-term credit contract or an increase to the credit limit of a
short-term credit contract (section 124A).
1.50 A breach of these prohibitions attracts a civil penalty of 2,000
penalty units and a criminal offence of 50 penalty units.
Small amount credit contracts
1.51 Item 2 of Schedule 3 amends the definition of small amount
credit contract from the original Enhancements Bill to exclude short-term
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
credit contracts from the definition, to remove the requirement that the
debtor's obligation not be secured by a mortgage, and to reduce the
maximum length of the contract from two years to one year.
1.52 The reduction of the maximum term for a small amount credit
contract addresses concerns in relation to its application on the cap on
costs.
1.53 This definition may also include any other requirements
prescribed by regulations, or to change the criteria in relation to the length
and amount of such contracts. This is required to address any potential
avoidance of the definition and related compliance requirements,
including the cap on costs. The history of the sector in relation to State
and Territory interest rate caps suggest that avoidance is common and
anticipated to occur in relation to the cap on costs.
1.54 A number of presumptions and obligations in relation to
suitability under the responsible lending conduct provisions in Chapter 3
of the Credit Act have been included to address concerns about specific
exploitative practices that are likely to increase the dependency of
consumers on small amount lending.
1.55 These provisions replace the `multiple contract' prohibitions in
the Enhancements Bill which prohibiting conduct such as refinancing or
increasing the credit limit of a small amount credit contract, or entering
into a second short-term credit contract where the credit provider is
already a party to an existing short-term credit contract.
1.56 The use of presumptions and requirements in responsible
lending rather than direct prohibitions provides licensees with greater
flexibility, while addressing concerns about `debt spiralling' (where
vulnerable consumers in this market are more likely to end up in an
ongoing debt cycle, increasing their reliance on credit for day-to-day
living expenses and having repeated roll-overs of their loans).
1.57 The purpose of introducing specific responsible lending
obligations is to improve lending and broking processes standards and,
therefore, the outcomes for consumers.
1.58 These new provisions recognise that the inquiries by licensees
into a consumer's financial situation (as mandated in Chapter 3 of the
Credit Act) and whether the repayments would cause substantial hardship
are an important part of the statutory framework. Given that a significant
percentage of consumers who typically use small amount credit contracts
are on low incomes this is an area where additional obligations are to be
introduced.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
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Display of information
1.59 Items 7 and 13 of Schedule 3 (sections 124B and 133CB)
introduce a requirement for licensees to display information or ensure
their website is in accordance with the regulations where:
· the licensee represents that they provide or are able to provide
credit assistance to consumers in relation to small amount credit
contracts; or
· the licensee represents that they enter into or are able to enter into
small amount credit contracts with consumers under which the
licensee would be the credit provider.
1.60 The location and content of the information is to be prescribed
by the regulations, so as to enable these requirements to be specified in a
way that allows for flexibility and maximises the impact of the
information on the consumer. For example, the regulations may prescribe
a notice to be displayed inside the licensee's business premises
(`shopfront'), or require a hyperlink to a Government website to be
provided on the licensee's website.
Responsible lending -- bank statements
1.61 Items 4 and 8 of Schedule 3 insert an additional responsible
lending requirement after subsections 117(1) and 130(1), so that a licensee
must review the account statements of a consumer when verifying their
financial situation in relation to a small amount credit contract.
1.62 It specifies that where a consumer has an account with an ADI
into which their income is paid, the licensee must obtain and consider a
consumer's account statements relating to the period of at least 90 days
prior to making a preliminary assessment under paragraph 115(1)(d) or an
assessment under paragraph 128(1)(d).
1.63 This provision seeks to ensure that the licensee considers the
income and expenses of the consumer as disclosed in the account
statement. It could ordinarily be assumed that licensees would obtain this
type of information in order to comply with the responsible lending
obligations. However, a specific obligation has been introduced in
relation to small amount credit contracts, given, first, the particular risks
associated with this product, and, second, the evidence from reviews
undertaken by ASIC since the commencement of responsible lending
conduct obligations has found that there are inconsistent standards in this
sector, resulting in a greater need for statutory direction.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
1.64 It is specifically provided that the introduction of this
requirement does not mean the licensee does not need to make other
inquiries into the consumer's financial situation; for example, the
information in the account statement may prompt additional inquiries.
1.65 The requirement to obtain and consider account statements does
not mean the licensee needs to review a statement as issued by the
consumer's ADI. What is relevant is the information in those statements,
whether it be provided through internet access or other means.
Responsible lending -- presumptions of unsuitability
1.66 Items 5, 6, 11 and 12 in Schedule 3 introduce presumptions in
relation to suitability under the responsible lending conduct provisions in
Chapter 3 of the Credit Act. The items provide that it will be presumed
that a small amount credit contract, or an increase in the credit limit of
such a contract, is unsuitable where:
· the borrower is already in default under another small amount credit
contract; or
· in the three-month period before the assessment occurs, the
consumer has been a debtor under two or more small amount credit
contracts.
1.67 The effect of the presumption is that, unless the contrary is
proven, a consumer would be considered to be in substantial hardship.
The provisions therefore places an onus on a licensee to establish that the
short-term credit contract was suitable for the consumer.
1.68 The presumptions have effect in this way as the operation of the
responsible lending obligations means that a loan can be unsuitable
because it results in substantial hardship, even if it meets the consumer's
requirements and objectives.
1.69 Conversely, even if a consumer can repay a small amount credit
contract (or other type of credit contract) without such hardship it does not
mean that the contract necessarily or invariably meets their requirements
and objectives. A licensee would still need to make additional inquires to
meet their statutory obligations; for example, some research has found
that some consumer use small amount credit contracts when their
preference would be to avoid this outcome if at all possible.
1.70 These provisions provide targeted reform to address concerns in
relation to both debt spirals and recurrent use of small amount credit
contracts. For example, there may be situations where a refinance would
result in lower repayments that are beneficial to the consumer.
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Technical amendments
1.71 Items 9 and 10 in Schedule 3 implement a technical amendment
that moves the civil penalty prescribed in paragraph 131(2) to
paragraph 131(1).
Prohibitions on small amount credit contracts
1.72 Item 13 in Schedule 3 includes section 133C which prohibits a
licensee from entering or offering to enter into a small amount credit
contract if the consumer is a class of consumer prescribed by regulations
and the repayments required would not meet the requirements set out in
the regulations.
1.73 This provision is intended to enable the future implementation of
a `Protected Earnings Amount' requirement. This concept was initially
raised in submissions to the Parliamentary Committees. It would, for
example, enable the Government to prohibit a credit provider from
providing a loan to a recipient of Centrelink benefits under which the
repayments would exceed 20 per cent of their income.
1.74 A breach of this provision attracts a civil penalty of
2,000 penalty units and a criminal penalty of 50 penalty units.
Court orders
1.75 Item 14 in Schedule 3 enables a court to make an order under
section 180 of the Credit Act for breaches of sections 124A and 133CA,
including an order that would prevent credit providers and providers of
credit assistance from profiting where they breach the prohibitions in
these sections. This approach is intended to create a greater deterrent to
persons who might otherwise seek to engage in conduct in breach of these
provisions, on the grounds that they may have no liability to the
consumer, as they may not suffer any loss, or any easily demonstrable
loss, from entering into such a contract.
Minister to commission review
1.76 Item 15 in Schedule 3 requires the Minister to commission, as
soon as practicable after 1 July 2015, a review of the operation of
provisions in the Credit Act and the Code in relation to small amount
credit contracts, including the provisions imposing caps on costs. The
review must be undertaken by 3 persons who, in the Minister's opinion,
possess appropriate qualifications to undertake the review.
1.77 This provision is complemented by item 22 which specifies the
matters in Schedule 4 of the Enhancements Bill that are to be the subject
of the review.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
Amendments to Schedule 4 -- cap on costs
1.78 The Enhancements Bill currently provides, in section 31A, that
for a small amount credit contract, the maximum amount that can be
charged is an establishment fee of 10 per cent of the adjusted credit
amount as currently defined in item 20 in Schedule 4 (in general terms,
the amount of credit the consumer receives in the hand), and a monthly
fee of 2 per cent of this amount.
1.79 For all other credit contracts, the Enhancements Bill provides in
section 32A for a cap of 48 per cent as determined by the annual cost rate
(including certain specified fees and charges).
1.80 The Senate Economics Committee and the Joint Parliamentary
Committee on Corporations and Financial Services (the Parliamentary
Committees) both reviewed the operation of the cap on costs. Both
Committees supported the need for a restriction on costs to protect
borrowers, but considered that the level at which it was set should be
reconsidered to address concerns about the viability of the industry.
1.81 The Senate Economics Committee in its report on the
Enhancements Bill stated at paragraph 2.46:
There is, therefore, a sound and principled case for national
legislation to curb excessive interest rates, fees and charges by
the payday loan industry in Australia.
1.82 Consistent with the observations and recommendations of the
Parliamentary Committees, it is proposed to create a tiered cap on costs to
balance the interests of consumers with the viability of the industry.
1.83 Lenders argued that the high establishment costs for short-term
credit contracts are not recouped under the current interest rate caps and
the model set out in the Enhancements Bill. The avoidance of caps
through various artificial legal constructs is common in all relevant
jurisdictions.
1.84 The tiered model seeks to accommodate the costs of lenders as
they transition between the caps while targeting specific problems in the
market. In particular, the amendments introduce prohibitions on
providing a short-term credit contract, increase the maximum amount of
permitted fees for a small amount credit contract and provide for a
bridging cap on costs for a medium amount credit contract.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
Table 1.1: Summary of tiered cap on costs
Credit contracts Permitted costs
Short-term credit contracts Provision of credit contract is prohibited.
Applies to a credit contract that:
· is not a continuing credit
contract;
· where the credit provider is
not an Authorised
Deposit-taking Institution
(ADI);
· the credit limit is $2,000 or
less; and
· the term of is 15 days or less.
Small amount credit contract 20 per cent establishment fee plus
4 per cent monthly fee on the original
Applies to credit contracts:
value of the loan for example maximum
· that is not a continuing credit total costs of $24 on a $100 loan for a
contract; term of 16 days.
· where the credit provider is
not an ADI;
· the credit limit of the contract 200 per cent total cap on charges for all
is $2,000 or less; and lending.
· a maximum term of 1 year.
Medium amount credit contract Annual cost rate must not exceed
48 per cent, with the formula allowing
Applies to credit contracts that:
for an additional $400 fee to be charged.
· is not a continuing credit
contract;
· where the credit provider is
not an ADI;
· the credit limit of the contract
is between $2,000 to $5,000;
and
· a maximum term of two years.
All Remaining Credit Contracts Annual cost rate must not exceed
48 per cent.
Excludes ADIs.
1.85 The amendments to the cap for small amount credit contracts
will result in the maximum amount that can be charged being doubled.
Setting the cap at this level would allow for a viable small amount lending
industry to continue while meeting the Government's objective of
indirectly encouraging longer term loans.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
1.86 This is demonstrated by Table 1.2 below, which compares the
effect of the Government's model with other models proposed to the Joint
Parliamentary Committee on Corporations and Financial Services by
individual credit providers, and by an industry body for small amount
lenders, the National Financial Services Federation (NFSF).
1.87 These other models were:
· an upfront fee of 28 per cent of the adjusted credit amount, and a
monthly fee of 2 per cent of this amount -- by the NFSF1;
· an upfront fee of 27 per cent of the adjusted credit amount, and a
monthly fee of 3 per cent of this amount -- by Cash Stop Financial
Services Pty Ltd2; and
· an upfront fee of 25 per cent of the adjusted credit amount, and a
monthly fee of 3 per cent of this amount -- by Money3 Corporation
Limited3.
Table 1.2: Comparison of return under different models
3 4 5 6 7 8 9
months months months months months months months
Charges
under a 20/4 32% 36% 40% 44% 48% 52% 56%
formula
Charges
under a 27/3 36% 39% 42% 45% 48% 51% 54%
formula
Charges
under a 25/3 34% 37% 40% 43% 46% 49% 52%
formula
Charges
under a 28/2 34% 36% 38% 40% 42% 44% 46%
formula
Note: Charges are expressed as a percentage of the adjusted credit amount.
1 Submission by National Financial Services Corporation to the Parliamentary Joint
Committee on Corporations and Financial Services on the Consumer Credit and
Corporations Legislation Amendment (Enhancements) Bill 2011, page 10.
2 Submission by Cash Stop Financial Services Pty Ltd on the National Consumer Credit
Protection Amendment (Enhancements) Bill 2011 Exposure Draft, page 3.
3 Submission by Money3 Corporation Limited on the National Consumer Credit Protection
Amendment (Enhancements) Bill 2011 Exposure Draft, page 3.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
1.88 Table 1.2 demonstrates that the `20/4 model' provides a higher
return than the other models after a period of time of between five and
nine months.
Restrictions on fees and charges for small amount credit contracts
1.89 Paragraph 31A(1)(a) currently includes a requirement for the
permitted establishment fee to reflect the credit provider's costs in respect
of that contract. This means that if the credit provider's costs are less than
20 per cent of the adjusted credit amount, than they are restricted to this
lower figure. It is proposed to simplify this provision, so that credit
providers can charge a maximum of 20 per cent in all cases.
1.90 Items 23 and 24 replaces the definition in paragraph 31A(1)(a)
of the permitted establishment fee to remove this limitation, and provides
that 20 per cent of the adjusted credit amount can be charged as an
establishment fee.
1.91 These items also include a prohibition on imposing a permitted
establishment fee if refinancing the original small amount credit contract.
This prohibition addresses the conduct of some providers in regularly
refinancing consumers to increase the amount of the debt.
1.92 Item 25 increases the permitted monthly fee for a small amount
credit contract in subsection 31A(3) from 2 per cent to 4 per cent.
1.93 Table 1.3 below provides examples of the permitted
establishment and monthly fees under two loans of $100 for 4 and 5
weeks respectively.
Table 1.3: Comparison of repayment on $100 loans of 4 and 5 weeks
Loan Loan Permitted Permitted Total
Term amount establishment fee monthly fee repayment
4 weeks $100 $20 $4 $124
5 weeks $100 $20 $8(that is, 2 x $4) $128
1.94 A consumer who is charged an amount in breach of the
permitted establishment or monthly fee can recover the full amount of the
fee that they are charged (and not simply the amount of the excess), as the
contract provision is void to the extent it imposes a liability to pay the fee
(rather than the provision only being void to the extent it imposes a
liability greater than that allowed by the Code).
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
1.95 Item 26 inserts a prohibition on a credit provider or a person
prescribed by regulations from requiring or accepting a payment by the
debtor of a fee or charge in relation to a small amount credit contract, or
the provision of the amount of credit under a small amount credit contract,
or a thing that is connected with a small amount credit contract or the
provision of the amount of credit under such a contract.
1.96 This prohibition operates as an anti-avoidance mechanism. This
addresses both historic and current concerns about credit providers in the
short-term lending market using sophisticated legal techniques to avoid
existing State and Territory caps on costs. Avoidance mechanisms
include the `broker' model, using third parties to obtain additional fees
and charges, and the requirement to purchase a `product' at inflated costs
in order to obtain a loan. Allowing for the prohibition to extend to third
parties is necessary to prevent such avoidance techniques migrating to
small amount credit contracts.
1.97 A breach of this prohibition attracts a civil penalty of
2,000 penalty units and a criminal penalty of 50 penalty units.
Amendments relating to the annual cost rate
1.98 Section 32B currently specifies the formula, inputs, assumptions
and tolerances to be used in calculating the annual cost rate for the
purposes of determining whether or not this rate exceeds 48 per cent. In
summary:
· subsection 32B(1) sets out a formula for calculating the annual cost
rate;
· subsections 32B(3) and (4) specify the costs (fees and charges) to be
included in the credit cost amount, with this figure used to calculate
one of the inputs into the formula; and
· subsections 32B(5) to (8) specify tolerances and assumptions to be
used in relation to the formula.
1.99 The Enhancements Bill is to be amended so that the current
prohibition on credit providers exceeding the proposed 48 per cent cap
before entering into a credit contract will be complemented by a further
prohibition on credit providers exceeding this cap over the life of the
contract. This prohibition is to address potential practices such as credit
providers unilaterally increasing the interest rate to a rate in excess of
48 per cent after the contract has been entered into.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
1.100 Section 32AA, introduced by item 27, provides that a credit
provider is considered to have exceeded the annual cost rate of 48 per cent
if the annual cost rate would have been exceeded when the contract was
entered into but the calculation was made on the basis that:
· the annual percentage rate under the contract would have been
increased; or
· where regulations are made -- there was an increase in the credit cost
amount as a result of an increase in the amount of a fee and charge (as
referred to in subsection 32B(3)), including an increase from $0 where
no fee was previously charged.
1.101 Section 32AA applies to a credit provider who is party to a
credit contract other than a small amount credit contract or bridging
finance contract, provided they are not an ADI.
1.102 The difference in approach between increases in the annual cost
rate resulting from changes to the annual percentage rate and from
increases in fees and charges reflects the greater potential compliance
burden for credit providers in having to monitor changes to the annual
cost rate from the imposition of fees. The fees and charges that may be
prescribed by the regulations are likely to include those developed by
credit providers to avoid the cap on costs, with a need for ongoing
flexibility as new techniques are developed.
1.103 The prohibition ensures that credit providers can apply
consistent compliance practices across their portfolio of credit contracts
and ongoing review of the credit contract would only triggered in specific
circumstances. A breach of this prohibition attracts a criminal penalty of
50 penalty units.
1.104 Item 28 replaces the existing equation for calculating r for the
purposes of the annual cost rate calculation to include a formulation to
allow the permitted additional fee for a medium amount credit contract.
This is achieved by subtracting the fee amount from the right hand side of
the equation. The fee in the formula is represented by `F'.
1.105 Item 29 clarifies that `F' is $400 (or other amount prescribed by
regulations) for a medium amount credit contract, but otherwise $0. This
allows flexibility in amending the cap should the need arise in the future
(for example, following the review by the Minister).
1.106 Item 30 is a technical correction replacing `necessary' with
`necessarily' in the definition of j in subsection 32B(2).
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
1.107 Item 31 amends section 32B by introducing
subsection 32B(4A). This amendment provides the flexibility to exclude,
by regulations, certain fees or charges from a class of credit contracts that
would otherwise be required to be included in the credit cost amount.
This complements section 32AA, and will allow for fees and charges to be
appropriately taken into account in applying the annual cost rate over the
life of the contract.
Other Amendments relating to small amount credit contracts
1.108 Section 39A currently prohibits a credit provider from receiving
any of the credit provided under a small amount credit contract.
Consequent on the removal of the prohibition on refinancing, item 32
amends this provision to allow a credit provider to retain money used to
pay for a refinance of some or all of the credit provided under another
small amount credit contract.
1.109 A regulation-making power is to be introduced by item 33 that
would allow provisions to be introduced directing a credit provider to do
specified things, where they are party to a small amount credit contract
that is being repaid by a direct debit, and there has been a failure in the
direct debit request (and payment has not occurred). This provision is
intended to address the risk of fees accruing to a debtor's account through
repeated unsuccessful use of a direct debit. It is contemplated the
regulations would require the credit provider to try and make contact with
the debtor in order to clarify why the direct debit is being rejected (in
circumstances where a debtor is in default and likely to be in financial
hardship). The exact nature of the obligations is to be determined
following specific consultations on this issue. A breach of this provision
attracts a criminal penalty of 50 penalty units.
1.110 Item 34 clarifies that a breach of a cap on costs in
subsection 32A (1) and subsection 32AA(2) is a breach of a key
disclosure and other requirements in section 111 of the National Credit
Code, attracting the associated penalties, including redress for a debtor or
guarantor.
1.111 Under section 111 a court could penalise the credit provider by
finding that they should forfeit up to a maximum of all interest charged
under the contract (and not simply reduce the interest charges to
48 per cent). This recognises that there should be a significant
disincentive to credit providers exceeding the annual cost rate of
48 per cent or the other cap on costs. If, for example, the credit provider
was only at risk of losing the amount charged in excess of the annual cost
rate some credit providers may consider the potential gains that can still
be realised are sufficient to engage in conduct in breach of the prohibition,
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
particularly when they are dealing with vulnerable consumers who are less
likely complain to ASIC.
1.112 Items 35 and 37amend the definition of the adjusted credit
amount in section 204 of the Code to mean, in relation to a small amount
credit contract, the first amount of credit that is, or is to be, provided
under the contract.
1.113 The adjusted credit amount is defined by reference to the first
amount of credit provided under the contract, and will typically be the
amount of money the borrower receives in their hand. The credit provider
will determine this sum as the amount they are prepared to lend to the
borrower (for example, to meet bills).
1.114 The establishment fee and monthly fee must be calculated as
20 per cent and 4 per cent respectively of the adjusted credit amount.
The adjusted credit amount would therefore exclude:
· any fees that the credit provider may be considering financing under
the contract;
· the amount of any prohibited credit amount, where there is a
contravention of subsection 39A(1); and
· any other amounts that may be prescribed by the regulations.
1.115 The operation of this provision is illustrated by the following
examples.
Example 1.2
A consumer seeks a loan for $1000. They can pay an establishment fee
from their existing funds
The consumer will enter into a contract under which the amount of
credit provided is $1000. The adjusted credit amount is also $1000.
The consumer can be charged a permitted establishment fee of
20 per cent of the adjusted credit amount (or $200), and permitted
monthly fees of 4 per cent of the adjusted credit amount (or $40).
A consumer seeks a loan for $1000. They are unable to pay an
establishment fee from their existing funds
The consumer will enter into a contract under which the adjusted credit
amount is $1000.
The consumer can be charged a permitted establishment fee of
20 per cent of the adjusted credit amount (or $200), and permitted
monthly fees of 4 per cent of the adjusted credit amount (or $40).
The amount of credit provided under the contract will therefore be
$1200.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
Medium amount credit contract
1.116 Item 36 sets out the definition of a medium amount credit
contract. A medium amount credit contract is a credit contract that is not
a continuing credit contract, the credit provider is not an ADI:
· the credit limit of the contract is at least $2,001 but not more than
$5,000 (or another amount prescribed by the regulations); and
· the term of the contract is at least 16 days but no longer than two years
(or number of years as prescribed by the regulations).
1.117 The contract meets any other requirement prescribed by the
regulations. This definition may also include any other requirements
prescribed by the regulations. This prescription is required to address any
potential avoidance of the definition and related compliance requirements.
1.118 Item 38 is a consequential amendment to the cross reference to a
permitted monthly fee.
Leases -- changes on grounds of hardship
1.119 Item 39 amends the provisions in the Enhancements Bill in
relation to lessees making hardship applications in respect of their
obligations under consumer leases. The provisions operate in the same
way as the provisions in relation to debtors under credit contracts,
discussed in paragraphs 1.3 to 1.16 above.
Effect of hardship notices on enforcement
1.120 Items 40 and 41 replace two current references in section 179F
(in Schedule 5 of the Enhancements Bill) to the notices provided under
paragraph 177(2)(b) with references to the notices to be provided under
paragraph 177(4)(b). The effect is that a lessor will be unable to
commence enforcement action until 14 days after it has sent a notice
under paragraph 177(4)(b), that is, a notice stating that the lease will not
be changed. This period of time is provided to allow the debtor to
consider their options.
Amendments to title
1.121 Items 42 and 43 remove the reference to `and Corporations'
from references to the title of the Enhancements Bill.
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Amendments to the Consumer Credit and Corporations Legislation Amendment
(Enhancements) Bill 2011
Commencement of reverse mortgage provisions
1.122 Items 44 to 65 make consequential amendments to the
applications provisions under Schedule 6 of the Enhancements Bill. The
amendments are consequential to the change in the commencement
provisions for certain reverse mortgage provisions from 1 July 2012 to
1 March 2013.
Application and transitional provisions
1.123 Item 66 provides that the prohibition on entering a short-term
credit contract only apply to credit contracts entered into on or after the
commencement of the Schedule (on 1 March 2013).
1.124 Items 67 and 68 make consequential amendments to ensure that
the relevant cap on cost provisions are cited for commencement.
1.125 Similarly, item 69 provides that the prohibitions on later
increases to the annual percentage rate introduced in section 32AA, and
the consequent penalty provisions in paragraphs 111(1)(k) and 111(2)(fb)
only apply to credit contracts entered into on or after the commencement
of the Schedule (on 1 July 2013).
27
Chapter 2
Amendments to the Australian
Consumer Law
Detailed explanation of new law
2.1 The Australian Consumer Law (ACL) is Schedule 2 to the
Competition and Consumer Act 2010 (CCA). Sections 96 to 99 of the
ACL provide for certain requirements that apply to lay-by agreements.
Section 103 of the ACL provides for notices to be prescribed that relate to
the repair of goods. Sections 188 to 191 of the ACL mirror provisions
96 to 99 of the ACL, to provide for penalties that apply to contraventions
of lay-by provisions.
2.2 Sections 96 to 99, 103 and 188 to 191 of the ACL include an
erroneous reference to `consumer goods'. This term was incorrectly
applied to these provisions when the ACL was enacted. The term
consumer goods is defined in section 2 of the ACL as:
... goods that are intended to be used, or are of a kind likely to be
used, for personal, domestic or household use or consumption, and
included any such goods that have become fixtures since the time that
they were supplied if (a) a recall notice for the goods has been issued;
or (b) a person has voluntarily taken action to recall the goods.
2.3 The ACL replaced Part V of the Trade Practices Act 1974
(TPA) as the principal consumer protection law in Australia. The term
consumer goods was applied within the product safety provisions of the
TPA. Provisions of the TPA other than those dealing with product safety
used the formulation `supply of goods to a consumer' (or similar). This
formulation relies on the definition of `consumer', which was section 4B
of the TPA and is now section 3 of the ACL.
2.4 The definition of consumer in section 3 of the ACL differs from
the definition of consumer goods. In particular, it applies to all
transaction with a value of less than $40,000, irrespective of the nature of
the goods or services and applies to goods or services that are ordinarily
acquired for personal, domestic or household use or consumption.
2.5 Item 70 inserts Schedule 7 into the Enhancements Bill to correct
an error in the ACL by removing references to `consumer goods',
wherever those references occur in sections 96 to 99, 103 and 188 to 191,
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
and replacing them with `goods' or `goods supplied to a consumer', as
appropriate.
Application and transitional provisions
2.6 The ACL amendments in Schedule 7 to the Enhancements Bill
are to commence upon proclamation.
2.7 The ACL is applied as a law of each State and Territory of
Australia and amendments are automatically applied in each State and
Territory with the exception of Western Australia. The
Western Australian Parliament will consider whether to make
amendments that mirror these amendments in order to preserve
consistency of consumer law across Australia.
2.8 The Commonwealth is likely to delay proclamation until any
amendments are ready to also commence in Western Australia. This
delayed commencement will also allow businesses time to adjust to the
new requirements.
2.9 Item 70 also inserts Chapter 6 to Schedule 2 of the CCA to deal
with transitional issues that arise from the amendment of sections 96 to
99, 103 and 188 to 191 of the ACL.
2.10 The new section 288 of the ACL would provide that the
amendment to the lay-by provisions of the ACL (sections 96 to 99 and
188 to 191) would apply to lay-by agreements entered into on or after the
commencement of those items of the Enhancements Bill.
2.11 The new section 289 of the ACL would provide that the
amendment to the repair notices provision of the ACL (section 103)
would apply to repair of goods that are accepted for repair on or after the
commencement of that item of the Enhancements Bill.
2.12 The new section 290 of the ACL would save regulations made
for the purposes of subsection 103(1) of the ACL so that they continue to
apply after the subsection is amended.
30
Chapter 3
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Amendments to the Consumer Credit and Corporations Legislation
Amendment (Enhancements) Bill 2011
3.1 These amendments to the Enhancements Bill 2011 are
compatible with the human rights and freedoms recognised or declared in
the international instruments listed in section 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011.
Overview
3.2 The amendments to the Enhancements Bill affect changes to:
· the commencement of certain provisions relating to reverse mortgages;
· hardship applications under the National Credit Code (Code);
· certain definitions;
· arrangements for employer payment authorisations;
· the regulation of reverse mortgages;
· the regulation of short-term credit contracts and a cap on costs; and
· correct a minor error in the Australian Consumer Law (ACL).
Human rights implications
3.3 These amendments to the Enhancements Bill and the ACL do
not engage any of the applicable rights or freedoms.
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Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
Conclusion
3.4 These amendments to the Enhancements Bill and the ACL are
compatible with human rights as it does not raise any human rights issues.
The Hon Bill Shorten MP, Minister for Financial Services and
Superannuation
32