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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020
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ISSN 1328-8091
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BILLS DIGEST NO. 52, 2020-21 15 MARCH 2021
National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 Paula Pyburne Law and Bills Digest Section
Contents
Purpose of the Bill ........................................................... 5
Structure of the Bill ......................................................... 5
Structure of this Bills Digest ........................................ 5
Background ..................................................................... 5
Consultation on the Bill ............................................... 5
Committee consideration ................................................ 6
Senate Standing Committee on Economics ................ 6 Senate Standing Committee for the Scrutiny of Bills .............................................................................. 7
Financial implications ...................................................... 7
Statement of Compatibility with Human Rights................ 7
Parliamentary Joint Committee on Human Rights ..... 7 Schedule 1—key issues and provisions ............................. 7
Commencement .......................................................... 8
About the Consumer Credit Act ....................................... 8
Precursor to the Consumer Credit Act ........................ 8
Enactment ................................................................... 8
National Credit Code ................................................. 9
Responsible lending obligations.................................. 9
What credit products are covered? ........................ 10
Nature of the obligations ........................................ 10
Banking Royal Commission ....................................... 10
‘Wagyu and shiraz’ case .......................................... 11
Rationale for the measure ........................................ 11
What the Bill does ..................................................... 12
New rules for low limit credit contracts.................. 12 What this means for banks ....................................... 13
Regulation by APRA ................................................. 13
Date introduced: 9 December 2020
House: House of Representatives
Portfolio: Treasury
Commencement: various dates as set out in the body of this Bills Digest
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.
When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.
All hyperlinks in this Bills Digest are correct as at March 2021.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 2
What this means for consumers ............................... 14
Reduction in remedies ............................................ 14
Reliance on the Banking Code of Practice .............. 15 What it means for credit cards ................................. 16
Policy position of non-government parties .............. 16 Stakeholder comments ............................................. 17
Financial service providers ...................................... 17
Consumer advocates ............................................... 18
Individual submitters............................................... 18
Reverse mortgages ........................................................ 19
ASIC review ................................................................ 19
What the Bill does ..................................................... 19
Giving information before entering into a reverse mortgage .................................................... 19
Stakeholder comments ............................................. 20
About civil penalties .................................................. 21
Civil penalties in the Consumer Credit Act .............. 21 Civil penalties in the Bill .......................................... 21
Prohibition of certain conduct ................................ 21
Additional rules for non-ADIs ........................................ 22
What the Bill does ..................................................... 22
Making standards .................................................... 22
Systems, processes and policies.............................. 23
Giving documents .................................................... 23
Scrutiny of Bills Committee comments ................... 23 Stakeholder comments ............................................. 23
Best interests obligations .............................................. 24
About the best interest duty ..................................... 24
Extension to mortgage brokers ............................... 24
What the Bill does ..................................................... 25
Stakeholder comments ............................................. 25
Schedule 2—key issues and provisions ........................... 25
Commencement ........................................................ 25
About small amount credit contracts ............................. 25
Limits ......................................................................... 26
Additional responsible lending obligations ............. 26 2016 statutory review ............................................... 26
2019 debt trap report ............................................. 27
Protected earnings amount ........................................... 27
What the Review recommended .............................. 28
What the Bill does ..................................................... 28
Stakeholder comments ............................................. 28
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 3
Small amount credit contract providers ................. 28 Consumer advocates ............................................... 29
Loss of charges mechanism ........................................... 29
What the Review recommended .............................. 29
What the Bill does ..................................................... 29
Requirement for equal charges and intervals ................. 30
What the Review recommended .............................. 30
What the Bill does ..................................................... 30
Unsolicited communications are prohibited ................... 30
What the Review recommended .............................. 30
What the Bill does ..................................................... 31
Unexpired monthly fees are prohibited ......................... 31
What the Review recommended .............................. 31
What the Bill does ..................................................... 31
Requirement to display information .............................. 32
What the Bill does ..................................................... 32
Requirement for written documentation ....................... 33
What the Review recommended .............................. 33
What the Bill does ..................................................... 33
Removing the presumption of unsuitability ................... 33
What the Review recommended .............................. 33
What the Bill does ..................................................... 33
Schedules 3 and 5—key issues and provisions ................ 34
Commencement ........................................................ 34
About consumer leases ................................................. 34
Relevant reviews ....................................................... 34
2015—ASIC report ................................................... 34
2016—statutory review .......................................... 35
2019—Senate inquiry .............................................. 35
Remove the exclusion of leases for an indefinite period ........................................................................... 36
What the Review recommended .............................. 36
What the Bill does ..................................................... 36
Caps on fees and charges .............................................. 36
What the Review recommended .............................. 36
What the Bill does ..................................................... 37
Stakeholder comments ............................................. 38
Consumer lease for household goods ............................ 39
What the Bill does ..................................................... 39
Protected earnings amount ........................................... 40
What the Review recommended .............................. 40
What the Bill does ..................................................... 40
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 4
Key requirements .................................................... 41
Stakeholder comments ............................................. 42
Consumer lease providers ....................................... 42
Consumer advocates ............................................... 42
Incidents of default ....................................................... 43
What the Bill does ..................................................... 43
Schedule 4—key issues and provisions ........................... 43
Commencement ........................................................ 43
2016 statutory review ............................................... 43
What the Bill does ..................................................... 44
Scrutiny of Bills Committee comments ................... 45 Concluding comments ................................................... 45
Annexure 1 ................................................................... 47
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 5
Purpose of the Bill The purpose of the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (the Bill) is to amend the National Consumer Credit Protection Act 2009 (Consumer Credit Act) to put in place the following:
⢠amendments to the responsible lending obligations so that they apply only to small amount credit contracts (SACCs), SACC-equivalent loans by authorised deposit-taking institutions (ADIs) and consumer leases and
⢠enhancements to the consumer protection framework in relation to small amount credit contracts and consumer leases.
Structure of the Bill The Bill comprises seven Schedules:
⢠Schedule 1 contains the new regulatory framework for the provision of consumer credit
⢠Schedule 2 relates to small amount credit contracts
⢠Schedule 3 contains amendments relating to consumer leases
⢠Schedule 4 sets out relevant anti-avoidance measures
⢠Schedule 5 relates to those consumer leases which have an indefinite term
⢠Schedules 6 and 7 contain consequential amendments and application provisions respectively.
Structure of this Bills Digest As many of the matters covered by each of the Schedules are independent of each other, the relevant background, stakeholder comments (where available) and analysis of the provisions are set out under each Schedule number.
Background On 25 September 2020, the Government announced a suite of proposed changes to Australia’s consumer credit framework aimed at ‘reducing the cost and time it takes consumers and businesses to access credit’.1 The announcement stated:
These changes will make it easier for the majority of Australians and small businesses to access credit, reduce red tape, improve competition, and ensure that the strongest consumer protections are targeted at the most vulnerable Australians.2
Consultation on the Bill An exposure draft of the Bill was subject to a short consultation by the Treasury for the period 4 November to 20 November 2020.3 At the time of writing this Bills Digest none of the submissions in response to the consultation are available on the Treasury website.
Importantly, the final form of the Bill is similar to, but not the same as, the exposure draft.4
1. J Frydenberg (Treasurer) and M Sukkar (Assistant Treasurer), Simplifying access to credit for consumers and small business, media release, 25 September 2020. 2. Ibid.
3. The Treasury, Consumer Credit Reforms, The Treasury website, n.d. 4. Ibid.
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Committee consideration
Senate Standing Committee on Economics The Bill was referred to the Senate Standing Committee on Economics (Economics Committee) for inquiry and report by 12 March 2021.5 The Committee received 112 submissions.
The report of the Economics Committee, published on 12 March 2021 notes:
… the key concerns with the proposed reforms raised by inquiry participants, both through their submissions and at the two public hearings held in Canberra. The committee is of the view that these regulatory changes will not undermine consumer protections and that the principal of 'responsible lending' is deeply embedded in Australia's broader regulatory framework, which credit providers and credit assistance providers must still operate within and comply with.6
The majority Senators recommended the Bill be passed.7
However, both the Australian Labor Party (Labor) Senators and the Australian Greens (the Greens) provided dissenting reports.
Amongst other things, Labor Senators noted that the Bill:
… stands in direct opposition to at least two recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry - Recommendation 1.1 (the retention of the responsible lending obligations) and Recommendation 6.10 (the retention of the twin peaks model for financial sector regulation). This is a concerning decision, and contributes to the Government’s ongoing failure to understand and implement the findings of Commissioner Hayne.8
The Labor Senators recommended that the Bill not be passed.9
The Greens Senators also drew attention to the recommendation made by Commissioner Hayne that the Consumer Credit Act ‘should not be amended to alter the obligation to assess unsuitability’.10 Further, the Greens Senators argue that rather than responsible lending obligations placing an undue burden on banks, impeding the flow of credit:
… [t]he most recent ABS lending data shows that growth in new loans to households for housing over the last twelve months was 44 per cent, seasonally adjusted. This is the highest growth rate over any twelve month period on record. This twelve month period starts in January 2020 before the pandemic hit and covers the time in which there was a nationwide lock down. That is, despite the pandemic, banks increased lending at a faster rate than they ever have. This illustrates that, so far as the economy wide provision of consumer credit is concerned, the effect of the RBA’s monetary policy and APRA’s prudential regulation dwarfs that of responsible lending obligations.11
5. The terms of reference, submissions to the Senate Economics Committee and the Committee’s final report are available on the inquiry homepage. 6. Senate Standing Committee for Economics, National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 [Provisions], The Senate, Canberra, 12 March 2021, p. 54. 7. Ibid., p. 55.
8. Australian Labor Party Senators, Dissenting report, Senate Standing Committee for Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 [Provisions], The Senate, Canberra, March 2021, p. 62.
9. Ibid., p. 67.
10. Australian Greens Senators, Dissenting report, Senate Standing Committee for Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 [Provisions], The Senate, Canberra, March 2021, p. 69.
11. Ibid., p. 70.
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The Greens Senators recommended that the Bill be opposed.12
Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) commented on a number of provisions in the Bill in relation to the following:
⢠significant matters are set out in delegated—rather than primary—legislation and
⢠amendments in the Bill reverse the legal burden of proof in some circ*mstances and the evidential burden of proof in others.13
These matters are canvassed below under the relevant Schedule heading.
Financial implications According to the Explanatory Memorandum the measures in the Bill will have nil financial impact on the Government.14
However, the measures in Schedules 2-6 of the Bill are estimated to give rise to an annual compliance cost to business of $15.9 million.15
Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.16
Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights had no comment in relation to the Bill.17
Schedule 1—key issues and provisions The provisions in Parts 1 and 3 of Schedule 1 to the Bill amend the Consumer Credit Act: ⢠so that the responsible lending obligations only apply to low limit credit contracts ⢠to provide additional protections for consumers entering into a credit contract for a reverse
mortgage ⢠to insert further rules about non-ADI credit conduct and ⢠to extend the best interests obligation that currently apply to mortgage brokers, to other
credit assistance providers. The provisions in Part 2 of Schedule 1 to the Bill amend the Age Discrimination Act 2004 so that certain provisions relating to reverse mortgages are not unlawful under that Act.
12. Ibid., p. 73.
13. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 2, 2021, 3 February 2021, pp. 12-20. 14. Explanatory Memorandum, National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, pp. 3, 4. 15. Ibid., p. 4.
16. The Statement of Compatibility with Human Rights can be found at pages 129-143 of the Explanatory Memorandum to the Bill. 17. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 1, 2021, 3 February 2021, p. 46.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 8
Commencement The amendments in Parts 1 and 2 of Schedule 1 to the Bill commence on the day after Royal Assent.
The amendments in Part 3 of Schedule 1 (about the ‘best interests’ obligation) commence six months after Parts 1 and 2 commence.
About the Consumer Credit Act
Precursor to the Consumer Credit Act Prior to the enactment of the Consumer Credit Act responsibility for consumer credit, including mortgages, was shared between the Australian Government (regulated by the Australian Securities and Investments Commission (ASIC)) and the state and territory governments (through their respective Fair Trading Offices). The states and territories regulated credit and consumer lending through the Uniform Consumer Credit Code (UCCC).18
The UCCC was template legislation, substantially uniform in all Australian states and territories. It was enacted in Queensland by the Consumer Credit (Queensland) Act 1994 (QLD) pursuant to the Uniform Credit Laws Agreement, and in the other states and territories through various arrangements. The UCCC focused on pre-contractual disclosure and a limited range of conduct requirements.19
Enactment The Consumer Credit Act was, in part, a response to the Productivity Commission Review of Australia’s Consumer Policy Framework which highlighted problems in cross jurisdictional regulation and recommended a national approach.20
The legislation was enacted on the basis of the referral of powers under section 51(xxxvii) of the Constitution by the states to the Commonwealth.21 The Consumer Credit Act brought about:
⢠a comprehensive licensing regime for those engaging in credit activities via an Australian credit licence to be administered by ASIC as the sole regulator and
⢠industry-wide responsible lending conduct requirements for licensees.22
Under the Consumer Credit Act a person must not engage in a credit activity if the person does not hold an Australian Credit Licence (licence).23 The Consumer Credit Act requires a licensee to, amongst other things, do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly.24
18. The Treasury, Financial services and credit reform: improving, simplifying and standardising financial services and credit regulation: green paper, Treasury, Canberra, 2008, p. 5. 19. Ibid., pp. 5-6. 20. Productivity Commission (PC), Review of Australia‘s Consumer Policy Framework, Inquiry report, 45, PC, Canberra,
30 April 2008, p. 2. 21. Credit (Commonwealth Powers) Act 2010 (Qld); Credit (Commonwealth Powers) Act 2010 (NSW); Credit (Commonwealth Powers) Act 2010 (Vic); Credit (Commonwealth Powers) Act 2009 (Tas); Credit (Commonwealth Powers) Act 2010 (SA);
Credit (Commonwealth Powers) Act 2010 (WA). 22. Consolidated Explanatory Memorandum, National Consumer Credit Protection Bill 2009, p. 3. See also P Tan, National Consumer Credit Protection Bill 2009, Bills digest, 30, 2009-10, Parliamentary Library, Canberra, 2009. 23. National Consumer Credit Protection Act 2009 (Consumer Credit Act), section 29. 24. Consumer Credit Act, paragraph 47(1)(a).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 9
National Credit Code The National Credit Code is located in Schedule 1 to the Consumer Credit Act. It largely replicates the state and territory based UCCC. The National Credit Code regulates many aspects of the provision of certain types of credit, including upfront and ongoing disclosure obligations, changes to the credit contract, advertising and marketing requirements, termination of the credit contract and penalties and remedies.25
It applies to credit contracts entered into on, or after, 1 July 201026 where:
⢠the lender is in the business of providing credit
⢠a charge is made for providing the credit
⢠the debtor is a natural person or strata corporation
⢠the credit is provided:
- for personal, domestic or household purposes or - to purchase, renovate or improve residential property for investment purposes or to refinance credit previously provided for this purpose.27 The National Credit Code does not apply to every loan for personal domestic or household purposes—certain types of credit are specifically excluded from its application. In particular, short term credit provided for a period of less than 62 days, where the maximum fees and charges imposed do not exceed five per cent of the loan and on which the interest charges are equal to or less than 24 per cent per annum, is not subject to the National Credit Code.28
To avoid confusion, this Bills Digest refers to sections of the Consumer Credit Act and to clauses of the National Credit Code.
Responsible lending obligations Chapter 3 of the Consumer Credit Act sets out the rules for responsible lending conduct. It is divided into Parts each of which relates to a licensee who provides a certain type of credit, for instance:
⢠Part 3-1 contains the rules that apply to licensees that provide credit assistance29 in relation to credit contracts—such as a finance broker
⢠Part 3-2 applies to licensees that are credit providers30—such as an authorised deposit-taking institution (ADI), that is, a bank
⢠Part 3-3 applies to licensees that provide credit assistance in relation to consumer leases and
⢠Part 3-4 applies to licensees that are lessors under consumer leases.
In each of those Parts, the responsible lending obligations are repeated with some variation, depending on the nature of the relevant lending contract.
25. Consolidated Explanatory Memorandum, p. 6. 26. National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009, item 2A of Schedule 1 provides that the new Credit Code applies from commencement. Commencement is defined as 1 July 2010 in section 4 of that Act. 27. Consumer Credit Act, Schedule 1, clause 5. 28. Consumer Credit Act, Schedule 1, subclause 6(1). 29. The term credit assistance is defined in section 8 of the Consumer Credit Act. A person gives credit assistance to a
consumer if the person suggests that the consumer apply for, or assists a consumer to apply for, a particular credit contract, apply for an increase in a credit contract, or remain in a credit contract. 30. The term credit provider is defined in subclause 204(1) in Schedule 1 of the Consumer Credit Act as a person that provides credit.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 10
What credit products are covered? Currently, all holders of a licence must comply with the responsible lending obligations.31 The obligations apply only in relation to credit products provided to individuals and strata corporations (both referred to as consumers32) for personal, domestic and household purposes or for the purchase or improvement of residential property.33
This encompasses home loans, reverse mortgages, residential investment loans, personal loans, credit card contracts, medium and small amount credit contracts and consumer leases.34
Nature of the obligations The responsible lending obligations are aimed at better informing consumers and preventing them from being in unsuitable credit contracts. Generally speaking, they require:
⢠before providing credit or credit assistance to a consumer, a licensee must make a preliminary assessment about whether the contract will be unsuitable for the consumer.35 To do this, the licensee must make inquiries and verifications about the consumer’s requirements, objectives and financial situation36
⢠a licensee must assess that a contract will be unsuitable if:
- the consumer will be unable to comply with their obligations under the contract, or could only comply with substantial hardship - the contract will not meet the consumer’s requirements or objectives - the regulations prescribe circ*mstances in which a credit contract is unsuitable.37 ⢠a licensee is prohibited from:
- entering into a credit contract or increasing the credit limit of a contract with a consumer or - providing assistance to a consumer by suggesting that the consumer apply for, or assisting the consumer to apply for, a particular credit contract or an increase to the credit limit of a credit contract
if the contract will be unsuitable for the consumer.38
Banking Royal Commission At the time the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) was being drafted, Commissioner Hayne was aware of ongoing litigation before the Federal Court of Australia between ASIC and Westpac in relation to the responsible lending obligations.39 He considered that if the court processes were to reveal ‘some deficiency in the law’s requirements to make
31. Consumer Credit Act, paragraph 47(1)(d). 32. Consumer Credit Act, section 5. 33. Australian Securities and Investments Commission (ASIC), Credit licensing: responsible lending conduct, Regulatory guide 209, ASIC, [Canberra], December 2019, p. 5.
34. Ibid.
35. Consumer Credit Act, section 116 (Part 3.1); section 129 (Part 3.2); section 139 (Part 3.3); section 152 (Part 3.4). 36. Consumer Credit Act, section 117 (Part 3.1); section 130 (Part 3.2); section 140 (Part 3.3); section 153 (Part 3.4). Note: In Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) (2019) 139 ACSR 25, [2019] FCA 1244 (ASIC v Westpac), Perram J observed at [59] that ‘ASIC is correct to submit that the purpose of section 130
is to ensure that credit providers put themselves in an informed state about the financial position of the consumer before making an assessment of the suitability or otherwise of the loan’. 37. Consumer Credit Act, section 118 (Part 3.1); section 131 (Part 3.2); section 141 (Part 3.3); section 154 (Part 3.4). Currently section 28LCF of the National Consumer Credit Protection Regulations 2010 prescribes the circ*mstances in which a credit
contract is unsuitable. 38. Consumer Credit Act, section 123 (Part 3.1); section 133 (Part 3.2); section 146 (Part 3.3); section 156 (Part 3.4). 39. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry(Banking Royal
Commission), Final report, v. 1, Banking Royal Commission, Canberra, 2019, pp. 56-57. See Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) (2019) 139 ACSR 25, [2019] FCA 1244 (13 August 2019).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 11
reasonable inquiries about, and verify, the consumer’s financial situation’, legislation should be enacted to ‘fill in that gap’.40
Ultimately, Commissioner Hayne recommended that the obligation to assess unsuitability should not be changed.41
‘Wagyu and shiraz’ case The outcome of the litigation to which Commissioner Hayne referred came to be known as the wagyu and shiraz case. This was due to comments by Federal Court judge, Nye Perram, who dismissed claims made by ASIC that Westpac had breached responsible lending practices when assessing customer applications. According to Justice Perram requiring banks to comb over expenses failed to take into consideration that it was:
… always possible that some of the living expenses might be foregone by potential borrowers to meet repayments …
I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.42
ASIC lodged an appeal to the Full Court of the Federal Court.43 By a 2:1 majority, the Full Court of the Federal Court dismissed ASIC's appeal. In separate judgements their Honours Justice Gleeson and Justice Lee held that there is no statutory basis for ASIC’s ‘prescriptive’ interpretation of responsible lending obligations stating:
The language of the Act does not support the degree of prescription contended for by ASIC. Rather, the Act leaves it open to the licensee to decide:
(1) what inquiries it will make … provided that those inquiries are reasonable;
(2) what steps it will take to verify the consumer’s financial situation … provided that those inquiries are reasonable; and
(3) how it will use the results of its inquiries and verification to make the unsuitability assessment, provided that it in fact assesses whether the contract will be relevantly unsuitable for the particular consumer and noting that the licensee is otherwise motivated by the Act to refrain from entering into an unsuitable contract.44 [emphasis added]
ASIC did not take the matter further by appealing the decision to the High Court.
Rationale for the measure According to the Explanatory Memorandum to the Bill, limiting the responsible lending obligations to low limit credit contracts only:
40. Ibid., p. 57.
41. Ibid., p. 59. Recommendation 1.1 was that the Consumer Credit Act should not be amended to alter the obligation to assess unsuitability. 42. Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) (2019) 139 ACSR 25, [2019] FCA 1244 (13 August 2019), [75] and [76]. 43. Australian Securities and Investments Commission v Westpac Banking Corporation (2020) 380 ALR 262, [2020] FCAFC 111. 44. Ibid., [141].
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 12
… forms part of the Government’s Consumer Credit Reforms aimed at improving the flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can continue to spend and business can invest and create jobs.45
However, the Law Council of Australia is concerned about the permanent nature of the change:
There were sound reasons for the Royal Commission recommendation and sound reasons for the acceptance by the Australian Government of the recommendation that [responsible lending obligations] should not be changed. While it is appreciated that the COVID-19 pandemic has changed the economic circ*mstances in Australia, the Bill does not represent a temporary adjustment to exceptional conditions. Rather, it seeks to make permanent changes that will not expire when the crisis has passed.46 [emphasis added]
Others argue that ‘there is little evidence to support any assertion that RLOs [responsible lending obligations] are preventing people from accessing credit’.47 The submission from Consumer Credit Legal Service (WA) cites recent lending statistics from the Australian Bureau of Statistics that ‘the number of home loans approved by lenders in Australia reached record highs in November 2020’ noting that ‘all of these loans were approved within the current framework, requiring credit providers to comply with’ responsible lending obligations.48 Similarly, Digital Finance Analytics notes:
… recent RBA data reveals strong lending for housing, even now—with the current responsible lending mechanism in place. Housing credit is rising at an annualised rate of 3.54% with owner occupied loans at 5.58% and rising.49
What the Bill does The Bill operates so that the responsible lending obligations will no longer apply to ADIs.
New rules for low limit credit contracts As stated above, Part 3-1 of the Consumer Credit Act applies the responsible lending conduct rules to licensees that provide credit assistance in relation to credit contracts. Items 6-17 and 18-22 of the Bill amend Part 3-1 so that the requirement to make a preliminary assessment of the suitability (or otherwise) of a contract only applies to low limit credit contracts.50
A credit contract is a low limit credit contract if:
⢠the contract is a small amount credit contract51 or
⢠the contract would be a small amount credit contract if paragraph (b) of the definition—that the credit provider under the contract is not an ADI—was disregarded.52
45. Explanatory Memorandum, National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, p. 3. 46. Law Council of Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 103], 10 February 2021, p. 7. 47. Consumer Credit Legal Service (WA) Inc, Submission to the Senate Standing Committee on Economics, Inquiry into the
National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 70], 3 February 2021, p. 6. 48. Ibid.
49. Digital Finance Analytics, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 26], 1 February 2021, p. 2. 50. Item 3 in Part 1 to the Bill amends the Guide to this Part in section 111 of the Consumer Credit Act to reflect this. 51. Consumer Credit Act, subsection 5(1) defines the term small amount credit contract. Essentially it is a contract for a loan of
up to $2,000 where the term of the contract is between 16 days and 12 months and the credit provider is not an ADI. 52. Consumer Credit Act, subsection 5(1), inserted by item 1 in Part 1 of Schedule 1 to the Bill.
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The current rule that a licensee is prohibited from providing credit assistance to a consumer in relation to a credit contract if the contract will be unsuitable for the consumer is amended by items 23-25 and 27-31 in Part 1 of Schedule 1 to the Bill. The effect of the amendments is that the prohibition will only apply in relation to low limit credit contracts.53
The Bill similarly amends Part 3-2 of the Consumer Credit Act which applies to licensees that are credit providers such as ADIs. The current requirement that a licensee assess the unsuitability of a credit contract for a consumer before entering into the contract is amended by items 37-50 in Part 1 of Schedule 1 to the Bill so that it only applies in relation to low credit limit contracts.54
In addition, items 51-56 amend Part 3-2 of the Consumer Credit Act so that a licensee is prohibited from entering or increasing the credit limit of a credit contract that is unsuitable for a consumer only if the credit contract is a low credit limit contract.55
What this means for banks Banks are ADIs. They are currently subject to two responsible lending regimes:
⢠the regime set out in the Consumer Credit Act which is administered by ASIC and is focused on consumer harm and
⢠the capital adequacy regime administered by the Australian Prudential Regulation Authority (APRA). This is focused on risk management.
This is called the ‘twin peaks’ model of financial regulation.
The effect of the Bill is that from the Bill’s commencement ADIs will be subject only to the APRA regime in the context of responsible lending. ASIC’s regulatory role under the Consumer Credit Act will no longer exist. This is inconsistent with the recommendation of the Banking Royal Commission that the ‘twin peaks’ model should be retained.56
Regulation by APRA Under the Banking Act 1959, the APRA may, in writing, determine standards in relation to prudential matters to be complied with by all ADIs.57 The relevant prudential standards are:
⢠Prudential Standard APS 220 Credit Quality (APS 220) and
⢠Prudential Standard CPS 220 Risk Management (CPS 220).
The APRA has issued a prudential practice guide about residential mortgage lending (APG 223) which:
… summarises prudent lending practices in residential mortgage lending in Australia, including the need to address credit risk within the ADI’s risk management framework, sound loan origination criteria, appropriate security valuation practices, the management of hardship loans and a robust stress-testing framework. 58
In particular APG 223 contains detailed guidance on serviceability of loans, including:
53. Item 4 in Part 1 to the Bill amends the Guide to this Part in section 111 of the Consumer Credit Act to reflect this. 54. Item 34 in Part 1 to the Bill amends the Guide to this Part in section 125 of the Consumer Credit Act to reflect this. 55. Item 35 in Part 1 to the Bill amends the Guide to this Part in section 125 of the Consumer Credit Act to reflect this. 56. Banking Royal Commission, Final report, op. cit., recommendation 6.1, p. 37. 57. Banking Act 1959, subsection 11AF(1). 58. Australian Prudential Regulation Authority (APRA), Prudential practice guide: APG 223 - residential mortgage lending, APRA,
Canberra, July 2019, p. 5.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 14
⢠a prudent ADI would be expected to make reasonable inquiries and take reasonable steps to verify a borrower’s available income59
⢠APRA expects ADIs to use the greater of a borrower’s declared living expenses or an appropriately scaled version of the household expenditure measure (HEM)60 or the Henderson Poverty Index (HPI)61 indices (applying a margin linked to the borrower's income if these indices are used)62 and
⢠a prudent ADI would have effective procedures to verify a potential borrower’s existing debt commitments and to take reasonable steps to identify undeclared debt commitments.63
Section 11AG of the Banking Act requires an ADI to which a prudential standard applies to comply with the standard. However, there is no civil penalty for a failure to do so. The ultimate penalty is to lose the right to conduct a banking business.64
While APRA’s regulatory standards may broadly promote safe lending, they do this on a portfolio level, directed at ensuring banks stay financially stable. These standards provide no legal rights to people in relation to individual loans nor impose penalties for individual breaches. APRA has noted that its intent:
… is to continue to regulate ADIs in accordance with existing prudential standards. APRA is not planning material revisions to its credit-related prudential standards or guidance. However, some amendments will be necessary in the event that the Government’s proposed credit reforms are passed as legislation …
The expected amendments to the prudential framework will not change APRA’s approach to supervising ADIs’ lending practices, or enforcing APRA’s prudential requirements. APRA’s objective remains to set prudential requirements of ADIs for sound lending practices, which support the financial soundness of ADIs and the stability of the Australian financial system.65 [emphasis added]
What this means for consumers
Reduction in remedies When announcing the reforms in September 2020, the Treasurer made clear that they will allow ‘lenders to rely on the information provided by borrowers, replacing the current practice of “lender beware” with a “borrower responsibility” principle’.66
Currently, the Consumer Credit Act provides that the responsible lending obligations are civil penalty provisions. When a lender breaches any of the responsible lending obligations the Australian Securities and Investments Commission (ASIC) may apply to a court for a declaration of contravention.67 In that case, the court may order a person to pay a pecuniary penalty to the
59. Ibid., clause 41, p. 15. 60. The HEM is a standard benchmark that some banks use to estimate people’s annual living expenses. This calculation can be used to assess people’s borrowing capacity, to help determine if they can afford the home loan they’re applying for. Source: E McLachlan, Home loan buzzword explained: What is the Household Expenditure Measure, Canstar website, 26 June 2019.
61. Prior to 2010 the banking industry had used Henderson Poverty Index (‘HPI’) to assess household expenses in serviceability calculations. The problem with the HPI was that it was based on data from the United States gathered in the 1960s and thereafter indexed for inflation. Source: Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) (2019) 139 ACSR 25, [2019] FCA 1244 (13 August 2019), paragraph 39.
62. APRA, Prudential practice guide: APG 223, op. cit., clause 44, p. 16. 63. Ibid., clause 45, p. 17. 64. Banking Act, section 8 and subparagraph 9A(2)(b)(i). 65. APRA, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection
Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 74], 3 February 2021, p. 6. 66. J Frydenberg and M Sukkar, Simplifying access to credit for consumers and small business, op. cit. 67. Consumer Credit Act, section 166.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 15
Commonwealth.68 In addition, the Consumer Credit Act authorises the court to grant a range of remedies, including injunctions,69 compensation orders70 and other orders to compensate loss or damage against those who engage in credit activities unlawfully.71
Without the civil penalty provisions that apply to an individual loan, consumers will lose their legal rights—and therefore ability to go to court—in relation to a breach of the responsible lending obligations by an ADI.
A borrower may still have access to remedies under the Australian Securities and Investments Commission Act 2001 (ASIC Act) for unconscionable conduct,72 unfair contract terms73 and other consumer protection matters such as misleading and deceptive conduct74 which are regulated by ASIC.
ASIC states:
At this stage of the development of the new regime, it is not clear what direct remedies will be available to consumers who have complaints about assessments and credit decisions by ADIs. The explanatory memorandum to the Bill indicates the Australian Financial Complaints Authority (AFCA) will have jurisdiction to hear consumer complaints. APRA has indicated in its submission to the Committee that it has developed a relationship with AFCA and that it will refer individual complaints to AFCA.75
Reliance on the Banking Code of Practice An additional brake on banking conduct arises under subsection 1101A(1) of the Corporations Act 2001 which states that ASIC may approve codes of conduct that relate to any aspect of the activities of financial services licensees. Accordingly, ASIC has made the ASIC Corporations (Approval of March 2020 Banking Code of Practice) Instrument 2019/1255.
Most ADIs have subscribed to the Banking Code of Practice (the Code).76 Under the Code, when lending to individuals, banks are to ‘exercise the care and skill of a diligent and prudent banker’.77 However, this is much less prescriptive than the requirement to assess whether a loan is unsuitable for a consumer as required by the responsible lending obligations in the Consumer Credit Act.
Under the Code, a borrower is able to talk to a customer advocate who will ‘help facilitate fair customer outcomes’.78 In the event that the complaint is not resolved, an aggrieved borrower can take their complaint to the Australian Financial Complaints Authority (AFCA).79
The Australian Financial Complaints Authority was established by the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act). Importantly, AFCA does not have the right to adjudicate on all matters. It has made Complaint Resolution Scheme Rules which provide, amongst other things, for time limits for
68. Consumer Credit Act, section 167. 69. Consumer Credit Act, section 177. 70. Consumer Credit Act, section 178. 71. Consumer Credit Act, section 179. 72. ASIC Act, Part 2, Division 2, Subdivision C. 73. ASIC Act, Part 2, Division 2, Subdivision BA. 74. ASIC Act, Part 2, Division 2, Subdivision D. 75. ASIC, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection
Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 110], 16 February 2021, p. 11. 76. Australian Banking Association (ABA), New banking code, ABA website, latest edition 1 March 2021. 77. ABA, Banking Code of Practice, ABA, Sydney, 1 March 2020, pp. 11 and 25. 78. Ibid., Chapter 46. 79. Ibid., Chapter 47. The Australian Financial Complaints Authority was established by the Treasury Laws Amendment (Putting
Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 16
bringing a complaint,80 monetary restrictions on AFCA’s jurisdiction81 and the exclusion of certain matters from its jurisdiction altogether.82
According to the Redfern Legal Centre:
Experience has shown that voluntary industry codes of practice and AFCA complaints not supported by the legal force of [responsible lending obligations] will not provide the incentive for lenders to provide helpful [independent dispute resolution] outcomes, or deter risk taking by financial institutions that causes consumer harm, while they are primarily driven by shareholder and profit motives.83 [emphasis added]
What it means for credit cards Schedule 5 of the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 inserted additional consumer protections into the Consumer Credit Act in relation to credit cards. The amendments each stated that a consumer is taken to be able to comply with the consumer’s financial obligations under a contract only with substantial hardship if:
⢠the contract is a credit card contract and
⢠the consumer could not comply with an obligation to repay an amount equal to the credit limit of the contract within the period determined by ASIC under section 160F.
Accordingly, ASIC made ASIC Credit (Unsuitability—Credit Cards) Instrument 2018/273 to deem that a credit card contract is unsuitable if the consumer could not repay an amount equal to the credit card limit within three years.
The Bill repeals those sections as well as section 160F of the Consumer Credit Act.84 The effect of the repeal of the relevant sections is that the obligations in relation to unsuitability of credit card contracts will no longer apply.
According to Legal Aid NSW, by removing the responsible lending obligations from ADIs, the Bill creates a ‘two-tier consumer protection system’ regarding credit cards issued by ADIs and non-ADIs. This would:
… subject credit cards issued by ADIs to fewer consumer protections than those issued by non-ADIs, by removing the presumption of unsuitability if a consumer could not repay the credit card contract within three years as currently required by ASIC.85
Policy position of non-government parties Senator McKim of the Australian Greens (the Greens) believes the decision to scrap responsible lending laws will lead to more people landing in unsustainable debt. In his view ’with unemployment and underemployment high in the middle of a global pandemic, there has never been a worse time to let banks off the leash’.86
80. Australian Financial Complaints Authority (AFCA), Complaint Resolution Scheme Rules, AFCA, Melbourne, 13 January 2021, p. 26. 81. Ibid., p. 41.
82. Ibid., p. 31.
83. Redfern Legal Centre, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 81], 3 February 2021, p. 3. 84. Part 1 in Schedule 1 to the Bill repeals subsection 118(3AA) (item 17); subsection 119(3A) (item 22); subsection 123(3AA) (item 26); subsection 124(3A) (item 31); subsection 131(3AA) (item 46); subsection 133(3AA) (item 54) and Division 5 of
Part 3-6A (item 69) all of which allow for deeming circ*mstances that make credit card contracts unsuitable. 85. Legal Aid New South Wales, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 5], January 2021, p. 7. 86. N McKim, Government abandons Banking Royal Commission recommendations, media release, 19 January 2021.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 17
Australian Labor Party (ALP) Shadow Treasurer, Jim Chalmers, states:
Retaining responsible lending laws in their current form was the Royal Commission’s very first recommendation, which the Government supported.
Commissioner Hayne himself described them in his report as “critical” in ensuring good faith negotiations on loan products between banks and customers.
Unwinding responsible lending laws risks a return to the bad old days of predatory bank lending, was not called for by the banking sector, and has been slammed by consumer groups.87
Stakeholder comments
Financial service providers ADIs Westpac, Commonwealth Bank and ANZ have welcomed the proposed removal of the responsible lending obligations for ADIs.88
Similarly, the Mortgage and Finance Association of Australia considers the move will ‘lead to stronger customer outcomes, as lenders and brokers will have a clearer understanding of their individual responsibilities, including a higher legal duty for brokers’.89
Sam Boer, Chief Executive of Smartline Mortgage Advisers argues that whilst the imposition of responsible lending laws was appropriate as a response to the global financial crisis:
… It’s now overly complex for the average Australian just to get a basic home loan or for small business owners to invest and grow.
There are too many rules, too much paperwork to fill out and copious amounts of documents required for borrower assessment. This has resulted in increasingly slow approval times and in some cases, overly conservative servicing assessments. This puts more pressure on businesses and consumers wanting to borrow and is leading to reduced investment and spending across the board.90
87. J Chalmers and S Jones, Morrison breaks promise on Banking Royal Commission, putting millions of Australians at risk, media release, 9 December 2020. 88. Westpac Banking Corporation, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 59], 3 February 2021,
p. 1; Commonwealth Bank, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 83], 3 February 2021, p. 1; ANZ, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 97], 3 February 2021, p. 2. 89. Mortgage and Finance Association of Australia, Submission to the Senate Standing Committee on Economics, Inquiry into
the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 49], 3 February 2021, p. 1. 90. S Boer, ‘The truth about the responsible lending roll back’, Sunday Mail Adelaide, 18 October 2020, p. 13.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 18
Consumer advocates Consumer advocacy groups,91 community legal centres92 and financial counsellors93 have roundly criticised the proposed removal of responsible lending obligations for ADIs.94 Submissions to the Economics Committee are replete with real life accounts of individuals and families who have needed help to deal with ongoing and overwhelming debt.
For instance, Fiona Guthrie, Chief Executive of Financial Counselling Australia is reported as expressing concern that ‘victims of domestic violence, people with mental health problems and people with low financial literacy were at risk of being loaded up with debt they would struggle to repay’.95 These concerns—about the impact of the Bill on the lives of vulnerable Australians—have led some submitters to call for the proposal to be abandoned.96
Individual submitters The Economics Committee also received submissions from individual citizens and citizen groups who strongly urged that the Bill should not be passed.97
One such submitter considered that the situation could be summed up as follows:
Abolishing the responsible lending law for large loans will weaken credit assessment processes. Banks were already approving unaffordable loans under the existing laws. Repealing them, together with enforcement and penalties, is the go-ahead for a whole new state of unaffordable loans accruing interest and fees, household debt and asset stripping.98
91. For example Good Shepherd Australia New Zealand, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 31], February 2021; The Salvation Army, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 48], February 2021.
92. For example Women’s Legal Service Qld, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 39], February 2021; WEstjustice, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 44], 27 January 2021.
93. J Rawson, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 14], 29 January 2021. 94. Legal Services Commission of South Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 56],
3 February 2021, p. 2. 95. B Butler, ‘Scrapping responsible lending laws a ‘disaster’ that could drown Australian in debt, consumer groups say’, The Guardian, 20 January 2021; P Smith, ‘Consumer groups savage responsible lending plan’, Australian Financial Review,
23 November 2020, p. 19. 96. For instance, Consumer Credit Legal Service (WA) Inc, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 70],
3 February 2021, p. 3; Consumer Action Law Centre (Joint Report), Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 40], 2 February 2021, p. 1. 97. These include, but are not limited to, WR Ifield, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 3], n.d.; A Lawler, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 68], n.d; K Kerr, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 99], 29 January 2021. 98. M Mesch, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 13], n.d., p. 1. See also T and J Jordan, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 22], n.d.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 19
Reverse mortgages Reverse mortgages allow older Australians to borrow against the equity in their home through a loan that does not require repayment until a later time, typically when the borrower has vacated the property or passed away. 99
In 2012, the Government introduced a ‘no negative equity guarantee’ protection so that credit providers cannot require or accept repayment of a loan for an amount which exceeds the market value of the mortgaged property.100 ASIC notes:
These measures were introduced to address the unique nature of reverse mortgages compared with other types of credit contracts: the product is marketed exclusively towards older Australians who are at or approaching retirement age, repayments are not required until specified events occur, the long-term effect of the loan is difficult to predict, and, before these protections, borrowers (or their dependents) might have been required to repay more than the value of their secured property at the end of the loan.101 [emphasis added]
In addition, before providing credit assistance or entering into a credit contract for a reverse mortgage, a licensee must provide projections of the debtor’s equity in the property that may be covered by the reverse mortgage.102
ASIC review In 2018, ASIC conducted a review of reverse mortgage lending in Australia noting:
Despite the introduction of the [no negative equity guarantee], borrowers still faced a risk of being left with insufficient equity in their homes to pay for their future financial needs. In particular, our data analysis indicated that a substantial proportion of borrowers may be at risk of being left with substantially less home equity if the interest rate on their loan rises, or if property prices grow more slowly than expected.103
And further:
Poor awareness of this risk can lead borrowers to take out a larger reverse mortgage, or to withdraw money more quickly from a line-of-credit facility in a reverse mortgage. The interest charges that accrue over time can reduce the capacity of these borrowers to afford important future expenses, such as aged care accommodation, medical treatment, and day-to-day living expenses.104 [emphasis added]
What the Bill does The Bill amends Part 3-2D in Chapter 3 of the Consumer Credit Act which applies to licensees that provide credit services or are credit providers in relation to reverse mortgages. Importantly, the ‘no negative equity guarantee’ is not changed.105
Giving information before entering into a reverse mortgage Items 60-65 in Part 1 of Schedule 1 to the Bill amend section 133DB of the Consumer Credit Act.
99. ASIC, Review of reverse mortgage lending in Australia, report, 586, ASIC, Canberra, August 2018, p. 4. 100. Inserted into the Consumer Credit Act by Schedule 2 of the Consumer Credit Legislation Amendment (Enhancements) Act 2012. See P Pyburne, Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, Bills digest, 71, 2011-12, Parliamentary Library, Canberra, 2011, p. 11.
101. ASIC, Review of reverse mortgage lending in Australia, op. cit., p. 6. 102. Consumer Credit Act, section 133DB. 103. ASIC, Review of reverse mortgage lending in Australia, op. cit., p. 9. 104. Ibid., p. 10. 105. The guarantee is contained in Consumer Credit Act, Schedule 1, Part 5, Division 1, Subdivision B.
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In particular, item 64 inserts proposed subsection 133DB(1A) which specifies the conduct which will trigger the requirements of subsection 133DB(1) (discussed below). The relevant conduct includes:
⢠providing credit assistance to the consumer in relation to a contract for a reverse mortgage
⢠entering a credit contract for a reverse mortgage
⢠making an unconditional representation to a consumer that he or she is eligible to enter a credit contract for a reverse mortgage
⢠increasing the credit limit of a credit contract for a reverse mortgage or
⢠making an unconditional representation to a consumer that the credit limit of a credit contract for a reverse mortgage will be able to be increased.
Before any of the conduct outlined above occurs, subsection 133DB(1) requires the licensee to give the consumer projections that relate to the value of the dwelling or land that may become reverse mortgaged property, and the consumer’s indebtedness, over time if the consumer were to enter into a contract for a reverse mortgage. Those projections must be made in accordance with the regulations by using a website approved by ASIC.106 Item 63 in Part 1 of Schedule 1 to the Bill inserts proposed paragraphs 133DB(1)(ba) and (bb) so that the licensee must also:
⢠show the consumer in person, or give the consumer in a way set out in the regulations, a comparison of the projections and the likely amount of the person’s aged care accommodation costs, based on the consumer’s stated requirements and objectives in meeting possible future aged care accommodation needs and
⢠give the consumer a printed copy of the comparison.
A failure to comply with the requirements of subsection 133DB(1) of the Consumer Credit Act gives rise to a civil penalty of 5,000 penalty units.107 Importantly, item 65 of Part 1 in Schedule 1 to the Bill inserts proposed subsections 133DB(4A) and 133DB(4B) to provide a defence for the purposes of proposed paragraphs 133DB(1)(ba) and (bb) if the licensee reasonably believes that another person has shown the consumer the relevant comparison and given a copy of it to the consumer and the comparison is the same, or substantially the same, as the comparison that the licensee is required to show the consumer. Proposed subsection 133DB(4B) provides that a further defence may arise if circ*mstances prescribed in regulation exist.
Stakeholder comments ‘Reverse mortgages are complex credit contracts that are commonly entered into by older Australians’.108
Of concern to the Consumer Action Law Centre is that, with the removal of the responsible lending obligations, the Bill will introduce a process which relies on the ‘consumer having a strong understanding of their possible future aged care accommodation costs and needs’.109 However,
106. Consumer Credit Act, paragraph 133DB(1)(a). 107. Crimes Act 1914, section 4AA and the Notice of Indexation of the Penalty Unit Amount provide that a penalty unit is equivalent to $222. This means that the maximum civil penalty is $1,110,000, but see discussion of civil penalties below. 108. Consumer Action Law Centre (joint submission), Submission to the Senate Standing Committee on Economics, Inquiry into
the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 40], 2 February 2021, p. 24. 109. Ibid., p. 25.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 21
the submission to the Economics Committee by Reverse Mortgage Finance Solutions highlights that the requisite understanding is absent in ‘most potential borrowers of reverse mortgages’.110
About civil penalties
Civil penalties in the Consumer Credit Act Under the Consumer Credit Act, civil penalty provisions impose obligations on certain persons. It is for the court to make a declaration that a person has contravened a civil penalty provision111 and order the person to pay a pecuniary penalty.112
A pecuniary penalty is a debt payable to the Commonwealth.113 Only ASIC may apply to the court for the declaration or order.114
The maximum pecuniary penalty payable by an individual is the greater of the penalty that is specified in the civil penalty provision and—if the court can determine the benefit derived and detriment avoided because of the contravention—that amount multiplied by three.115
The maximum pecuniary penalty payable by a body corporate is the greatest of:
⢠the penalty that is specified in the civil penalty provision multiplied by 10
⢠if the court can determine the benefit derived and detriment avoided because of the contravention—that amount multiplied by three
⢠either 10 per cent of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision or—if that amount is greater than an amount equal to 2.5 million penalty units—2.5 million penalty units.116
The benefit derived and detriment avoided because of a contravention of a civil penalty provision is equal to the total value of all benefits that one or more persons obtained that are reasonably attributable to the contravention plus the total value of all detriments that one or more persons avoided that are reasonably attributable to the contravention.117
Civil penalties in the Bill The civil penalties imposed by the Bill are generally expressed as being for 5,000 penalty units— that is an amount currently equivalent to $1,110,000.118 The terms of sections 167A and 167B of the Consumer Credit Act which allow for greater penalty amounts will still apply.
Prohibition of certain conduct Item 66 in Part 1 of Schedule 1 to the Bill inserts proposed section 133DF into the Consumer Credit Act. It sets out a new civil penalty provision in relation to reverse mortgages. A licensee must not do either of the following:
110. Reverse Mortgage Finance Solutions, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 15], 30 January 2021, p. 2.
111. Consumer Credit Act, subsection 166(1). 112. Consumer Credit Act, subsection 167(2). 113. Consumer Credit Act, subsection 167(4). 114. Consumer Credit Act, subsections 166(1) and 167(1). 115. Consumer Credit Act, section 167A and subsection 167B(1). 116. Consumer Credit Act, section 167A and subsection 167B(2). 117. Consumer Credit Act, section 167D. 118. Crimes Act 1914, section 4AA and the Notice of Indexation of the Penalty Unit Amount operate so that a penalty unit is
equivalent to $222.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 22
⢠offer a reverse mortgage to a consumer under the age of 56 years if the loan to value ratio of the mortgage exceeds 15 per cent119
⢠offer a reverse mortgage to a consumer over the age of 56 years if the loan to value ratio of the mortgage exceeds the sum of 16 per cent and one per cent for each year that the person is aged more than 56 years.120
The Bill provides that the loan to value ratio of a reverse mortgage is the amount of credit owed, or intended to be owed, under the credit contract for the reverse mortgage, expressed as a percentage of the value of the dwelling or land that is to be the subject of the reverse mortgage.121
Proposed section 133DF replaces existing section 28LC of the National Consumer Credit Protections Regulations 2010 (the Regulations).
The amendment to the table in Schedule 2 of the Age Discrimination Act 2004 which is set out in Part 2 of Schedule 1 to the Bill operates so that anything done by a person in direct compliance with section 133DF (including discrimination on the basis of age) is not unlawful.
Additional rules for non-ADIs
What the Bill does Item 67 in Part 1 of Schedule 1 to the Bill inserts proposed Part 3-2E—Licensees that are credit providers under credit contracts: additional rules for non-ADI credit conduct into Chapter 3 of the Consumer Credit Act.
Making standards Within new Part 3-2E, proposed section 133EA of the Consumer Credit Act empowers the Minister to determine non-ADI credit standards that specify requirements with which a licensee’s systems, policies and processes relating to non-ADI credit conduct must comply. The standard will be a legislative instrument.
The Bill defines the term non-ADI credit conduct as conduct that consists of a licensee doing any of the following:
⢠entering a credit contract that is not a small amount credit contract (see Schedule 2 for amendments relating to small amount credit contracts) where the credit provider under the contract is not an ADI
⢠making an unconditional representation to a consumer that he, or she, is eligible to enter a credit contract that is not a small amount credit contract where the credit provider under the contract is not an ADI
⢠increasing the credit limit of a credit contract that is not a small amount credit contract where the credit provider under the contract is not an ADI or
⢠making an unconditional representation to a consumer that the credit limit of a credit contract that is not a small amount credit contract will be able to be increased where the credit provider under the contract is not an ADI.122
119. Consumer Credit Act, proposed subsection 133DF(2). 120. Consumer Credit Act, proposed subsection 133DF(3). 121. Consumer Credit Act, proposed subsection 133DF(5). 122. Consumer Credit Act, proposed subsection 133EA(5).
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Systems, processes and policies The relevant standard may specify requirements relating to systems, policies and processes relating to that conduct. In that case, a licensee must not engage in non-ADI credit conduct unless the mandated systems, policies and processes have been established and are maintained. Similarly, a licensee must not engage in non-ADI credit conduct unless there is a written plan that documents the systems, policies and processes the licensee has established, and maintains, that comply with those requirements. A failure to do so gives rise to a civil penalty of 5,000 penalty units.123
Proposed section 133EC is also a civil penalty provision (5,000 penalty units) which prohibits a licensee from engaging in non-ADI credit conduct if the licensee repeatedly fails to comply with the relevant systems, processes and policies even if the licensee has established, and maintains, systems, policies and processes in accordance with the standards.
Giving documents The relevant standard may also require the licensee to give the consumer a document. A failure to do so gives rise to a civil penalty of 5,000 penalty units.124 A licensee must not request or demand payment for the giving of such a document to the consumer. A licensee who requests such a payment is subject to a civil penalty of 5,000 penalty units.125
A person commits an offence of strict liability if the person is subject to a requirement to give a document as set out above and the person engages in conduct that contravenes the requirement. Similarly, a person commits an offence of strict liability if the person is subject to a requirement to give a document and the person demands payment for the document.126
Scrutiny of Bills Committee comments The Scrutiny of Bills Committee takes the view:
… that significant matters, such as obligations where non-compliance attracts significant civil penalties or may constitute a strict liability offence, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided.127
Whilst it acknowledged that the Explanatory Memorandum to the Bill had provided some justification, the Scrutiny of Bills Committee has asked the Treasurer to provide detailed advice about why it is considered necessary and appropriate to leave these matters to delegated legislation.128
Stakeholder comments The effect of the Bill is that non-bank lending to consumers will not be judged by on the basis of unsuitable outcomes for consumers but rather by whether:
⢠the systems, policies and processes conform to the criteria in the Ministerial standards and
123. Consumer Credit Act, proposed subsection 133EB(1). 124. Consumer Credit Act, proposed subsection 133ED(1). 125. Consumer Credit Act, proposed subsection 133ED(3). 126. Consumer Credit Act, proposed subsections 133ED(4) and (5). Note that the imposition of strict liability means that a fault
element does not need to be satisfied, but the offence will not criminalise honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations. 127. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 2, 2021, op. cit., p. 13. 128. Ibid., pp. 14-15.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 24
⢠the assessment of suitability was made in accordance with those systems, policies and processes.
Of concern to the Law Council of Australia is that this ‘makes enforcement of the standards complex and difficult. It would also make it highly difficult for a consumer to assess whether or not their own lender has breached the non-ADI standards’.129
The Explanatory Memorandum to the Bill states:
A single failure only of a licensee to comply with the requirements of the licensee’s systems, policies and processes will not contravene the civil penalty provision, and a single failure only will also not enable ASIC’s licensing enforcement powers to be used.130
Importantly, ‘unless the non-compliance is repeated, the lender will not contravene a civil penalty provision and a … consumer will have no right to seek compensation’ under the Consumer Credit Act.131
Best interests obligations
About the best interest duty The best interests duty and related obligations are contained in Part 7.7A of Chapter 7 of the Corporations Act 2001, which regulates financial services and financial markets overall. Within Chapter 7, subsection 961B(1) requires a provider of financial services to act in the best interest of their client. What needs to be done to satisfy that duty is set out in subsection 961B(2) of the Corporations Act. The provider must have done, amongst other things, the following:
⢠identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions132
⢠identified:
- the subject matter of the advice that has been sought by the client and - the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter133 and ⢠where it was reasonably apparent that information relating to the client’s relevant circ*mstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information.134
Extension to mortgage brokers The Banking Royal Commission recommended that the law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower and that the obligation should be a civil penalty provision.135 The Government agreed.136
129. Law Council of Australia, Submission op. cit., pp. 8-9. 130. Explanatory Memorandum, National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, p. 22. 131. Australasian Consumer Law Roundtable (Consumer Law Academics), Submission to the Senate Standing Committee on
Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 91], 3 February 2021, p. 2. 132. Corporations Act, paragraph 961B(2)(a). 133. Corporations Act, paragraph 961B(2)(b). 134. Corporations Act, paragraph 961B(2)(c). 135. Banking Royal Commission, Final report, op. cit., recommendation 1.2, p. 73. 136. The Treasury, Restoring trust in Australia’s financial system, Treasury, Canberra, February 2019, p. 6.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 25
Accordingly the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 amended the Consumer Credit Act to insert Part 3-5A which requires, amongst other things, that mortgage brokers and mortgage intermediaries act in the best interests of the consumer (sections 158L-158LF).
Importantly, the Consumer Credit Act does not currently have a provision similar to subsection 961(2) of the Corporation Act, which sets out what conduct is required to satisfy the best interest duty. Nor does the Bill insert one.
What the Bill does Items 71-75 of Schedule 1 of the Bill amend Part 3-5A of the Consumer Credit Act so that the best interests obligation is extended to licensees and to their credit representatives.
According to the Explanatory Memorandum to the Bill:
The duty to act in the best interests of the consumer in relation to credit assistance is a principles-based standard of conduct that applies across a range of activities that licensees and representatives engage in. As such, what conduct satisfies the duty will depend on the individual circ*mstances in which credit assistance is provided to a consumer in relation to a credit contract or a consumer lease. The duty does not prescribe conduct that is taken to satisfy the duty in specific circ*mstances. It is the responsibility of credit assistance providers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circ*mstances.137
Stakeholder comments Whilst the Legal Services Commission of South Australia welcomed the extension of the best interests duty it does not consider that it will replace the responsible lending obligations stating:
It is difficult to see how the best interest duty will function effectively without [responsible lending obligations] to protect a consumer from an unaffordable loan.138
Schedule 2—key issues and provisions The amendments in Schedule 2 to the Bill insert prohibitions against: ⢠entering into small amount credit contracts in certain circ*mstances ⢠making unsolicited communications to a consumer about small amount credit contracts
and
⢠charging unexpired monthly fees after a small amount credit contract is paid out. In addition, the amendments insert requirements for: ⢠displaying information by licensees and ⢠providing written documentation to consumers.
Commencement The amendments in Schedule 2 to the Bill commence six months after Royal Assent.
About small amount credit contracts A credit contract is a small amount credit contract if all of the following are satisfied:
137. Explanatory Memorandum, National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, p. 13. 138. Legal Services Commission of South Australia, Submission op. cit., p. 11.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 26
⢠the contract is not a continuing credit contract 139
⢠the credit provider under the contract is not an ADI
⢠the credit limit of the contract is $2,000 (or such other amount as is prescribed by the regulations) or less
⢠the term of the contract is at least 16 days but not longer than one year
⢠the debtor’s obligations under the contract are not, and will not be, secured (that is, there is no mortgage) and
⢠the contract meets any other requirements prescribed by the regulations.140
Limits So called ‘payday loans’ are small amount credit contracts.141 Small amount credit contracts (or SACCs) are subject to certain statutory limits. These take the form of a cap on the fees and charges of the loan being:
⢠an establishment fee of a maximum of 20 per cent of the amount of credit142 and
⢠a monthly fee of a maximum of four per cent of the amount of credit.143
In addition, consumers who default under a small amount credit contract must not be charged an amount that exceeds twice the amount of the original loan.144
Example: if a consumer borrowed $500 for 12 weeks the maximum charges the credit provider could impose would be $160 (being $100 establishment fee plus three monthly fees of $20 each). The total amount payable by the consumer is $660 which equates to a multiple of 1.32 times the amount of credit ($500)—being a significant repayment given the amount of the original loan.
Additional responsible lending obligations As stated above, Part 3-2 of the Consumer Credit Act sets out the responsible lending obligations which apply to licensees that are credit providers. Part 3-2C of the Consumer Credit Act contains additional rules which apply to those licensees who are credit providers under short-term credit contracts and small amount credit contracts.
Relevant to this Bills Digest, Part 3-2C imposes requirements on a licensee who makes representations about entering into small amount credit contracts and prohibits a licensee from entering into, or offering to enter into, small amount credit contracts in certain circ*mstances.145
2016 statutory review Section 335A of the Consumer Credit Act requires the Minister to have an independent review of the laws relating to small amount credit contracts undertaken ‘as soon as practicable after 1 July 2015’. Accordingly, on 7 August 2015, the Assistant Treasurer, Josh Frydenberg announced that the review would take place with a report to be provided by the end of 2015.146
139. Subclause 204(1) of the National Credit Code provides that the term continuing credit contract means a credit contract under which multiple advances of credit are contemplated and the amount of available credit ordinarily increases as the amount of credit is reduced.
140. Consumer Credit Act, section 5. 141. Stop the Debt Trap Alliance, The debt trap—how payday lending is costing Australians, Stop the Debt Trap Alliance, [Melbourne], November 2019, p. 6. 142. Consumer Credit Act, Schedule 1, subclause 31A(2). 143. Consumer Credit Act, Schedule 1, subclause 31A(3). 144. Consumer Credit Act, Schedule 1, subclause 39B(1) and subclause 204(1) which defines the term adjusted credit amount. 145. Consumer Credit Act, sections 133CB and 133CC. 146. J Frydenberg (Assistant Treasurer), Review of the small amount credit contract laws, media release, 7 August 2015.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 27
The final report of the Review of the Small Amount Credit Contract Laws (the Review) was published in March 2016.147 It contained 24 recommendations. On 28 November 2016 the Minister for Revenue and Financial Services, Kelly O’Dwyer, formally responded to the report.148 The recommendations and the Government’s response to each of them are set out in table form at Annexure 1 of this Bills Digest.
Although the Government accepted many of the Review’s recommendations, until now there has been no legislative response to the Review.
The Review identified that the existing consumer protections for small amount credit contracts are insufficient and that enhancements to the regulatory regime are required to ensure it is ‘fit for purpose’.149
However, it should be noted that the amendments to the small amount credit contract rules provided for by the Bill do not necessarily reflect the recommendations of the Review in all cases.
2019 debt trap report The November 2019 report entitled The debt trap—how payday lending is costing Australians provides the following data about the incidence of payday loans:
⢠Between April 2016 and July 2019, just over 4.7 million individual payday loans have been written, worth an approximate total of $3.09 billion and taken on by around 1.77 million households.
⢠These loans will have generated approximately $550 million in net profit for the lenders.
⢠Digital platforms have resulted in an explosion of loans that originate online. Ten years ago only 5.6 per cent of payday loans originated online. In 2019 that figure is expected to hit 85.8 per cent.
⢠Data shows that over a five-year period, around 15 per cent of payday loan borrowers fall into a debt spiral. On that basis, an additional estimated 324,000 Australian households have been allowed to enter a debt path that may result in an event such as bankruptcy.150
It has been stated that ‘banks and other larger financial institutions (ADIs) ceased offering SACCs over a decade ago and no other credible and lawful third party source has emerged as an alternative to the current SACC lenders’.151
Protected earnings amount Currently section 133CC of the Consumer Credit Act (located in Part 3-2C which contains the additional responsible lending rules in relation to small amount credit contracts) prohibits a licensee from entering into a small amount credit contract if the consumer is included in a class of consumers prescribed by the Regulations or the repayments under the contract would not be consistent with the Regulations.
The relevant regulation is section 28S of the National Consumer Credit Protection Regulations 2010 (Consumer Credit Regulations) which protects consumers who receive at least 50 per cent of their gross income as payments under the Social Security Act 1991. In that case, a licensee must not require payments in respect of each small amount credit contract for which the consumer is a debtor which exceed 20 per cent of the person’s gross income for each payment cycle of income
147. The Treasury, Review of the Small Amount Credit Contract Laws, final report, Treasury, Canberra, March 2016. 148. K O’Dwyer (Minister for Revenue and Financial Services, Government response to the final report of the review of the small amount credit contract laws, media release, 28 November 2016. 149. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 3. 150. Stop the Debt Trap Alliance, The debt trap, op. cit., p. 4. 151. Finance Industry Delegation, Submission to the Senate Standing Committee on Economics, Inquiry into credit and financial
services targeted at Australians at risk of financial hardship, [Submission no. 41], p. 3.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 28
(the payment cycle is the period where the person receives the majority of their social security payments).152
What the Review recommended The Review recommended that the protected earnings amount regulation should be extended to cover small amount credit contracts provided to all consumers.153 In addition the Review recommended that the government reduce the cap on the total amount of all small amount credit contract repayments from 20 per cent of the consumer’s gross income to 10 per cent of the consumer’s net (that is, after tax) income.154
What the Bill does Items 10 and 11 in Schedule 2 to the Bill amend section 133CC so that first, a licensee must not enter into, or offer to enter into, a small amount credit contract with a consumer if the repayments under the contract would not meet the requirements prescribed by the Regulations. This is a civil penalty provision with a penalty of 5,000 penalty units.155
According to the Explanatory Memorandum to the Bill:
It is expected that the regulations will provide separate protected earnings amounts for consumers who receive 50 per cent or more their net income (rather than gross income) from social security payments, and those who do not.
⢠For consumers who receive 50 per cent or more of their net income from social security payments, a licensee must not enter into a small amount credit contract or a consumer lease with the consumer if:
- the total repayments under the consumer’s small amount credit contracts and consumer leases would exceed 20 per cent of the consumer’s net income and - within that 20 per cent, the total repayments under the small amount credit contracts would exceed 10 per cent of the consumer’s net income.
⢠For all other consumers, a licensee must not enter into a small amount credit contract with the consumer if the total repayments under the consumer’s small amount credit contracts would exceed 20 per cent of the consumer’s net income.156
Stakeholder comments
Small amount credit contract providers Cash Converters is of the view that the amendments relating to small amount credit contracts ‘are not in the interests of consumers and will further disadvantage financially excluded Australians who are unable to access credit from a bank—or who simply choose not to have a credit card and require a small loan when needed’.157
A summary of Cash Converters’ concerns about the amendments are as follows:
⢠12,764 customers across Australia have completed the [Cash Converters] survey on the proposed changes. The main reasons given for not supporting them being that they will restrict credit, make the loans longer term and ultimately more expensive
152. National Consumer Credit Protection Regulations 2010 (Consumer Credit Regulations), subsections 28S(3)-(4). 153. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 11. 154. Ibid.
155. Consumer Credit Act, proposed subsection 133CC(1). 156. Explanatory Memorandum, National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, p. 75. 157. Cash Converters, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit
Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 84], 3 February 2021, p. 1.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 29
⢠93% of customers surveyed do not agree with the changes in the Bill and 89% claim they will be heavily impacted if the Bill proceeds
⢠the demand for small amount credit contracts is not for discretionary purchases and will not simply abate. Small amount credit contracts are needed to finance car repairs, white goods purchases and general expenses
⢠the current regulatory environment provides an appropriate level of regulation and protection for consumers
⢠the Bill will impose a protected earnings regime for all consumer’s income, no matter what the source. This assumes that all consumers, not just those on Centrelink benefits, are somehow vulnerable and incapable of making rational decisions about the allocation of their income and
⢠current policy and regulatory settings have artificially restricted the supply of lending products by regulated credit providers such as Cash Converters, shifting this pent-up demand to substitute products offered by unregulated operators including Buy Now Pay Later and Early Wage Access providers.158
Consumer advocates Consumer advocacy groups are concerned that the proposed amendments do not reflect the Review’s recommended 10 per cent cap. The Consumer Action Law Centre (Joint Report) summed up these concerns stating:
In our experience, this 20% limit has not been a sufficient protection for borrowers on low incomes to leave them with enough of their income to manage their other expenses, or prevent them from falling into a debt spiral, particularly as people taking out payday loans will often have numerous other debts.159
Loss of charges mechanism
What the Review recommended Recommendation 23 of the Review was aimed at encouraging a rigorous approach to compliance by providing for the automatic loss of the right to charges under a small amount credit contract where SACC providers contravene certain obligations.160
What the Bill does The second amendment to section 133CC creates a consumer remedy where a licensee enters into a small amount credit contract contrary to the prohibition outlined above and either the court has made a declaration about that contravention or the licensee is found guilty of an offence in relation to that conduct.161 The remedies are:
⢠the consumer is not liable (and is taken never to have been liable) to pay either the permitted establishment fee or the permitted monthly fee162 and
⢠the consumer may recover as a debt due to the consumer the total of the amounts which have already been paid.163
This is called the ‘loss of charges mechanism’.
158. Ibid., p. 6. 159. Consumer Action Law Centre (Joint Report), Submission, op. cit., p. 27. 160. Treasury, Review of the Small Amount Credit Contract Laws, final report, op. cit., p. 90. 161. Consumer Credit Act, proposed paragraphs 133CC(3)(a) and (b). 162. The relevant fees are contained in Consumer Credit Act, Schedule 1, paragraphs 31A(1)(a) and (b) respectively. 163. Consumer Credit Act, proposed paragraphs 133CC(3)(c) and (d).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 30
Requirement for equal charges and intervals
What the Review recommended Recommendation 5 of the Review was that the definition of a small amount credit contract should be amended so that the relevant credit contract must have equal repayments over the life of the loan (noting that there may need to be limited exceptions to this rule).164
What the Bill does Item 12 in Schedule 2 to the Bill inserts proposed sections 133CD-133CF into Part 3-2C of the Consumer Credit Act. Under proposed section 133CD a licensee must not enter into, or offer to enter into, a small amount credit contract with a consumer if any of the following applies:
⢠repayments that would be required under the contract are not equal—this means that repayments must be of the same amount other than the last repayment which may be up to five per cent less than each other repayment—ASIC can also determine conditions for equal repayments by legislative instrument165
⢠the intervals between repayment dates would not be equal—this means that repayments are to be made on or by a fixed day of each week, fortnight or month. If the fixed day is not a business day, then the repayment is to be made on or by the immediately preceding or succeeding business day166
⢠the interval between the date on which credit is first provided under the contract and the first repayment date is longer than twice the interval between the first repayment date and the second repayment date.167
Failure to comply with these requirements gives rise to a civil penalty of 5,000 penalty units (being currently equivalent to $1,110,000).168 In addition, proposed section 133CD contains two offence provisions. A licensee who intentionally engages in conduct that contravenes the requirements above commits an offence—the maximum penalty for which is 100 penalty units.169 An offence of strict liability is also provided—the maximum penalty for which is 10 penalty units.170
Unsolicited communications are prohibited
What the Review recommended Recommendation 8 of the Review was that small amount credit contract providers should be prevented from making unsolicited small amount credit contract offers to current or previous consumers.171
164. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 27. 165. Consumer Credit Act, proposed paragraph 133CD(1)(a) and proposed subsections 133CD(2) and 133D(5). 166. Consumer Credit Act, proposed paragraph 133CD(1)(b) and proposed subsection 133CD(4). 167. Consumer Credit Act, proposed paragraph 133CD(1)(c). 168. See also sections 167A and 167B of the Consumer Credit Act and the discussion of ‘Civil penalties in the Consumer Credit
Act’, above.
169. Consumer Credit Act, proposed subsection 133CD(7). As the provision does not specify a fault element, the fault element of intention is applied under subsection 5.6(1) of the Criminal Code Act 1995. 170. Consumer Credit Act, proposed subsections 133CD(8) and (9). The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not criminalise honest errors and a person cannot be held liable if he, or
she, had an honest and reasonable belief that they were complying with relevant obligations. This offence therefore has a lower threshold for proof than the offence at proposed subsection 133CD(7), however also provides for a lower penalty. 171. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 33.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 31
What the Bill does An unsolicited communication to a consumer is made by a person directly to the consumer (or their agent) in any the following circ*mstances:
⢠no prior request has been made to the licensee for that communication
⢠the consumer has made a prior request to the licensee and that request was solicited by (or on behalf of) the licensee or
⢠circ*mstances prescribed by the Regulations.172
The Regulations can also prescribe kinds of communications to which the above does not apply.173
Proposed section 133CF of the Consumer Credit Act prohibits a licensee from making certain unsolicited communications in relation to a small amount credit contract. A failure to comply with this requirement gives rise to a civil penalty of 5,000 penalty units.174
In the alternative, a person who engages in conduct which contravenes the prohibition commits an offence, the maximum criminal penalty being 100 penalty units.175
The Bill inserts a consumer remedy where all of the following are satisfied:
⢠a licensee engages in conduct contrary to the prohibition on unsolicited communications with a consumer
⢠the licensee has entered into a small amount credit contract with the consumer within 30 days of the relevant communication and
⢠either the court has made a declaration about that contravention or the licensee is found guilty of an offence in relation to that conduct.176
In that case, a loss of charges mechanism applies.177
Unexpired monthly fees are prohibited
What the Review recommended Recommendation 7 of the Review was that the credit provider under a small amount credit contract should not be permitted to charge the monthly fee in respect of any outstanding months of the original term after the consumer has repaid the outstanding balance and those amounts should be deducted from the outstanding balance at the time it is paid.178
What the Bill does Division 4 in Part 2 of the National Credit Code sets out the rules for fees and charges payable in relation to credit contracts. Item 13 in Schedule 2 to the Bill inserts proposed clause 31C into the National Credit Code to prohibit a licensee from requiring or accepting payment of an unexpired monthly fee from a debtor under a small amount credit contract. For the purposes of this clause, the Bill defines an unexpired monthly fee as each permitted monthly fee that is in respect of a month that commences after the date on which the contract is paid out.179
172. Consumer Credit Act, proposed subsection 133CF(2). 173. Ibid.
174. Consumer Credit Act, proposed subsection 133CF(1). 175. Consumer Credit Act, proposed subsection 133CF(3). 176. Consumer Credit Act, proposed paragraphs 133CF(4)(a)-(c). 177. Consumer Credit Act, proposed paragraphs 133CF(4)(d) and (e). 178. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 31. 179. Consumer Credit Act, Schedule 1, proposed subclause 31C(2).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 32
There are consequences for a credit provider who contravenes this prohibition. First, the loss of charges mechanism applies.180 Second, the licensee commits a criminal offence if he, or she, intentionally engages in conduct which contravenes the prohibition about unexpired monthly fees—the maximum penalty being 100 penalty units.181 In the alternative the conduct gives rise to an offence of strict liability—the maximum criminal penalty for which is 10 penalty units.182
Requirement to display information
What the Bill does Currently a licensee who makes representations that the licensee provides, or is able to provide credit assistance in relation to small amount credit contracts must display certain information as prescribed by the Consumer Credit Regulations.183 Item 5 in Schedule 2 to the Bill repeals and replaces section 124B in Part 3-1 of the Consumer Credit Act. Whilst proposed section 124B similarly requires the display of information, it also requires a licensee to give certain information to consumers.
The Bill empowers ASIC, by legislative instrument, to determine matters relating to licensees that make representations about credit assistance in relation to small amount credit contracts being:
⢠the information that the licensees must display
⢠how the licensees must display the information
⢠when the licensees must display the information
⢠the information that the licensees must give to consumers
⢠how the licensees must give the information to consumers and
⢠when the licensees must give the information to consumers.184
A licensee is liable for a civil penalty of 5,000 penalty units if the licensee provides credit assistance by way of small amount credit contracts and the licensee fails to comply with such a determination.185 In addition, a person commits an offence if the person engages in conduct that contravenes a requirement of an ASIC determination. In that case, the maximum criminal penalty is 50 penalty units (being equivalent to $11,100).186
Item 9 in Schedule 2 to the Bill repeals and replaces section 133CB in Part 3-2 of the Consumer Credit Act. Proposed section 133CB is in equivalent terms to proposed section 124B—except that it relates to a licensee who represents that he, or she, enters into, or is able to enter into, small amount credit contracts with a consumer.
180. Consumer Credit Act, Schedule 1, proposed subclause 31C(3). 181. Consumer Credit Act, Schedule 1, proposed subclause 31C(4). 182. Consumer Credit Act, Schedule 1, proposed subclauses 31C(5) and (6). 183. Consumer Credit Act, section 124B. The precise wording of the notice is set out in Schedule 7 to the Consumer Credit
Regulations.
184. Consumer Credit Act, proposed subsection 124B(2). 185. Consumer Credit Act, proposed subsection 124B(1). 186. Consumer Credit Act, proposed subsection 124B(4).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 33
Requirement for written documentation
What the Review recommended Recommendation 20 of the Review was that there should be a requirement for providers of small amount credit contracts to document in writing their assessment that a proposed contract is suitable—at the time the assessment is made.187
What the Bill does Currently, the Consumer Credit Act sets out the obligations of licensees which arise before credit assistance is provided. In particular, the responsible lending obligations broadly require a credit provider to determine that a particular credit contract is not unsuitable for the borrower before providing the relevant credit assistance.188 The Consumer Credit Act similarly imposes an obligation on licensees to assess unsuitability before the day that credit is extended to a consumer (such as by entering a credit contract).189
Item 5 in Schedule 2 to the Bill inserts proposed section 124C into the Consumer Credit Act to require a licensee to document its preliminary assessment that a small amount credit contract is not unsuitable for a consumer and of the inquiries and verifications made for that purpose.190 ASIC may, by legislative instrument, determine the form in which those matters are to be documented.191 A failure to comply with this requirement gives rise to a civil penalty of 5,000 penalty units (equivalent to $1,110,000).
Item 12 in Schedule 2 to the Bill inserts proposed section 133CE into Part 3-2C of the Consumer Credit Act in near equivalent terms. It requires a licensee to document in writing its assessment of the unsuitability of the proposed small amount credit contract and the inquiries and verification which have been made in relation to that assessment. A failure to comply with this requirement gives rise to a civil penalty of 5,000 penalty units.
Removing the presumption of unsuitability
What the Review recommended Recommendation 2 of the Review was to remove the rebuttable presumption that a loan is presumed to be unsuitable if either the consumer is in default under another small amount credit contract or in the 90-day period before the assessment, the consumer has had two or more other small amount credit contracts.192 The Review noted that this recommendation was contingent on Recommendation 1 (regarding protected earning amounts) being implemented.193
What the Bill does The Consumer Credit Act contains a rebuttable presumption that a consumer could only comply with the consumer’s financial obligations under a new consumer credit contract with substantial hardship, unless the contrary is proved, if:
⢠at the time of the preliminary assessment the consumer is a debtor under another small amount credit contract and is in default in payment of an amount under that other contract or
187. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 80. 188. Consumer Credit Act, paragraphs 115(1)(c) and 115(2)(a). 189. Consumer Credit Act, paragraph 128(c). 190. Consumer Credit Act, proposed subsection 124C(1). 191. Consumer Credit Act, proposed subsection 124C(2). 192. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 22. 193. Ibid.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 34
⢠in the 90-day period before the time of the preliminary assessment, the consumer has been a debtor under two or more other small amount credit contracts.194
Items 3, 4, 6 and 7 in Schedule 2 to the Bill repeals the rebuttable presumption.195
Schedules 3 and 5—key issues and provisions The amendments in Schedule 5 to the Bill remove the provisions of the National Credit Code that exclude consumer leases entered into for an indefinite period from being regulated under the Consumer Credit Act. The amendments in Schedule 3 to the Bill: ⢠introduce a cap on the amount a lessor can charge in connection with a consumer lease ⢠insert a new definition of the term ‘consumer lease for household goods’ and ⢠introduce a regulation-making power to set a protected earnings amount for consumer
leases of household goods.
Commencement The amendments in both Schedule 3 and Schedule 5 to the Bill commence six months after Royal Assent.
About consumer leases Consumer leases are regulated under Part 11 of the National Credit Code. They are contracts for goods (hired wholly or predominantly for personal, domestic or household purposes) for longer than four months where:
⢠the consumer does not have a right or obligation to purchase the goods196 and
⢠the total amount payable exceeds the cash price.197
Importantly Part 11 of the National Credit Code does not apply to a consumer lease for a fixed period of four months or less; or for an indefinite period.198
Relevant reviews
2015—ASIC report In 2015, ASIC published a report about the cost of consumer leases for household goods.199 ASIC noted:
Even where the fortnightly payments are relatively low, we found that over the term of the lease, the consumer will pay significantly more than the retail price of the goods and be charged more than a lender is permitted to charge under a small amount credit contract.200
In particular, ASIC made the following findings (based on a RMIT market survey and Centrelink recipient data):
194. Consumer Credit Act, subsections 118(3A) and 123(3A) (Part 3-1, in relation to credit assistance providers) and subsections 131(3A) and 133 (3A) (Part 3-2, in relation to credit providers). 195. Repealing subsections 118(3A), 123(3A), 131(3A) and 133(3A) respectively. 196. Consumer Credit Act, Schedule 1, clauses 169, 170 and 171(1). 197. Consumer Credit Act, Schedule 1, subclause 204(1) defines the term cash price. 198. Consumer Credit Act, Schedule 1, subclause 171(1). 199. ASIC, Cost of consumer leases for household goods, report, 447, ASIC, Canberra, September 2015. 200. Ibid., p. 4
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 35
⢠the amounts charged by different lessors for the same goods vary significantly201
⢠the financial benefits of a longer term lease are questionable202
⢠there is no consistency in total amount charged for different goods with a similar retail price203
⢠the same lessors charge significantly different amounts for the same goods—in particular Centrelink recipients were charged more than the advertised costs204 and
⢠Centrelink recipients were charged more than the maximum payable under a small amount credit contract.205
2016—statutory review As stated above, the final report of the statutory review of small amount credit contract laws was published in March 2016.206 That report noted that consumer leases are the only product regulated by the Consumer Credit Act which is not subject to a cap on the amount that can be charged and stated:
The fact that the absence of a cap has permitted such high costs being charged in some cases to consumers who can least afford them dictates the need for reform and illustrates the unequal bargaining power in this market. Moreover, these costs are not readily visible to consumers.207
The Review noted that there are differences between a credit contract and a consumer lease because lessors may incur costs if something goes wrong with the leased product, with some lessors stating that ‘they incurred staffing costs for organising repairs on behalf of the consumer’.208
The Review acknowledged that whilst consumer leases and small amount credit contracts:
… are functionally different products, there was general agreement from stakeholders that consumer leases should be subject to a cap on costs to remove the extremely high cost leases from the industry and protect vulnerable consumers. There was almost unanimous agreement that a cap, if applied, should be expressed as a multiple of the price of the goods and not as an annual percentage rate. 209
2019—Senate inquiry The Senate Standing Committee on Economics (Economics Committee) conducted an inquiry into credit and financial services targeted at Australians at risk of financial hardship which reported in February 2019.210
The submission from ASIC to the Economics Committee explains the way that consumer leases work.
Low-income consumers commonly use consumer leases to obtain household goods. In practice, at the end of a consumer lease contract, the provider will often allow the consumer to keep possession of the leased goods (e.g. by allowing the consumer to make an offer to buy the goods for a nominal amount).
201. Ibid., p. 5. 202. Ibid., p. 6. 203. Ibid.
204. Ibid., p. 7. 205. Ibid.
206. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit. 207. Ibid., p. 4. 208. Ibid., p. 49. 209. Ibid., p. 50. 210. The terms of reference, submissions to the Senate Standing Committee on Economics and the Committee’s final report are
available on the inquiry homepage.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 36
This makes consumer leases functionally similar to a credit contract under which a consumer buys the goods through a loan.
Many low-income consumers make the rental payments due on their leases through Centrepay, a voluntary deduction service for Centrelink recipients. The rental payments are deducted directly from the consumer’s Centrelink payment, which gives the provider assurance that payments will be met, as the provider of the consumer lease will not need to compete with other expenses of the consumer. Centrepay deductions for consumer leases of household goods from July-December 2015 were around $160 million (or $320 million on an annualised basis).
Unlike lenders, providers of consumer leases are not subject to any restrictions or controls on prices, which means that they can charge very high amounts under a lease. Consumers can pay significantly more than the price of the goods and be charged more than would be permitted under a loan to buy the goods (notwithstanding the functional similarity between these products).211 [emphasis added]
The Economics Committee made 20 recommendations, including that ASIC, the Australian Competition and Consumer Commission (ACCC) and the Australian Financial Complaints Authority (AFCA) undertake a review to assess what systems and mechanisms would counteract the chronic underreporting of malpractice and how best to allow consumers to make complaints about the behaviour of consumer lease and payday lending providers.212
Remove the exclusion of leases for an indefinite period
What the Review recommended The Review recognised that some providers structured their business model in such a way as to avoid being regulated under the Consumer Credit Act. To that end the Review recommended that the Government amend the Act to regulate indefinite term leases.213
What the Bill does Items 1-3 in Schedule 5 to the Bill amend clause 171 of the National Credit Code so that the existing exclusion of leases for an indefinite period is omitted.
Caps on fees and charges
What the Review recommended Recommendations 11-14 of the Review relate to the cost of consumer leases. In particular, recommendation 11 included the following:
⢠there should be a cap on the total amount of the payments to be made under a consumer lease of household goods
⢠the cap should be a multiple of the Base Price of the goods, determined by adding four per cent of the Base Price for each whole month of the lease term to the amount of the Base Price
⢠for a lease with a term of greater than 48 months, the term should be deemed to be 48 months for the purposes of the calculation of the cap.214
211. ASIC, Submission to the Senate Standing Committee on Economics, Inquiry into credit and financial services targeted at Australians at risk of financial hardship, [Submission no. 21], November 2018, p. 8. 212. Senate Economics Reference Committee, Credit and hardship: report of the Senate inquiry into credit and financial products targeted at Australians at risk of financial hardship, Senate, Canberra, February 2019, recommendation 4, p. ix. 213. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit. recommendation 24, p. 93. 214. Ibid., op. cit., p. 45.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 37
What the Bill does Item 31 in Schedule 3 to the Bill inserts proposed clauses 175AA-175AC into the National Credit Code. In particular, proposed clause 175AA imposes a cap on fees and charges for consumer leases.
The permitted cap for a consumer lease is the total of the following amounts:
⢠the base price of the goods hired under the consumer lease
⢠the permitted delivery fee (if any) for the consumer lease
⢠the permitted installation fees (if any) for the consumer lease
⢠the amount worked out by multiplying the sum of those amounts by,
- in the case of a consumer lease for a fixed term—0.04 for each whole month of the consumer lease to a maximum of 48 months or - in the case of a consumer lease for an indefinite period—1.92.215 For the purposes of the proposed clause:
⢠the base price of the goods hired is worked out in accordance with the regulations216
⢠a permitted delivery fee is for the delivery of the hired goods to the lessee, at the lessee’s request—provided that the fee is limited to the reasonable cost of delivery of the goods217
⢠the permitted installation fees for the lease is an amount specified by ASIC, by legislative instrument, in respect of the installation of particular kinds of goods.218
Example—consumer lease for fixed term Brian Brown enters into a consumer lease for a computer with a base price of $2,000 for five years. Brian is charged a permitted delivery fee of $100. The maximum amount that Brian can be charged over the five-year lease is $6,132 comprising: ⢠the base price plus permitted delivery fee ($2,100) and ⢠monthly fees of $4,032 ($2,100 x 48 months x 0.04). The lessor calculates Brian’s required fortnightly repayment of $47.17 by dividing the maximum amount ($6,132) by the number of fortnights in the term of the lease (130 fortnights). This means that Brian pays $6,130.08 under the lease over five years, which is less than the permitted cap of $6,132. The Bill creates an overall cap for every consumer lease so that a lessor must not enter into, or vary, a consumer lease if the total amount that would be payable by the lessee in connection with the lease (including any applicable taxes and any add-on fees) is more than the permitted cap.219 In addition, the Bill creates a monthly cap if the consumer lease is for an indefinite period. In that case, the total amount payable in any month in connection with the lease (including any applicable taxes and any add-on fees) must not exceed 1/48 of the permitted cap for the lease.220
For the purposes of these caps an add-on fee is any fee or charge (whether an interest charge or not) for which all of the following conditions are met:
215. Consumer Credit Act, Schedule 1, proposed subclause 175AA(5). 216. Consumer Credit Act, Schedule 1, proposed subclause 175AA(6). 217. Consumer Credit Act, Schedule 1, proposed subclause 175AA(7). 218. Consumer Credit Act, Schedule 1, proposed subclause 175AA(8). 219. Consumer Credit Act, Schedule 1, proposed subclause 175AA(1). 220. Consumer Credit Act, Schedule 1, proposed subclause 175AA(2).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 38
⢠the fee or charge is one that the lessee is liable to pay under an agreement
⢠the fee or charge relates to a service or product that either facilitates or complements the lessee’s use of the goods hired or is marketed by the lessor as being complementary to the lessee’s use of those goods
⢠either a failure by the lessee to pay the fee or charge, or to acquire the service or product to which the fee applies will affect the lessee’s rights or obligations under the consumer lease or the lessor represents that such failure will or may affect the lessee’s rights or obligations under the consumer lease.221
Example—add on fees William White enters into a consumer lease for a computer with a base price of $3,000 for three years. Stephen is charged a delivery fee of $300. The maximum amount that William can be charged under the permitted cap over the three year lease is $8,052, comprising: ⢠the base price and permitted delivery fees ($3,300) and ⢠monthly fees of $4,752 ($3,300 x 36 months x 0.04) As a condition of the lease agreement, William is required to purchase a DVD which provides information about set up of his computer and how to install various programs. The price of the DVD is $250. This charge is an add-on fee. However, the lessor must not require William to pay more than the permitted cap of $8,052.
The Bill provides that in calculating the overall cap, or the monthly cap on a consumer lease for an indefinite period, certain amounts are not included in the total amount payable by the lessee. The amounts are:
⢠a fee or charge for the creation of the consumer lease which is charged only once and is not more than 20 per cent of the base price of the goods that are the subject of the lease
⢠a fee or charge that is payable in the event of a default in payment under the consumer lease and
⢠enforcement expenses—up to a specified limit.222
A person commits a criminal offence if the person engages in conduct which contravenes the requirements to comply with the overall cap, or the monthly cap on a consumer lease for an indefinite period.223 In that case, the maximum criminal penalty is 100 penalty units.
In addition, the lessee is not liable (and is taken never to have been liable) to pay any amount under the consumer lease that exceeds the base price of the goods hired. Any such amount that has been paid by the lessee may be recovered against the lessor as a debt.224
Stakeholder comments Many submitters to the Economics Committee expressed concern that the Bill does not fully respond to the Review recommendations.225 According to Legal Aid NSW:
221. Consumer Credit Act, Schedule 1, proposed subclause 175AA(3). 222. Consumer Credit Act, Schedule 1, proposed subclause 175AA(4). 223. Consumer Credit Act, Schedule 1, proposed clause 175AB. 224. Consumer Credit Act, Schedule 1, proposed clause 175AC. 225. For instance Good Shepherd Australia New Zealand, Submission to the Senate Standing Committee on Economics, Inquiry
into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 31], February 2021, p. 11; JW Rawson, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 14], 29 January 2021, p. 2; The Salvation Army, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 48], February 2021, p. 19.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 39
… the proposed cap on fees and charges for consumer leases is not sufficient. The … Bill would permit fees for delivery and installation to be added to the base price of the goods before the cap is calculated to determine the monthly amount charged, and for a 20 per cent establishment fee to be charged in addition to the capped amount. These additional fees add significantly to the cost of consumer leases …226
The joint report from the Consumer Action Law Centre echoes that view:
There are a number of concessions to industry evident in [section 175AA], particularly the significant increase in allowable fees and charges under the cap. Put simply, the departures from the SACC Review’s recommended consumer lease cost cap will tip the balance of leases to put more money in the pockets of lessors, to the detriment of financially vulnerable consumers.227
And further:
… by allowing lessors to charge 4% per month on top of delivery, and installation (which was not mentioned at all in the SACC Review), the Bill turns these services into an additional source of profit for lessors. Rather than just ensuring consumer leases are available to people in remote areas, this means they pay considerably more than they should for the service. For example, if a person is charged $200 for the delivery of a fridge on a 4 year lease, they could end up paying $584 total for that delivery across the life of the lease.
This change provides lessors in the industry a massive financial incentive to upsell expensive delivery and installation ‘services’. It also harms more vulnerable people who must rely on the delivery or installation services, for whatever reason. Considering the misleading explanations of fees that are common in the consumer lease industry already, there is a real risk that the true cost of accepting delivery and installation will not be explained at the point of sale, and people will sign up without understanding that they will be paying extra for delivery for the life of the loan.228
Consumer lease for household goods
What the Bill does The Bill inserts new definitions into both the Consumer Credit Act and the National Credit Code and rules which are specific to them. Relevant to consumer leases are the following:
⢠consumer lease for household goods means a consumer lease to which Part 11 of the National Credit Code applies where any of the goods hired under the lease are household goods, but does not include a consumer lease where the goods hired under the lease include:
- motor vehicles - vehicles that are not for use on a road and are intended primarily for use by persons with restricted mobility or - goods that are ordinarily used for accommodation (either permanently or temporarily).229 ⢠household goods means goods of a kind ordinarily acquired for domestic or household
purposes.230
The new rules which apply to a consumer lease for household goods are as follows.
226. Legal Aid NSW, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 5], January 2021, p. 10. 227. Consumer Action Law Centre (Joint Report), Submission, op. cit., p. 29. 228. Ibid., p. 30. 229. Consumer Credit Act, amendment to subsection 5(1) inserted by item 1 of Schedule 3 to the Bill; Consumer Credit Act,
Schedule 1, amendment to subclause 204(1) inserted by item 35 of Schedule 3 to the Bill. 230. Consumer Credit Act, amendment to subsection 5(1) inserted by item 1 of Schedule 3 to the Bill; Consumer Credit Act, Schedule 1, amendment to subclause 204(1) inserted by item 35 of Schedule 3 to the Bill.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 40
First, credit assistance providers and lessors will be required to collect and consider a consumer’s account statements for the 90 days prior to providing credit assistance for a consumer lease or entering into a consumer lease for household goods.231
Second, lessors will be required to disclose to lessees the base price of the goods hired under the consumer lease for household goods and the difference between the total amount payable by the lessee in connection with the lease and the base price.232 The lessor may also have to disclose other information as required by the regulations.233
Third, lessors are prohibited from undertaking door-to-door selling of consumer leases for household goods.234 A breach of this prohibition is a criminal offence.
Fourth, the Bill requires licensees who are credit assistance providers to document in writing, their assessment or preliminary assessment that a consumer lease for household goods is not unsuitable for a consumer. This requirement is inserted by proposed section 147B in equivalent terms to those set out in proposed sections 124C and 133CE in relation to small amount credit contracts.235 Proposed section 156C is an equivalent requirement for a licensee who enters into, or is able to enter into, consumer leases for household goods.236
Fifth, credit assistance licensees must display and give information to consumers in accordance with the requirements determined by ASIC in a legislative instrument. This requirement is inserted by proposed section 147A and is equivalent to the requirements for a licensee in relation to small amount credit contracts. Item 7 in Schedule 3 to the Bill inserts proposed Division 5—special rules for consumer leases for household goods into Part 3-4 of Chapter 3 of the Consumer Credit Act. Within new Division 5, proposed section 156A imposes the same requirement on a licensee who enters into, or is able to enter into, consumer leases for household goods.
Protected earnings amount
What the Review recommended Recommendation 15 of the Review was:
⢠a protected earnings amount requirement be introduced for leases of household goods so that lessors cannot require consumers to pay more than 10 per cent of their net income in rental payments under consumer leases of household goods and
⢠the total amount of all rental payments (including under the proposed lease) cannot exceed 10 per cent of their net income in each payment period.237
What the Bill does New Division 5 within Part 3-4 of Chapter 3 of the Consumer Credit Act contains proposed section 156B which prohibits a licensee from entering into, or offering to enter into, a consumer lease for household goods if the amount payable under the lease would not meet the requirements prescribed by the Regulations. A failure to comply with this provision gives rise to a civil penalty of
231. Consumer Credit Act, proposed subsection 140(1A) inserted by item 3 in Schedule 3 to the Bill and proposed subsection 153(1A) inserted by item 6 in Schedule 3 to the Bill. 232. Consumer Credit Act, Schedule 1, proposed subclause 174(1A) inserted by item 30 in Schedule 3 to the Bill. 233. Consumer Credit Act, Schedule 1, proposed subclause 174(1A)(c) inserted by item 30 in Schedule 3 to the Bill. 234. Consumer Credit Act, Schedule 1, proposed clause 179VA(1A) inserted by item 34 in Schedule 3 to the Bill. 235. Consumer Credit Act, proposed section 147B is inserted by item 4 in Schedule 3 to the Bill. 236. Consumer Credit Act, proposed section 156C is inserted by item 7 in Schedule 3 to the Bill. 237. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 59.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 41
5,000 penalty units.238 In the alternative, a licensee who engages in conduct that contravenes the requirement commits a criminal offence, the penalty for which is 50 penalty units.239
The section also contains a loss of charges mechanism which operates where a licensee has entered into a consumer lease for household goods in contravention of the general rule set out above and a court has declared that the licensee has contravened the civil penalty provision or the licensee has been found guilty of the offence. In that case, the lessee is not liable (and is taken never to have been liable) to pay any amount under that consumer lease that exceeds the base price of the goods. The lessee is entitled to recover from the licensee an amount that he or she was not liable to pay as a debt.240
Key requirements Currently clause 111 of the National Credit Code lists those matters which are identified as key requirements in connection with credit contracts and continuing credit contracts. Clause 112 empowers a party to a credit contract, a guarantor or ASIC to apply to the court for an order that a credit provider pay a penalty or pay to the debtor or guarantor an amount by way of compensation for loss arising from the contravention of a key requirement.241
Once an application has been made clause 113 provides that the court must, by order, declare whether or not the credit provider has contravened a key requirement in connection with the credit contract or contracts concerned.
The Bill provides that the following provisions (all proposed in Schedule 3) are key requirements in connection with consumer leases:
⢠a consumer lease for household goods must contain the base price of the good hired and the difference between the base price and the total amount payable under the contract: subclause 174(1A) of the National Credit Code
⢠the total amount payable under a consumer lease must not be more than the permitted cap: subclause 175AA(1) of the National Credit Code
⢠the monthly amount payable in respect of a consumer lease for an indefinite period must not exceed 1/48 of the permitted cap: subclause 175AA(2) of the National Credit Code and
⢠a lessor must not canvas for consumer leases of household goods at a person’s home: clause 179VA of the National Credit Code.242
A contravention of those new requirements also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the National Credit Code. The maximum penalty that may be imposed for a contravention of a key requirement in relation to a consumer lease is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price. However, if the loss suffered by the lessee is greater than that amount, a greater penalty may be imposed.243
The Bill repeals and replaces subclauses 112(1) and (2) so that an application for an order may be made by a party to a credit contract or consumer lease, a guarantor in relation to a credit contract
238. Note that the maximum penalty is worked out under Consumer Credit Act, sections 167A and 167B which are discussed above in this Bills Digest. 239. Consumer Credit Act, proposed subsection 156B(2). 240. Consumer Credit Act, proposed paragraphs 156B(3)(c) and (d); Consumer Credit Act, Schedule 1, proposed subclause
175AA(6) defines the base price of the goods hired under a consumer lease as the amount worked out in accordance with the Regulations. 241. Consumer Credit Act, Schedule 1, clause 118 provides that the court may order a payment of compensation. 242. Consumer Credit Act, Schedule 1, proposed subclause 111(2A) inserted by item 9 in Schedule 3 to the Bill. 243. Consumer Credit Act, Schedule 1, proposed clause 114A inserted by item 19 in Schedule 3 to the Bill.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 42
or ASIC. In addition the Bill expressly prevents a debtor, lessee or guarantor from making an application for an order in respect of a contravention in connection with a contract or consumer lease if the contravention is or has been subject to an application for an order made by the credit provider, lessor or ASIC anywhere in Australia under the Code. 244
Items 11-18 in Schedule 3 to the Bill make consequential amendments to clause 113 of the National Credit Code so that penalties may be imposed for contravention of a key requirement by a credit provider or a lessor.
Stakeholder comments
Consumer lease providers The Consumer Household Equipment Rental Providers Association (CHERPA) supports the Bill and the amendments to the provisions relating to consumer leases stating that the amendments in Schedules 3 and 6 of the Bill:
… provide additional consumer protections for consumers of consumer leases, including vital controls such as the introduction of a protected earnings amount and a cap on costs, each of which … are to be set at levels tolerable for both consumers and industry members, thereby preserving the industry’s overall viability, and also preventing financial exclusion while avoiding excessive financial burden to consumers.245
CHERPA states, in relation to the cap on costs, that it:
… nevertheless needs to recognise the inherent risks taken by operators within the industry, especially in regard to general operational expenses plus loss of goods due to consumer defaults combined with a lack of genuine recovery power on the part of industry members.246
Aspire 42 Financing Pty Limited (Aspire 42), a consumer household goods leasing provider, has recommended the speedy passage of the Bill’s consumer leases amendments.247 In its submission to the Economics Committee, Aspire 42 argued against any reduction to the cap on fees contained in the Bill:
The Committee should consider the serious negative impacts on consumers, the industry, taxpayers, and the wider economy in recommending against any changes if such an amendment was to pass … While regulation via a 10% protected earnings cap may be appropriate to debt recovery and consumer decisions on debt … regulation over [consumer lease] decisions involves further and distinct considerations. It requires balancing consumer choice, ongoing utility of the goods provided and financial inclusion with consumer protection considerations.248
Consumer advocates The submission from the Stop the Debt Trap Alliance explains its concerns this way:
Two of the key recommendations from the Review were to introduce ‘protected earnings amount (PEA) caps’ for both payday loans and consumer leases. The PEA caps would ensure a person could not be required to commit more than 10% of their net income in total to repayments for payday loans at any time, with a separate 10% cap applying to consumer leases.
244. Consumer Credit Act, Schedule 1, proposed subclauses 112(1) and (2) inserted by item 10 in Schedule 3 to the Bill. 245. CHERPA, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 77], 2 February 2021, p. 2. 246. Ibid., p. 4. 247. Aspire 42, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit
Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 73], 3 February 2021, p. 2. 248. Ibid., p. 3.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 43
…
The Bill proposes to double the caps for people whose income is not predominantly from Centrelink, to 20% each for payday loans and leases. This would mean someone in employment could still have up to 40% of their net income taken by payday lenders and consumer lease providers, rendering it ineffective in preventing current harm.
Importantly, this would mean the legislation is ineffective at reducing the likelihood of debt spirals— vulnerable borrowers would be tempted back for further borrowing because the repayments on existing loans or leases leave them unable to afford repayments.249
Incidents of default
What the Bill does The Bill provides that the Regulations may prescribe a way of working out the limit on the amount that is able to be recovered in the event of default by a lessee. In that case, the lessor must not recover more than the relevant limit. A failure to comply with this requirement gives rise to a civil penalty of 5,000 penalty units.250
Schedule 4—key issues and provisions The amendments in Schedule 4 to the Bill prohibit schemes that are designed to avoid the application of the Consumer Credit Act in relation to small amount credit contracts and consumer leases.
Commencement The amendments in Schedule 4 to the Bill commence on the day after Royal Assent.
2016 statutory review The Review of the Small Amount Credit Contract Laws (the Review) identified some of the characteristics of avoidance practices as follows:
⢠artificiality or unnecessary complexity of the arrangements—for example, there are more parties to the arrangement than is reasonably necessary, noting that some avoidance practices rely on the use of third parties to charge additional fees or perform unnecessary services
⢠whether the entity has changed its practices in response to a change in the law—that is, the timing of the introduction creates an inference that it was a response to those changes, so that the entity can continue operating in substantially the same way rather than changing its practices to comply with the changes to the law
⢠business model avoidance—by which the provider promotes the products it offers on the basis that they provide the consumer with financial outcomes similar to those under a small amount credit contract or a consumer lease of household goods.251
The Review acknowledged that avoidance behaviour can affect both industry participants and consumers. Providers engaging in avoidance activity can obtain competitive advantages over their compliant industry competitors if they are able to provide their products more quickly by not
249. Stop the Debt Trap Alliance, Submission to the Senate Standing Committee on Economics, Inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, [Submission no. 55], 2 February 2021, p. 2.
250. Consumer Credit Act, Schedule 1, proposed clause 179GA inserted by item 33 in Schedule 3 to the Bill. 251. The Treasury, Review of the Small Amount Credit Contract Laws, op. cit., p. 100.
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 44
having to meet the responsible lending and other conduct obligations. Consumers may enter into arrangements that are unsuitable and that result in the consumer paying higher costs.252
What the Bill does Item 3 in Schedule 4 to the Bill inserts proposed Division 1A—Avoidance schemes (proposed sections 323A-323D) into Part 7-1 of the Consumer Credit Act.
Proposed section 323A prohibits a person from entering into a scheme, beginning to carry out a scheme or carrying out a scheme if the purpose or a purpose of that conduct is an avoidance purpose.
The Bill defines a scheme as:
⢠any agreement, arrangement, understanding, promise or undertaking, whether express or implied or
⢠any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.253
An avoidance purpose is each of the following:
⢠to prevent a contract from being a small amount credit contract or a consumer lease
⢠to cause a contract to cease to be a small amount credit contract or a consumer lease
⢠to avoid the application of a provision of the Consumer Credit Act to a small amount credit contract or a consumer lease
⢠to avoid the application of a provision of the Consumer Credit Act to a contract that has ceased to be a small amount credit contract or a consumer lease.
The prohibition is a civil penalty provision. The civil penalty is $5,000.254 In addition, a person commits an offence if the person is subject to the prohibition in proposed section 323A and the person engages in conduct which contravenes the requirement. In that case, the criminal penalty is 100 penalty units.255
In addition to the general prohibition on persons, the Bill sets out prohibitions in similar terms that link to the Commonwealth’s powers to make laws under the Constitution. These apply to:
⢠constitutional corporations (within the meaning of paragraph 51(xx) of the Constitution) which enter into a scheme, begin to carry out a scheme or carry out a scheme256
⢠any person who enters into a scheme, begins to carry out a scheme or carries out a scheme in the course of constitutional trade or commerce (within the meaning of paragraph 51(i) of the Constitution)257 and
⢠any person using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution) to enter into a scheme, begin to carry out a scheme, or carry out a scheme.258
Proposed section 323B of the Consumer Credit Act lists the matters to be considered in forming a conclusion that a scheme was for an avoidance purpose. These matters include:
252. Ibid., p. 96. 253. Consumer Credit Act, amendment to subsection 5(1), inserted by item 1 of Schedule 4 to the Bill. 254. Consumer Credit Act, proposed subsection 323A(1). 255. Consumer Credit Act, proposed subsection 323A(7). 256. Consumer Credit Act, proposed subsection 323A(3). 257. Consumer Credit Act, proposed subsection 323A(4). 258. Consumer Credit Act, proposed subsection 323A(5).
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National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 45
⢠whether the scheme was, is or would be:
- a means of providing a consumer with credit in a manner more complex or more costly than a small amount credit contract would have been - a means of providing a consumer with financial accommodation equivalent to providing the consumer credit in a manner more complex or more costly than a small amount credit
contract would have been - a means of enabling a consumer to have the use of goods in a manner more complex or more costly to the consumer than a consumer lease would have been ⢠whether representations about the scheme were similar to representations about small
amount credit contracts or consumer leases
⢠whether representations about the scheme were made to persons in a group similar to a group who had been given representations about small credit contracts and consumer leases.
Proposed section 323C of the Consumer Credit Act deems that it is reasonable to conclude that a person entered into or carried out a scheme for an avoidance purpose if:
⢠the scheme is of a kind prescribed by the regulations or
⢠the scheme is of a kind determined by ASIC by legislative instrument.
The presumption that a person has entered into a scheme for an avoidance purpose is rebuttable. However, the legal burden of proof is placed on the defendant who needs to prove, on the balance of probabilities, it would not be reasonable to conclude that there was a relevant avoidance purpose, having regard to the matters listed in proposed section 323B.259
Scrutiny of Bills Committee comments According to the Scrutiny of Bills Committee:
At common law, it is ordinarily the duty of the prosecution to prove all elements of an offence. This is an important aspect of the right to be presumed innocent until proven guilty. The inclusion of presumptions in relation to offences interferes with this common law right by placing a legal burden on the defendant to rebut the presumption. The committee expects any provision that places a legal burden of proof of the defendant to be fully justified in the explanatory materials. Additionally, the committee notes that the Guide to Framing Commonwealth Offences states that the inclusion of presumptions in relation to offences should be kept to a minimum.260
The Scrutiny of Bills Committee requested the Treasurer’s detailed advice on this issue, as well as justification for the necessity of allowing the prescription and determination of avoidance schemes in delegated legislation.261
Concluding comments The Bill provides that the responsible lending obligations will no longer apply to ADIs—despite the recommendation of the Banking Royal Commission that they should be retained. The effect of this measure is two-fold. On the one hand the ‘twin peaks’ model of regulation which has ASIC and APRA sharing the regulatory role is dismantled, leaving only the prudential regulator in charge of ADIs. On the other hand, consumers will no longer be able to complain to ASIC about particular conduct. Instead, their remedy will be through AFCA which does not have the same powers as ASIC currently does to take action against systemic misconduct.
259. Consumer Credit Act, proposed subsection 323C(2). 260. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, op. cit.,pp. 15. 261. Ibid., pp. 17-18.
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Many submitters to the Economics Committee in relation to the Bill were deeply concerned that the responsible lending obligations, which are perceived as providing wide-spread protections to consumers, would be removed.
The Bill also amends the regulation of small amount credit contracts and consumer leases. ASIC’s role in relation to these products will continue. Given that they are considered to create widespread harm to the most vulnerable in the community, this is appropriate.
However, many consumer advocacy groups, which see the damage wrought by spiralling debt, advanced the view that the amendments did not go far enough in that they represented, in some places, a watered down response to the recommendations of the Review of the Small Amount Credit Contract Laws.
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Annexure 1 The recommendations from Review of Small Amount Credit Contract laws and the relevant Government response are set out below.
Recommendation Government response
Recommendation 1—affordability Extend the protected earning amount regulation to cover SACCs provided to all consumers. Reduce the cap on the total amount of all SACC repayments from 20 per cent of the consumer’s gross income to 10 percent of the consumer’s net income. Subject to these changes being accepted, retain the existing 20 per cent establishment fee and four per cent monthly fee maximums. Recommendation 2—suitability Remove the rebuttable presumption that a loan is presumed to be unsuitable if either the consumer is in default under another SACC, or in the 90 day period before the assessment, the consumer has had two or more other SACCS. This recommendation is made on the condition that it is implemented together with Recommendation 1.
The Government accepts these recommendations in full. The Government supports the panel’s direction to promote financial inclusion by ensuring that consumers do not enter into unaffordable SACCs whose repayment absorbs too large a proportion of their net income. The Government notes that these recommendations directly target the harm associated with repeat borrowing, rather than repeat borrowing per se, by reducing the likelihood of a debt spiral occurring, while still enabling consumers to access further SACCs if the repayments are affordable. The Government notes that it is unusual to have such prescriptive requirements regarding the amount that a consumer can devote to a particular form of finance; however, the panel’s report highlighted the vulnerable customer base of SACCs. The panel noted that the principles based responsible lending obligations appear insufficient alone to prevent observed harm; a more strict affordability test is warranted. The Government accepts this proposal. To assist SACC providers in complying with this obligation, the Government will provide a safe harbour allowing providers to rely on a consumer’s bank statements when determining a consumer’s average income for the purposes of the protected earnings amount, unless there is evidence suggesting that it is inappropriate to do so. The Government supports removing the current rebuttable presumption that a SACC is considered unsuitable if a consumer has had two or more SACCs in 90 days.
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Recommendation Government response
Recommendation 3—short term credit contracts Maintain the existing ban on credit contracts with terms less than 15 days.
The Government accepts this recommendation in full. Currently there is an outright ban on a provider offering a credit contract which has a term of 15 days or less irrespective of whether the credit contract is secured. The Government supports the panel’s recommendation to maintain this ban. Loans of less than 15 days consume a disproportionate amount of a consumer’s income due to large repayment amounts in a short period of time. These loans are more likely to trap consumers in a debt spiral than loans with longer durations.
Recommendation 4—direct debit fees Direct debit fees should be incorporated in the existing SACC fee. The Government notes this recommendation. This recommendation is the responsibility of ASIC, as the independent
regulator. In response to the recommendation, ASIC announced on 4 November 2016 that it would remove ASIC Class Order [CO 13/818] Certain small amount credit contracts. The class order allowed SACC providers to charge a separate fee for direct debit processing. The removal ensures that consumers are not charged direct debit fees when taking out a SACC. The change will apply to any SACC provided from 1 February 2017. Loans that commence before 1 February 2017 will continue to operate under the existing rules and third-party direct debits will be able to be charged on those loans.
Recommendation 5—equal repayments and sanction In order to meet the definition of a SACC, the credit contract must have equal repayments over the life of the loan. Where a contract does not meet this requirement the credit provider cannot charge more than an annual percent rate (APR) of 48 per cent.
The Government partially accepts this recommendation. The Government supports the panel’s recommendation that SACCs should have equal repayments over the life of the loan as it will stop SACC providers artificially extending the term of the loan. ASIC will have the power to allow limited exceptions where appropriate. However, the Government does not support the panel’s recommendation that, where a contract does not meet the equal repayment requirement, a credit provider cannot charge more than an annual percentage rate (APR) of 48 per cent. This would effectively create a specific penalty regime for this requirement, and the
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Recommendation Government response
Government would prefer a consistent approach to penalties across the SACC regime.
Recommendation 6—SACC database A national database of SACCs should not be introduced. Rather, the major banks should be encouraged to participate in the comprehensive credit reporting regime at the earliest date.
The Government accepts this recommendation in full. This does not preclude the industry from developing its own database.
Recommendation 7—early repayment No four per cent monthly fee can be charged for a month after the SACC is discharged by its early repayment. If a consumer repays a SACC early, the credit provider cannot charge the monthly fee in respect of any outstanding months of the original term of the SACC after the consumer has repaid the outstanding balance and those amounts should be deducted from the outstanding balance at the time it is paid.
The Government accepts this recommendation in full. This will allow consumers, if their loan is discharged early, to only pay fees for the new shorter length of the loan.
Recommendation 8—unsolicited offers SACC providers should be prevented from making unsolicited SACC offers to current or previous consumers.
The Government accepts this recommendation in full. The Government agrees with the principle that consumers should only apply for a SACC when they pro-actively choose to do so, rather than being prompted by a SACC provider.
Recommendation 9—referrals to other SACC providers SACC providers should not receive a payment or any other benefit for a referral made to another SACC provider.
The Government does not accept this recommendation. The panel considered that it would be inappropriate for SACC providers to refer a customer to another SACC provider after determining that the customer is unsuitable to receive a SACC. During the consultations undertaken following receipt of the final report, it became apparent that there are legitimate instances where it may be appropriate for a referral to occur. For example, some SACC providers only target specific geographical locations. If such a SACC provider receives an application from a consumer from another location, they may wish to refer that consumer to another SACC provider. In addition, paying for referrals may be less expensive than other means of attracting customers, who are in any case subject to a cap
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Recommendation Government response
on costs (a 20 per cent establishment fee and a 4 per cent monthly fee).
Recommendation 10—default fees SACC providers should only be permitted to charge a default fee that represents their actual costs arising from a consumer defaulting on a SACC up to a maximum of $10 per week. The existing limitation of the amount recoverable in the event of default to twice the adjusted credit amount should be retained.
The Government does not accept this recommendation. The Government will maintain the existing default cap of twice the adjusted credit amount. Evidence provided by the SACC industry suggests that the $10 per week default fee does not cover the costs of managing a defaulting borrower. The Government considers the existing cap provides sufficient restrictions to prevent SACC providers from over-charging a consumer.
Recommendation 11—cap on cost to consumers A cap on the total amount of the payments to be made under the consumer lease of household goods should be introduced. The cap should be a multiple of the base price of the goods, determined by adding four per cent of the base price for each whole month of the lease term to the amount of the base price. For a lease with a term of greater than 48 months, the term should be deemed to be 48 months for the purposes of the calculation of the cap.
The Government accepts this recommendation in full. The Government supports this recommendation. The SACC review identified the high cost of consumer leases, particularly to vulnerable consumers. This will provide, for example, a cap of 1.48 times of the Base Price of the goods for a 12 month lease and a multiple of 1.96 times the Base Price of the goods for a two year lease. Leases of four years or more would be subject to a cap of 2.92 times the Base Price of the goods. For example, a two year lease for a TV valued at $500 would be limited to total payments of $980. This recommendation will make the regulation of consumer leases more consistent with that of credit contracts, which are subject to a 48 per cent APR cap. However, in recognition of the different costs facing consumer lease providers, the Government supports a higher cap on costs for consumer leases.
Recommendation 12—base price of goods The base price of new goods should be the recommended retail price, or the price agreed in store, where this price is below the recommended retail price.
The Government accepts this recommendation with an amendment. The Government supports this recommendation for new goods. To provide a clear understandable process for applying the cap to second hand goods, second hand goods will be subject to the same
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Recommendation Government response
Further work should be done to define the Base Price for second hand goods. cap as new goods, with a 10 per cent discount to the original Base Price per annum, up to a maximum of 30 per cent.
For example, a $500 TV re-leased after two years would have a new base price of $400 for the purposes of calculating the cap.
Recommendation 13—add-on services and features The cost (if any) of add-on services and features, apart from delivery, should be included in the cap. A separate one-off delivery fee (limited to the reasonable costs of delivery of the leased goods) should be permitted. That fee should be limited to the reasonable costs of delivery of the leased good which appropriately account for any cost savings if there is a bulk delivery of goods to an area.
The Government accepts this recommendation with an amendment. The Government accepts that certain leased goods may necessarily have significant installation costs, and is therefore allowing installation of some items to be excluded from the cap. The Government will provide ASIC with the ability to exempt the installation costs of certain leased goods from inclusion in the cap on costs where ASIC considers it appropriate to do so.
Recommendation 14—consumer leases to which the cap applies The cap should apply to all leases of household goods including electronic goods. Further consultations should take place on whether the cap should apply to consumer leases of motor vehicles.
The Government accepts this recommendation with an amendment. Following further consultation after the release of the final report, the Government will apply the cap on costs to all consumer leases. The Government notes that novated leases and small business leases are not covered by the Consumer Credit Act, and will not be affected by any changes.
Recommendation 15—affordability A protected earnings amount requirement be introduced for leases of household goods, whereby lessors cannot require consumers to pay more than 10 per cent of their net income in rental payments under consumer leases of household goods, so that the total amount of all rental payments (including under the proposed lease ) cannot exceed 10 per cent of their net income in each payment period.
The Government accepts this recommendation in full. The Government notes that it is unusual to have such prescriptive requirements regarding the amount that a consumer can devote to a particular form of finance; however, the panel’s report highlighted the vulnerable customer base of consumer leases. The panel noted that the principles based responsible lending obligations appear insufficient alone to prevent observed harm; a more strict affordability test is warranted. The Government accepts this proposal. Capping the amount of income that can be devoted to lease payments will ensure that consumers do not get locked into long term lease contracts they cannot afford, while still enabling consumers to lease a wide range of goods.
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Recommendation Government response
To assist lessors in complying with this obligation, the Government will provide a safe harbour allowing lessors to rely on a consumer’s bank statements when determining a consumer’s average income for the purposes of the protected earnings amount, unless there is evidence suggesting that it is inappropriate to do so.
Recommendation 16—Centrepay implementation The Department of Human Services consider making the caps in recommendations 11 and 15 mandatory as soon as practicable for lessors who utilise or seek to utilise the Centrepay system.
The Government supports this recommendation in-principle. The Government supports this recommendation in-principle. Action in response to the recommendation will take account of the outcome of litigation between The Aboriginal Community Benefit Fund Pty Ltd and the Chief Executive Centrelink.
Recommendation 17—early termination fees The maximum amount that a lessor can charge on termination of a consumer lease should be imposed by way of a formula or principles that provide an appropriate and reasonable estimate of the lessors’ losses from early repayment.
The Government accepts this recommendation in full. The Government supports this recommendation in-principle and will undertake further consultation to finalise the formula or principles.
Recommendation 18—ban on the unsolicited marketing of consumer leases There should be a prohibition on the unsolicited selling of consumer leases of household goods, addressing current unfair practices used to market these goods.
The Government partially accepts this recommendation. The Government will prohibit door to door selling of consumer leases. The final report highlights the concerns that sales through unsolicited approaches are unfair and have the capacity to cause financial harm irrespective of the target market. However, difficulties with distinguishing between unsolicited selling and marketing mean that the Government will only prohibit door to door sales.
Recommendation 19—bank statements Retain the obligation for SACC providers to obtain and consider 90 days of bank statements before providing a SACC and introduce an equivalent obligation for lessors of household goods. Introduce a prohibition on using information obtained from bank statements for purposes other than compliance with responsible lending obligations.
The Government accepts this recommendation in full. The Government supports retaining the requirement for SACC providers to collect 90 days of bank statements before providing a SACC as well as introducing a requirement that lessors must also collect 90 days of bank statements. Evidence from the final report shows that lessors are not making sufficient inquiries when providing a lease and may be in a position to make a more accurate assessment of consumers’ circ*mstances if
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Recommendation Government response
ASIC should continue its discussions with software providers, banking institutions and SACC providers with a view to ensuring that ePayment Code protections are retained where consumers provide their bank account log-in details in order for a SACC provider to comply with their obligation to obtain 90 days of bank statements, for responsible lending purposes.
they collected at least 90 days of bank statements, in addition to their responsible lending obligations. The Government also supports introducing a prohibition on using information obtained from bank statements for purposes other than compliance with responsible lending obligations.
Recommendation 20—documenting suitability assessments Introduce a requirement that SACC providers and lessors under a consumer lease are required at the time the assessment is made to document in writing their assessment that a proposed contract or lease is suitable.
The Government accepts this recommendation in full. This recommendation strengthens the responsible lending obligations
Recommendation 21—warning statements Introduce a requirement for lessors under consumer leases of household goods to provide consumers with a warning statement, designed to assist consumers to make better decisions as to whether to enter into a consumer lease, including by informing consumers of the availability of alternatives to these leases. In relation to both the proposed warning statement for consumer leases of household goods and the current warning statement in respect of SACCs, provide ASIC with the power to modify the requirements for the statement (including the content and when the warning statement has to be provided) to maximise the impact on consumers.
The Government accepts this recommendation in full. The Government supports lessors being required to provide consumers with a warning statement to assist consumers in making more informed decisions. The Government considers that giving ASIC the flexibility to modify the requirements for the statement will likely result in a more effective warning over time.
Recommendation 22—disclosure Introduce a requirement that SACC providers and lessors under a consumer lease of household goods be required to disclose the cost of their products as an APR. Introduce a requirement that lessors under a consumer lease of household goods be required to disclose the Base Price of the goods being leased, and the difference between the Base Price and the total payments under the lease.
The Government partially accepts this recommendation. The Government supports disclosing the base price of a lease and the difference between the base price and the total cost of a consumer lease. The Government does not consider it appropriate to require disclosure of an APR for consumer leases as in order to calculate an APR it is necessary to treat the lease as a sale by instalment and
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Recommendation Government response
assume that the consumer owns the good at the end of the lease. This is not the case. In addition, the Government does not consider it appropriate to require disclosure of an APR for SACCs. While the APR does accurately reflect their high cost nature, this is partly a reflection of the short term nature of SACCs.
Recommendation 23—penalties Encourage a rigorous approach to strict compliance by extending the application of the existing civil penalty regime in Part 6 of the National Credit Code to consumer leases of household goods and to SACCs, and, in relation to contraventions of certain specific obligations by SACC providers and lessors, provide for automatic loss of the right to their charges under the contract.
The Government accepts this recommendation in full. The Government supports this recommendation as it will encourage SACC providers and lessors to comply with the Consumer Credit Act.
Recommendation 24—avoidance The Government should amend the Consumer Credit Act to regulate indefinite term leases, address avoidance through entities using business models that are not regulated by the Consumer Credit Act, and address conduct by licensees adopting practices to avoid the restriction on the maximum amount that can be changed under a consumer lease of household goods or a SACC, or any of the conduct obligations that only apply to a consumer lease of household goods or a SACC.
The Government accepts this recommendation in full. The Government supports regulating indefinite term leases. As these products are currently exempted from the consumer protections in the Consumer Credit Act, providers are not required to hold an Australian Credit Licence or meet responsible lending obligations. This has resulted in opportunities for regulatory arbitrage and has been relied upon by fringe providers of short-term and indefinite leases to avoid regulation, including where the consumer may be disadvantaged by the use of an unregulated lease relative to a consumer lease. The introduction of an anti-avoidance provision will assist in avoiding a drift to non-compliance where providers who are complying with the Consumer Credit Act are losing business to those who are not complying and are, therefore, under financial pressure to lower their own standards. It will also minimise consumer detriment resulting from businesses which are avoiding compliance with cost caps and additional responsible lending and conduct requirements.
Source: The Treasury, Review of the Small Amount Credit Contract Laws, final report, Treasury, Canberra, March 2016.and K O’Dwyer (Minister for Revenue and Financial Services), Government response to the final report of the review of the small amount credit contract laws, media release, 28 November 2016.
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