On 3 July the Commonwealth Government reached agreement with the States and Territories at the Council of Australian Governments (COAG) meeting in Sydney, to assume responsibility for regulation of all consumer credit. The decision is noted here.
What is still unknown is whether the existing Consumer Credit Code will be adopted "as is" by the Commonwealth or whether new laws will be drafted.
Before the COAG decision was known I wrote a background article for the Retail Banking Review (here).
The full article is reproduced below.
After 20 years of indecision by state and territory governments, the Commonwealth Government’s drive for regulatory reform combined with concerns about predatory lending and fringe operators is about to force the consumer credit regulation pendulum to swing to the extreme regulation mode. The days of “negative” licensing (whereby any one can lend until they are disqualified) are nearly over.
The Commonwealth Government’s Green Paper on Financial Services and Credit Reform outlines options for the future regulation of mortgages, mortgage brokers, margin lending, non-bank lending and trustee companies, debentures and property spruikers as well as the regulation of other credit products, such as credit cards and personal loans.
The policy rationale for this approach is to provide a consistent national regime in areas that are national or international, where there are conflicts or gaps in the existing regulatory framework and where there is evidence that significant numbers of consumers are suffering losses and other detriment because of the failings in the regulatory regime.
The Commonwealth proposes to assume responsibility for mortgages (ie home loan mortgages) by treating mortgage advice, mortgage brokers and non-deposit taking institutions involved in home loan mortgages.
If new licensing, conduct and disclosure requirements are adopted lenders and brokers will need to change their documents, systems and procedures to provide more information to consumers and provide a dispute resolution procedure and compensation schemes.
Mortgage brokers, who are only currently required to be licensed in Western Australia, will need to be licensed nationally.
ASIC would become the new regulator for home mortgages. But it is not clear whether ASIC would become an additional regulator or take over regulation entirely from the state and territory governments. Nor is it clear whether ASIC would issue special credit provider licences or require credit providers to take out an Australian financial services licence for their credit products.
The Green Paper also discusses the option of transferring responsibility for other forms of consumer credit (eg credit cards, car loans, personal loans), as well as mortgages, to the Commonwealth as recommended recently by the Productivity Commission.
The Green Paper shows why developing a cohesive framework has been so difficult to date. The table shows a patchwork of credit regulation which has struggled with coverage of businesses which do not themselves accept deposits or provide credit.
Regulation of credit providers would involve three phases: licensing of credit providers, the setting of minimum standards of disclosure of information and rules for the conduct of credit providers. Failure to observe these rules would result in fines and/or disqualification.
Reports and surveys by the Uniform Consumer Credit Code Management Committee (UCCMCC) over the last 10 years have failed to clearly demonstrate the benefits to consumers of disclosure tools such as mandatory comparison rates and highly regulated contract disclosure tables.
Some schemes or products are just unlawful: schemes to defraud people which are obvious crimes or products which are inherently unsafe should of course be prevented.
But in daily life consumers demand choice and are willing to exchange risk for reward. Can you regulate to protect people from themselves?
The arguments that credit providers previously put up unsuccessfully will again be raised by fringe operators:
1. the cost of regulation will be passed on to those who can least afford it and who the regulation is meant to protect (namely consumers).
2. disclosure will only make credit documents longer, more complex and difficult to understand.
3. more regulation will stifle product innovation
4. more regulation will benefit existing providers and reduce competition.
The Government is unlikely to accept these arguments.
But the Green Paper shows an understanding of constitutional difficulties and local differences.
Although the Australian Constitution gives some financial services regulatory powers to the commonwealth, in other areas the commonwealth and the states must act cooperatively to achieve consistent national regulation. As a result, the regulation of financial services in Australia is sometimes by function and sometimes by type of organisation; sometimes it is national and sometimes state-based.
For example:
• Financial products and services, deposit-taking, payment facilities, banking and insurance are commonwealth regulated but regulation of credit is a state-based power. Commonwealth regulated financial service providers require an Australian Financial Services Licence issued under the Corporations Act 2001 (Cth).
• Under the Banking Act 1959 (Cth) only a body corporate that is authorised can carry on a banking business in Australia. A body corporate that is granted an authority to carry on a banking business in Australia is referred to as an authorised deposit-taking institution, or ADI. Only certain ADIs can call themselves "banks", "credit unions" or "building societies".
• The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) applies to a wide range of financial services providers, the gambling industry and others.
• Consumer credit regulation may vary from state to state.
• Land title and personal property security systems currently vary from state to state.
Submissions on the Green Paper options closed on 1 July 2008.
