This article by me was first published in Retail Banking Review.

The new Minister for Financial Services , Superannuation and Corporate Law, Chris Bowen MP, introduced the 3 Bills in the consumer credit reform package into Parliament on 25th June 2009. Subject to the agreement of the States and Commonwealth Parliament the new laws will start on 1 November 2009 with licensing to commence by 1 January 2010.

The core Bill is the National Consumer Credit Protection Bill 2009 which contains the new national consumer credit code,responsible lending conduct provisions (which require lenders to make an assessment of the suitability of the loan for the borrower as well as the borrower’s capacity to repay the credit being offered), licensing of credit provider rules and greater enforcement powers for ASIC to police the new regime.

The Bill also requires mandatory membership of an external dispute resolution (EDR) body by all providers of consumer credit and credit-related brokering services and advice.

The scope of credit products covered by the Credit Code will be extended to regulate the provision of consumer mortgages over residential investment properties.

ASIC will become the national regulator for consumer credit and finance broking, taking over from the states and territories. This means that home loans, personal loans, credit cards, overdrafts and line of credit accounts, among other products and services, will be regulated under Commonwealth legislation and administered by ASIC.

Credit Licensing

The key elements of the new licensing regime are that:

• it requires persons who engage in credit activities to, initially, be registered with ASIC, and to subsequently hold an Australian Credit License;
• it imposes entry standards for registration and licensing, and enables ASIC to refuse an application where the person does not meet those standards;
• it requires registered persons and licensees to meet ongoing standards of conduct while they engage in credit activities; and
• it provides ASIC the power to suspend or cancel a licence or registration, or to ban an individual from engaging in credit activities.
• Existing lenders and credit-service providers (such as brokers) will be required to register with ASIC between 1 November 2009 and 31 December 2009, and will have to apply for a licence by 30 June 2010 in order to continue to engage in credit activities.
• ASIC expects that thousands of currently unregulated credit service providers will be caught by the new licensing provisions.
• The definition of “credit activity” is very wide. It could apply to car dealers, retailers providing credit and even internet peer to peer loan facilitators if they are conducting a business.
• Intermediaries providing a credit service would need to be licensed.

Responsible lending conduct

As a condition of being granted an Australian Credit Licence a credit provider or credit service provider must comply with conduct obligations, including responsible lending conduct requirements.

If a loan is considered to be unsuitable for a loan applicant and if the borrower does not have the capacity to repay the loan, they will not be provided with the loan.

The key obligation on licensees is to ensure they do not provide a credit contract or lease to a consumer or suggest or assist a consumer to enter into a credit contract or lease that is unsuitable for them. This obligation requires licensees to assess that the credit contract or lease is not unsuitable for the consumer‘s requirements and that the consumer has the capacity to meet the financial obligations under the credit contract or lease.

The responsible lending conduct obligations will commence on 1 January 2011 to provide industry time to put in place the systems, arrangements and training needed to comply with these obligations.

Credit Code changes

The application of the Code has been extended to residential investment property loans.

The Bill also introduces a number of new concepts and procedures into the consumer credit regime including the following:

• the “capacity to pay” test for credit assessment will be expanded by a test of whether the credit contract will be unsuitable for the borrower before entering the contract or increasing a loan;
• “unsuitability” means if it will be likely, at the time the loan is made, the borrower could not comply (and repay) without hardship or the credit doesn’t meet the borrower’s objectives;
• the Bill specifies what is reasonable for a credit provider to do in making the unsuitability assessment ;
• the credit provider must give the borrower a copy of the assessment if requested within two business days if requested any time up to 12 months after the contract expires. There is no obligation to provide a copy of the assessment if the credit contract is not entered into or the credit limit is not increased;
• credit providers must give a person a credit guide , as soon as practicable after it becomes apparent that the credit provider is likely to enter a credit contract with a person who will be the borrower under the contract;
• the credit provider must give written notice of the outcome of an application for a hardship change within 21 days after receiving the application. If the application is refused, the notice must state the credit provider’s EDR and the applicant’s rights under that scheme;
• The first time a default occurs in payment pursuant to a direct debit authority, the credit provider must give a notice in the prescribed form to the borrower and any guarantor within 10 business days of the default occurring;
• there are new default notice requirements before a credit provider can enforce a credit contract or a mortgage against a defaulting debtor or mortgagor.

The second phase of reform will consider a review of unsolicited credit card limit extension offers and the possible regulation of reverse mortgages.