Understanding the finer details of the new credit legislation

Kathryn Wardrobe outlines some of the finer details of the new credit legislation which might have slipped through the cracks.

National Consumer Credit Legislation has been upon us for some time, and by now Australian Credit Licence (ACL) holders and representatives should be well versed in their key compliance and responsible lending obligations. 

However, as is the case with any new reforms, the credit legislation has been evolving since its inception and is set to continue to do so in 2013. 

Recent changes to the credit legislation have been well documented, so much of what follows will not be all that new to many readers.

However, in practice we are seeing that some of the finer details of these changes have slipped through the cracks. 

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So, here’s what you might have missed.

Credit disclosure documents

As we all know, the commencement of the requirement to provide credit disclosure documents for credit assistance providers (being the credit guide, quote for providing credit assistance credit contract or lease disclosure proposal document and preliminary assessment), was postponed three times to its eventual start date of 2 October, 2011.

Regulations released during the second half of 2011set out further requirements as to the form and content of the credit disclosure documents. Some important changes are:

• The credit guide of a credit assistance provider must now state if a commission is payable by the licensee to third parties for the introduction of credit business, and include a statement that the consumer may, on request, obtain a reasonable estimate of such commission and how it is worked out.

What you may have missed: if the licensee pays commissions to third parties, the credit guide must also include information about the classes of persons to whom such commissions are payable. Simply stating ‘third parties’ will not suffice.

• Credit disclosure documents can be combined where appropriate, provided that the content requirements of each disclosure document are still being met.

  Given the timing requirements for provision of these documents, this predominantly saw credit guides and quotes being combined, and credit or lease disclosure proposal documents and preliminary assessments being combined. 

  Previously, the Australian Securities and Investments Commission (ASIC) had said that dual credit and financial services licensees could combine their disclosure documents where appropriate.

  This, together with the Regulations, saw many dual licensees combining their Financial Services Guide (FSG) with their Credit Guide/Quote, and their Statement of Advice (SoA) with their credit proposal documents/preliminary assessment. 

What you may have missed: if you are a dual credit and financial services licensee combining disclosure documents, ensure that the different terminology of the regimes is not being confused.

We commonly see terms such as ‘credit advice’ and ‘credit product’ being used in combined documents for what should be ‘credit assistance’ and ‘credit contract’.

• Credit disclosure documents can be provided to consumers electronically. More specifically, the regulations set out that the credit disclosure documents can either be sent to a consumer by electronic communication, or made available to the consumer on the licensee’s information system (ie, website). This saw many licensees move to providing the credit disclosure documents solely by email.

What you may have missed: credit disclosure documents can only be provided to a consumer electronically if the consumer consents. Before the consumer can consent, they must be told that:

• Paper documents may no longer be given;
• Electronic communications must be regularly checked; and
• Consent may be withdrawn at any time. 

Have you properly obtained the consumer’s consent?

• The requirement for licensees to display their ACL number on required documents commenced on 1 April 2012. The required documents are not just the credit disclosure documents, but also advertisements that relate to the provision of regulated credit (see below for more on advertising).

What you may have missed: ASIC clarified that when the licensee’s ACL number is to be displayed, it must be displayed as ‘Australian Credit Licence number 12345’, not ‘ACL 12345’.

However, if a licence number is referred to in a document more than once, it will be sufficient for the full description of the licence to be used once, and the abbreviated form to then be used in the remainder of that document.

• The extent of information about fees and charges required in the quote for providing credit assistance, and the manner in which such information is to be included, was expanded. The Act already states that the quote must include the maximum amount of fees and charges payable by the consumer to the licensee and what the amount relates to, including:
• The licensee’s fees for providing credit assistance;
• Charges that will be incurred by the licensee for matters associated with providing credit assistance; and
• Fees and charges that will be payable by the licensee to another person. 

The Regulations add that these fees and charges must be described as follows:

• Identify the fee or charge as payable to the licensee for the licensee’s services, or for payment to another person on the consumer’s behalf; and
• Include a clear explanation of the type of fee or charge; and
• If the fee or charge is not a fixed amount – explain the method used for working out the amount of the fee or charge; and
• State how frequently the fee or charge is to be paid; and
• Describe the circumstances when the fee or charge will or will not be payable.

Further, the maximum amount of each fee or each charge, if known, must be expressed in dollars or, if unknown, in one of the alternative ways set out in the regulations. 

What you may have missed: any of the above! Use this list as a checklist to ensure that your quote is compliant. Also, the regulations state that the document must include a statement that clearly identifies the amounts as a quote. 

• The regulations clarify that a quote is not required if the licensee does not impose fees or charges on consumers for credit assistance and the licensee’s credit guide includes a statement to that effect.

What you may have missed: the legislation does not require credit representatives to provide a separate quote to that of the licensee. However, credit representatives are required to provide their own credit guide and the licensee’s credit guide.

Advertising credit products and services

In June 2012, ASIC released its Consultation Paper CP 178 Advertising credit products and services (CP178). In February 2012, ASIC released Regulatory Guide 234 Advertising Financial Products and Advice Services (RG234).

CP178 proposes to update RG234 to give additional guidance on specific issues relating to advertising of credit contracts and credit services. 

CP178 proposes the following additional guidance which will be relevant for credit assistance providers:

• Restricting the use of certain terminology: CP178 states that terms such as ‘independent’, ‘impartial’ and ‘unbiased’ may create a misleading impression about the relationship between a credit service provider and third party.

  Although the use of these terms is not prohibited by the credit legislation, care should be taken in using these terms where a credit service provider receives a commission, or has a conflict of interest.

What you may have missed: the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 includes a ban on credit assistance providers using these terms.

• Nature and scope of credit assistance: RG234 states that advertisements should not create an unrealistic expectation about what the service can achieve.

  CP178 proposes to extend this general principle to credit assistance specifically by stating that credit assistance providers’ advertisements should be clear about the scope of the service that will be provided to the consumer. 

What you may have missed: CP178 states that a credit assistance provider should not promote that they are a ‘broker’ if they are only affiliated with one lender. 

The consultation period ends on 6 August 2012, and an updated RG234 is expected to be released in October 2012. 

What you may have missed: ASIC’s current RG234 is for promoters of financial products and financial advice services.

The reference to financial products in RG234 means financial products as defined in the Australian Securities and Investments Commission Act (ASIC Act).

A financial product under the ASIC Act is defined as including a credit facility, being the provision of credit which is not limited to consumer credit.

Therefore, even if you only provide or arrange commercial or investment credit, you should be following the existing guidance in RG234. 

Training requirements

In December 2011, ASIC issued an updated Regulatory Guide RG 206: Competence and Training (RG206) which detailed ASIC’s revised policy on training requirements for representatives who provide credit assistance in relation to a loan secured by real property.

Prior to December 2011, this was referred to as mortgage broking assistance. 

The updated RG 206 changed this to ‘home loan credit assistance’ and distinguishes between:

• Independent home loan credit assistance: home loan credit assistance where the licensee is not the credit provider; and
• Other home loan credit assistance: home loan credit assistance in relation to credit products provided by the licensee.

The requirements for those who provide independent home loan credit assistance remain unchanged (Cert IV Finance/Mortgage Broking) in addition to 20 hours of continuing professional development (CPD). 

For those who provide other home loan credit assistance, there is now no minimum training requirement. Instead, the licensee must be satisfied that the representative:

• Is able to deal with consumers appropriately;
• Has adequate understanding of the range of home loan products and their characteristics; and
• Understands the economic environment impacting home loans.

What you may have missed: ASIC’s updated RG206 also extended ASIC’s view of what can be counted as CPD. ASIC states that: ‘Generally, we do not regard private study as adequate for the purposes of meeting the CPD requirements unless it involves audio or visual material specifically designed for this purpose’.

2013: Future developments

The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 was passed by the House of Representatives in June 2012. 

The bill makes some significant changes to the National Consumer Credit Protection Act. The following are relevant to credit assistance providers:

• First, the bill defines reverse mortgages and introduces additional responsible lending requirements for credit assistance providers who provide credit assistance in relation to a reverse mortgage credit contract.

  These include showing to the consumer projections as to the value of the land which is the subject of the reverse mortgage credit contract, and giving the consumer a reverse mortgage information statement. 

• Second, the bill introduces the concept of a small-amount credit contract.

  According to the bill, a small-amount credit contract is not provided by an authorised deposit-taking institution (ADI), is not a continuing credit contract, is for two years or less and for an amount of $2000 or less. Credit assistance providers:

  • Must not provide credit assistance in relation to a small-amount credit contract, or enter into a small-amount credit contract, if the licensee knows, or should know, that the consumer is a debtor under another small-amount credit contract; and
  • Must not provide assistance to increase the limit of a small-amount credit contract.
  • The bill also introduces remedies for unfairness and dishonest conduct by credit assistance providers.

    The bill introduces remedies for unfairness and dishonest conduct by credit assistance providers.
     

    This is intended to make credit assistance providers, as opposed to the credit provider, more accountable.

    The bill does not define unfair and dishonest conduct, but provides a list of circumstances to be considered, including whether the consumer was at a special disadvantage and whether the credit assistance provider’s conduct with the consumer involved a technique that manipulated the consumer, and should not in good conscience have been used.

    The more such circumstances are present in a particular situation, the more likely the conduct is to be unfair and dishonest.

• Finally, the bill restricts the use of the following terms by credit assistance providers:
  • Independent;
  • Impartial;
  • Unbiased; or
  • A term of similar import.

The restriction does not apply if the credit assistance provider does not receive any commissions, gifts or benefits and operates free from conflicts of interest. 

What you may have missed: the commencement dates for key provisions of the bill have been postponed to 1 March 2013. 

Kathryn Wardrobe is a lawyer at Holley Nethercote Commercial and Financial Services Lawyers.