A credit crunch of a different kind

You would have probably heard by now that the Federal Government has announced a raft of changes to the way consumer credit products are to be sold.

If you work in the consumer credit sector, the new laws are going to impact you. While the new laws are still under discussion, you need to take notice of what is happening so that when the changes are finalised (which will be very soon), you can hit the ground running.

If you already hold an Australian Financial Services Licence (AFSL), most of the new credit-related obligations will be somewhat familiar to you. If you don’t have an AFSL, you are entering a whole new world.

If you sell credit products to consumers, you will probably need to get an Australian Credit Licence (ACL), or become a credit representative of someone who holds an ACL. These consumer credit obligations apply to a variety of products, including home loans, leasing arrangements, hire purchases and credit cards.

There are also changes to the way margin lending products can be recommended and sold. For starters, you need to have appropriate authorisations under an AFSL to do so. If you want to keep recommending margin lending products you will need to apply for an AFSL to do so, or vary your AFSL if you already have one.

The Australian Securities and Investments Commission (ASIC) will be the sole regulator of the new national credit framework. One of the biggest areas you will need to get on top of is the way ASIC will expect you to meet your new obligations.

Key changes relating to consumer credit include:

• a new national licensing regime (the Australian Credit Licence);
• a responsible lending obligation;
• new dispute resolution mechanisms;
• new consumer protection mechanisms; and
• numerous improvements to the existing credit code.

Some in the sector have already incorporated the Uniform Consumer Credit Code (UCCC) and other state-based rules into their business practices. For those of you who have, the changes won’t come as much of a shock. But those of you unfamiliar with these obligations will have a lot to do.

As well as these changes, further protections will be added to investment loans, including margin loans.

Margin loans will be considered a financial product for the purposes of the Corporations Act. From this, various obligations will flow — including the obligations associated with holding an AFSL, as well as additional dispute resolution and disclosure requirements.

The new way of doing business will come as a relief to many. It will set a consistent regulatory regime between states and all providers of consumer credit, levelling the playing field in this sector. It will clear the industry by identifying dodgy lenders and forcing them to change their ways or leave.

Your new obligations

Your obligations will depend on the services you provide. The bill includes a definition of ‘credit’ categories of service related to credit. The definition that your business operation falls under will determine the actions you need to take.

Broadly speaking, however, the proposed legislation will require you to:

• identify and manage conflicts of interest;
• maintain your competencies as well as those of your representatives;
• implement and document internal and external dispute handling mechanisms;
• ensure you have adequate financial resources;
• document your risk management systems;
• have a written compliance plan that shows how you meet all of your specific licence conditions and general legislative requirements;
• maintain trust accounts; and
• be ready when ASIC comes knocking on your door for an audit.

  Although you are probably confident that you meet these requirements already, your current processes may not be documented. Your procedures will need to be documented to the satisfaction of ASIC, and translating your internal procedures into formal documents can be more demanding — and revealing — than it may seem at first glance.

  ASIC will also require you to provide your customers with certain disclosures at certain times of the advisory process. These are likely to include:

• a credit guide — this will need to contain key information about your business, the way you charge fees, the products you can sell and your dispute resolution mechanisms. This is like the Financial Services Guide (FSG) that AFSL holders are required to provide; and
• a written quote — you will be required to provide prospective customers with a written quote stating the maximum amount they will have to pay you. The quote will also need to break down the fees and charges that they will be subject to.

  As part of your advisory process you will need to make an assessment of the consumer’s capacity to pay and the suitability of the product you have recommended for them. Many of you do this already. You are likely to be subject to a higher level of scrutiny in regard to this than in the past.

  You will need to be able to demonstrate to ASIC how you have gone about considering the needs of your clients and making product recommendations. If your customer requests, you will need to provide them with a written copy of your assessment regarding their capacity and the product’s suitability.

What do you need to do?

Aside from getting your head around hundreds of pages of bills, proposed regulations, and associated commentaries (available at www.treasury.gov.au/consumercredit), you will need to work out how you want your business to fit into the new regime. Questions you need to consider include the following:

• For providing consumer credit, do you want to go it alone and have your own ACL? Or do you want to be an authorised credit representative of an ACL holder?
• For providing margin loans, do you need to apply for the relevant authorisations under an AFSL, or do you want to be an authorised representative of an AFSL holder with the relevant authorisations?
• Who will manage your compliance obligations?
• How will you document your processes?
• What extra training will you and your representatives require?
• What changes will you need to make to your advertising, website and other promotional materials?
• How will you go about meeting the new disclosure requirements with respect to margin loans?

Key dates

The new credit legislation, the National Consumer Credit Protection Bill 2009, is expected to enter Parliament in June 2009. Amendments to bring margin lending into the FSR regime will be introduced around the same time. The Government hopes to implement the legislation shortly thereafter.

Although it is difficult to anticipate the specific changes that will be made to the proposed legislation, there are certain elements of the new regime that are not likely to change too much. It seems probable that if you are a credit provider, you will need to apply for an ACL from ASIC.

Applying for the ACL from ASIC will require two steps:

1. You must apply for registration with ASIC between November 1, 2009, and December 31, 2009; and

2. You must apply for the actual licence between January 1, 2010, and June 20, 2010.

If you provide margin lending you will need to have applied for the relevant variations in your AFSL within three months of the bill coming into effect.

It is important to have these dates in mind as the general obligation to have an ACL is not likely to change, and these timeframes are also likely to remain in place.

As always, forewarned is forearmed. The territory is changing, and you cannot change this fact. If you can familiarise yourself with your obligations ahead of time, you are likely to have a competitive advantage over those who put their head in the sand.

Sonnie Bailey is a lawyer and Melanie Sherrin is an intern at Holley Nethercote.