National introduction of consumer credit regulation

The Commonwealth Government will soon introduce a national regime to regulate the provision of consumer credit.

This development follows the meeting earlier this month of the Council of Australian Governments, where it was agreed that the Commonwealth Government should become responsible for the regulation of consumer credit in Australia.¹ The new regime will result in a consistent approach to the regulation of consumer credit throughout Australia and should reduce the regulatory burden for those lending businesses with national operations. Currently, each state and territory has legislation regulating the provision of credit to consumers.

Although the details of the reforms are not yet available, the Commonwealth Government has announced that the new national consumer credit regime will be implemented in two phases. It is expected that the first phase will be introduced by the middle of 2009 and the second phase by the middle of 2010. The key components of each phase are outlined in a Commonwealth Government publication titled ‘National Consumer Credit: Single, standard, national regulation of consumer credit in Australia’.² The outlined components are largely replicated below.

First phase

In the first phase of implementation, the Commonwealth Government proposes the following measures including: 

• the enactment of the Uniform Consumer Credit Code (Code), which is existing state-based legislation, as Commonwealth legislation and extend the provisions to encompass the regulation of consumer mortgages over residential investment properties. The Code currently does not apply to the provision of credit to businesses and does not apply to the provision of credit to consumers where the credit is provided or intended to be provided for wholly or predominately investment or business purposes
• all credit providers, finance brokers and credit product advisers in Australia to be licensed by the Australian Securities and Investments Commission (ASIC). Licensees will be subject to certain conduct prohibitions such as a requirement to lend responsibly and to be a member of an approved external dispute resolution scheme
• the regulation of margin lending under the Corporations Act 2001 (Cth) (Corporations Act) with better disclosure of the risks posed for investors. Currently, margin loans are largely unregulated in Australia
• ASIC being the sole regulator of the national regime for credit lending and finance broking, and
• the introduction of national regulation of trustee companies to create a national market.

Second phase

During the second phase, the Commonwealth Government plans to take additional actions, including:

• the review of the regulation of unsolicited offers to increase credit card limits and other ‘undesirable’ lending practices, and consider existing approaches to interest rate caps, with a view to imposing additional conduct obligations on credit providers, finance brokers and credit product advisers
• the regulation of credit provided to small businesses
• the regulation of investment loans that will not be covered by the first phase of reforms (that is, investment loans other than margin loans and consumer mortgages over residential investment properties)
• the reform of mandatory comparison rates and default notices
• the enhancement of the regulation and tailored disclosure of reverse mortgages, and
• the examination of remaining existing state and territory reform projects. These projects are likely to include the new disclosure model that the Ministerial Council on Consumer Affairs (MCCA) is developing due for release in mid 2009 and the proposals announced by MCCA in its August 2007 consultation package.³

Comment

Enacting the Code as Commonwealth legislation should not cause significant compliance concerns for regulated lenders and is certainly preferable to an expansion of Chapter 7 of the Corporations Act to cover consumer credit products. As more detail becomes available, it will be interesting to see whether:

• the business purpose declaration will be abolished as part of the first phase, and
• there will be any exemptions to the licensing regime for banks and other authorised deposit taking institutions already supervised by the Australian Prudential Regulation Authority or holders of an Australian Financial Services Licence.

Endnotes

1. National Consumer Credit Regulation
2. ‘National Consumer Credit: Single, standard, national regulation of consumer credit in Australia’
3. MCCA’s consultation package

This article was written by Philip Kennedy, Senior Associate, Sydney and Conor Seenan, Solicitor, Melbourne.

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