Commonwealth Numbered Regulations - Explanatory Statements

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NATIONAL CONSUMER CREDIT PROTECTION AMENDMENT (SMALL AMOUNT CREDIT CONTRACTS) REGULATION 2014 (SLI NO 89 OF 2014)

EXPLANATORY STATEMENT

Select Legislative Instrument No. 89, 2014

Issued by authority of the Treasurer

National Consumer Credit Protection Act 2009

National Consumer Credit Protection Amendment (Small Amount Credit Contracts) Regulation 2014

Section 329 of the National Consumer Credit Protection Act 2009 (the Credit Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Credit Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Credit Act.

The Consumer Credit Legislation Amendment (Enhancements) Act 2012 introduced, from 1 July 2013, a cap on costs and a limit on fees that credit providers can charge consumers for small amount credit contracts (which are up to $2,000 cash in hand to the consumer with a maximum term of 12 months).

 Since the introduction of the cap on costs for small amount lending, there has been uncertainty in the industry about the boundaries of some provisions, particularly those relating to the classification of a loan as a type of credit contract to which the Credit Act applies and the allowed fees and charges.  As a result of this uncertainty, some credit providers have avoided the cap on costs by using existing provisions in the national credit legislation more broadly than they were intended for.  In effect, this avoidance activity has allowed unlicensed credit providers to provide credit to consumers more quickly by circumventing the responsible lending obligations outlined in Chapter 3 of the Credit Act, while charging more than is allowed under the cap on costs.  Conduct that avoids regulation has serious consequences, both for individual borrowers who may lose out on the protections and remedies available under the Credit Act (for example, by paying excessive fees) and for other credit providers who are at a competitive disadvantage because they comply with the law as intended. 

The National Consumer Credit Protection Amendment (Small Amount Credit Contracts) Regulation 2014 (Regulation) amends the National Consumer Credit Protection Regulations 2010 (Principal Credit Regulations) to further support the reforms introduced by the Consumer Credit Legislation Amendment (Enhancements) Act 2012 and address these avoidance issues.

Specifically, the Regulation:

                clarifies the boundaries between small amount and medium amount credit contracts, to ensure that the small amount lending cap applies to contracts where the consumer receives a maximum amount of $2,000 in their hand, with prescribed fees and charges not included in this;

                confirm that credit providers and third parties cannot rely on the provision for short-term credit in the Credit Act which provides that the National Credit Code (Schedule 1 to the Credit Act) does not apply to the provision of short-term credit contracts.  Some credit providers are using these provisions to justify remaining unlicensed while levying fees and charges in excess of the cap on costs for small amount credit contracts.  The Regulation ensures that where short-term credit is provided to consumers, no additional amount can be charged above five per cent of the amount of credit, and interest is capped at 24 per cent;

                ensures that credit providers (other than authorised deposit-taking institutions) are only able to charge, for continuing credit contracts, an initial fee of $200, and $125 per annum in any subsequent years, per client, regardless of the number of continuing credit contracts the client enters into; and

                addresses avoidance practices where people establish both a credit provider and brokerage/management arm to their business, in which the broker only arranges credit with the related credit provider, in order to charge brokerage fees that are not included in the calculation of the amount payable under the cap.  This has the effect of prohibiting persons who provide a service to a debtor in relation to a small amount credit contract from receiving payments for services they arrange in relation to a small amount credit contract.

Details of the Regulation are set out in the Attachment.

The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Four weeks public consultation was undertaken between 7 February and 7 March 2014 on an Exposure Draft Regulation.  Changes to the Regulation were made following this process.

The Credit Act does not specify any conditions that need to be satisfied before the power to make the Regulation may be exercised.

The Regulation commences on the day following registration.

ATTACHMENT

Details of the National Consumer Credit Protection Amendment (Small Amount Credit Contracts) Regulation 2014

Section 1 - Name of Regulation

This section provides that the name of the Regulation is the National Consumer Credit Protection Amendment (Small Amount Credit Contracts) Regulation 2014 (Regulation).

Section 2 - Commencement

This section provides that the Regulation commence the day following registration.

Section 3 - Authority

This section provides that the Regulation is made under the National Consumer Credit Protection Act 2009 (Credit Act).

Section 4 - Schedules

This section provides that Schedule 1 amends the National Consumer Credit Protection Regulations 2010 (the Principal Credit Regulations).

Schedule 1 - Amendments

Item [1] inserts section 4D into the Principal Credit Regulations.

Section 4D clarifies the distinction between a small amount credit contract (SACC), and a medium amount credit contract (MACC), to clarify that fees and charges allowed under the cap are not included in the SACC amount limit.

A SACC allows up to $2,000 cash in hand to the consumer.  The distinction is relevant to the operation of the cap on the maximum amount a credit provider can charge under these contracts, and to the application of product-specific responsible lending and disclosure obligations to SACCs.

The cap for a SACC allows credit providers to charge maximum fees of:

                An upfront fee of 20 per cent of the adjusted credit amount (the amount the consumer receives in the hand). 

                A monthly fee of 4 per cent of the adjusted credit amount (the amount the consumer receives in the hand).

No interest can be charged on a small amount credit contract.

The cap for a MACC allows credit providers to charge a maximum amount of interest equivalent to 48 per cent.

It was originally intended that the definition of a SACC would allow credit providers to apply the SACC cap to all contracts where the consumer receives a maximum amount of $2,000 in their hand.  However, there are currently different legal opinions as to which cap applies to contracts where the consumer receives $2,000 or less, but is charged fees so that the total amount of credit exceeds $2,000.

The item clarifies that credit providers can apply the small amount lending cap to contracts where the consumer receives a maximum amount of $2,000 in their hand. Fees and charges allowed under the cap can be in addition to this amount.

Item [2] inserts section 50A into the Principle Credit Regulations.

Subsections 6(1), (2) and (3) of the National Credit Code currently allow that the Credit Code does not apply to the provision of low-cost credit contracts.  The provision applies if the loan has a maximum term of 62 days, and the credit provider only charges maximum costs of an upfront fee of 5 per cent of the amount of credit, and interest at 24 per cent.

                In practice this means that on a loan of $100, over 2 months a credit provider could charge a maximum of about $9.

The Regulation addresses concerns that a number of credit providers are relying on this provision while charging amounts more than are permitted under the cap on costs in Division 4 of the National Credit Code.  They do this by charging additional amounts because they are not specifically included or referred to in the description of the charges allowed under paragraph 6(1)(b). 

The Regulation confirms the broad nature of the definition of 'credit fees and charges' and 'contract' in subsection 204(1) of the Code.  The fees referred to are already covered as amount to be included in the calculation of credit fees and charges, however, the Regulation is being made to provide additional clarity to industry, and reduce the incidence of credit providers improperly purporting to rely on subsection 6(1) of the Code.  Additionally, it is specified that the fees referred to are captured whether they are under the contract or not.  Although the definition of contract is already very wide and captures any series or combination of contracts, or contracts and arrangements, the Regulation is being made to ensure that credit providers (and third-parties) do not use multiple contracts and arrangements to provide credit to consumers, and improperly purport to rely on subsection 6(1) of the Code.  The Regulation ensures that where short term credit is provided to consumers, all fees and charges are accounted for and consumers are afforded the protections of the Code.

The Regulation addresses this conduct by specifying the particular fees that are considered credit fees and charges for the purpose of the application of this provision.  This will ensure that no additional amounts can be charged above 5 per cent of the amount of credit, and interest at 24 per cent allowed under the provision.

Item [3] replaces regulation 51 in the Principle Credit Regulations.

Regulation 51 currently specifies the circumstances in which low-cost continuing credit contracts do not need to meet the requirements in the Credit Code.

The provision currently applies if the maximum charges are $200 in the initial 12 months of the contract, and $125 in any subsequent 12 month period.

A practice has developed among some small amount credit providers of arranging for a consumer to enter into a new continuing credit contract each time they require a further advance, when the credit provider charges a further fee of $200 on each such occasion.  An effect of this practice is that, for loans for small amounts, the credit provider can charge more than would be permitted under the cap on costs introduced by the Consumer Credit Legislation Amendment (Enhancements) Act 2012.  The credit provider also avoids the licensing and responsible lending obligations under the Credit Act.

The Regulation ensures that credit providers (other than authorised deposit-taking institutions) are only able to charge an initial fee of $200, and $125 per annum in any subsequent years, per client, regardless of the number of continuing credit contracts that are entered into. 

The Regulation also prevents credit providers from closing a continuing credit contract once a particular product is paid off, and requiring consumers to open another contract for the next advance of credit they require (for example, to finance another product) by providing that, if a consumer has been party to a continuing contract with the credit provider within the past 12 months, they cannot charge the consumer any fees or charges under the new continuing credit contract.  Continuing credit contracts are, by definition, envisaged to be used for multiple advances of credit.

While there is no defined period, a continuing credit contract would likely considered to be terminated if when the account balance has reached zero, and no further advances of credit are contemplated, or monthly account keeping fees are still required to be paid. 

Item [4] inserts section 79AE into the Principle Credit Regulations.

Subsection 31B(1) of the Code prohibits a credit provider or a person, as prescribed by the regulations, from requiring or accepting payment of a fee or charge in relation to a SACC.  

Practices have been developed under which credit providers establish a brokerage arm to their business, in which the broker only ever arranged credit with the related credit provider, in order to charge brokerage fees where they were not included in the calculation of the amount payable under the cap.  Some of these practices may include brokers introducing debtors to a consumer credit insurer.

The Regulation addresses these avoidance arrangements by specifying that the following persons are prescribed persons for the purposes of Subsection 31B(1) of the Code:

                a person who introduces the debtor to a credit provider (whether or not the person is associated with the credit provider); or

                a person who has been introduced to a debtor by a credit provider to provide a service in relation to a small amount credit contract (whether or not the person is associated with the credit provider).

This has the effect of prohibiting persons who provide a service to a debtor in relation to a small amount credit contract from receiving payments for services they arrange in relation to a SACC (although these third parties could seek payment directly from the borrower if they do not fall within the categories specified in the regulation).Section 31B prohibits a credit provider (or a prescribed person) from requiring or accepting payment of a fee or charge.  It therefore regulates conduct according to the person who requires or accepts the payment, not the person providing the service in relation to which the fee or charge is levied.  The effect of item 1 of Regulation 79AE is to prevent a broker charging the consumer cash for a brokerage fee.  However, it would also prevent the broker receiving payments in cash for services it arranges with third parties (as with the lender). 

The Regulation is consistent with the approach taken in subsections 6(1), (2) and (3) of the National Credit Code, which similarly provides that these types of fees cannot be charged outside the cap on costs.

 


 

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

National Consumer Credit Protection Amendment (Small Amount Credit Contracts) Regulation 2014

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The purpose of the Legislative Instrument is to:

                clarify the boundaries between small amount and medium amount credit contracts, to ensure that the small amount lending cap applies to contracts where the consumer receives a maximum amount of $2,000 in their hand, with prescribed fees and charges allowed to be additional;

                confirm that credit providers and third parties cannot rely on the provision for short-term credit in the National Credit Code to remain unlicensed while levying fees and charges in excess of what is allowed under the cap on costs for small amount credit contracts;

                ensure that credit providers (other than authorised deposit-taking institutions) are only able to charge, for continuing credit contracts, an initial fee of $200, and $125 per annum in any subsequent years, per client, regardless of the number of continuing credit contracts that are entered into; and

                address avoidance practices where people establish both a credit provider and brokerage/management arm to their business, in which the broker only arranges credit with the related credit provider, in order to charge brokerage fees that are not included in the calculation of the amount payable under the cap.

Human rights implications

This Legislative Instrument does not engage any of the applicable rights or freedoms.

Conclusion

This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.

 

 

 


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