Licensed activity

Chapter 2 of the NCCPA generally requires all persons engaging in "credit activities" to hold an Australian credit licence. An Australian Credit Licence carries with it onerous obligations which are set out more fully on the ASIC website. Professional assistance and advice must be obtained if an organisation wishes to obtain a licence.

"Credit activity" is defined comprehensively in section 6 of the NCCPA. In brief, a person is engaged in a credit activity if the person:

"Credit assistance"

Section 8 of the NCCPA defines the following activities as credit assistance:

The definition will capture the provision of finance brokering services.

"Acts as an intermediary"

Consumer credit regulation has historically had difficulty regulating conduct in multi-party credit arrangements such as those involving finance brokers, solicitors, mortgage originators and mortgage managers. Section 9 of the NCCPA defines the phrase "acts as an intermediary" with the intent of requiring persons engaged in such conduct to hold an Australian credit license and therefore be subject to regulation under the new national regime.

A person acts as an intermediary if, in the course of, as part of, or incidentally to, a business carried on in this jurisdiction by the person or another person, the person:

It does not matter whether the person does so on the person's own behalf or on behalf of another person.

Obligations of license holders

Australian credit licenses fall into different categories, depending upon the credit activity or activities in which the licensee engages. Under section 47 of the NCCPA, the obligations imposed on all licensees include:

The Australian Securities and Investments Commission (ASIC) has approved the external dispute resolution schemes operated by the Australian Financial Complaints Authority (AFCA) for the purposes of section 47.

ASIC has also adopted Australian Standard AS ISO 10002 on Complaints Handling as the relevant standard for internal dispute resolution procedures for the purposes of section 47.

Additionally, under sections 47(1)(j) and 48, and regulation 12 of the NCCP Regulations, licensees must have insurance cover that is adequate to compensate persons for loss or damage suffered because of a contravention of the NCCPA.

Chapter 3 of the NCCPA is a central part of the regulatory regime, imposing a series of obligations on credit providers and other licensees which are designed to reduce the instances of prejudicial or inappropriate loans being granted to consumers. Briefly the regime requires a lender to assess and verify a consumer’s financial situation and requirements before entering into a loan with that consumer. Failure to conduct a proper assessment is a breach of the responsible lending obligations, and has a number of consequences.

Section 128 of the NCCPA requires a lender to assess whether a credit contract will be unsuitable for a consumer not more than 90 days prior to entering or increasing the credit limit under that contract. Section 26 of the NCCP Regulations extends that period to 120 days in respect of secured credit used to purchase residential property.

A credit provider is also prohibited from making an unconditional representation before conducting a credit assessment to a consumer that the consumer is eligible to have the loan or enter into the consumer lease [NCCPA s 128].

In making an assessment under section 128, a lender is required to [s 130 NCCPA]:

NB Credit assistance providers (such as mortgage brokers) are also required to comply with responsible lending obligations as a condition of being licensed. They are required to make the same assessment of a consumer’s requirements and objectives and financial situation, and to take reasonable steps to verify the customer’s information. The assessment must be made prior to the credit assistance provider suggesting to a borrower or assisting that borrower enter into a particular loan or increase in credit limit. The responsible lending obligations for mortgage or lending brokers are set out in Part 3-2 of Chapter 3 of NCCPA.

ASIC's Regulatory Guide 209 "Credit licensing: Responsible lending conduct" provides some guidance to credit providers and credit assistance providers about how to fulfil these obligations. The Guide advises that the level of inquiries and steps taken to verify information will vary depending upon the circumstances (known as scaleability). Lenders can no longer simply rely upon information given to them by a borrower, but now must verify that information by independent inquiry.

Relevant factors will include:

Under section 131, a lender must assess that a credit contract will be unsuitable for a consumer if it is likely that:

Under section 131(3), where a consumer could only comply with the consumer's financial obligations under the contract by selling the consumer's principal place of residence, it is presumed that the consumer could only comply with those obligations with substantial hardship, unless the contrary is proved. This directly targets the practice of asset based lending, where there is no regard for the ability of the consumer to properly service (repay) the loan, and the lender finds safety in the fact that there is equity available should there be a default by the borrower.

Courts are increasingly frowning upon the practice of asset based lending where the lender has made no effort to enquire about the consumer’s ability to service a loan and based the decision to lend purely on the availability of the equity in an asset.

Obtaining the written credit assessment

Another important feature of the responsible lending regime is that consumers are permitted to obtain a copy of the written assessment done by the lender prior to entering into the loan. Under S S132 provides that if a consumer requests it, a lender must provide a written copy:

A lender is prohibited from requesting or demanding payment for providing a copy of the assessment [s 132(4)].

Section 133 prohibits a lender from entering or increasing a credit limit under a credit contract that is unsuitable. Subsections 133(2) and (3) provide guidance on when a credit contract will be unsuitable; these replicate the relevant provisions of section 131.

Consumers affected by the failure to meet responsible lending obligations may be entitled to compensation [NCCPA s 178], and may also be entitled to other remedies, but it is important to obtain advice from a lawyer first.

The NCC has added to the disclosure obligations originally imposed under the UCCC.

Credit Guide

Section 126 of the NCCPA requires lenders to give consumers a credit guide as soon as practicable after it becomes apparent to the credit provider that it is likely to enter into a credit contract with the consumer. The credit guide must:

A credit provider is required to undertake an assessment of the unsuitability of a loan, as part of the credit provider's responsible lending obligations. For more information about how this is done, see Responsible Lending Obligations.

Copy of assessment on request

A credit provider is required to provide a copy of the written preliminary assessement (if undertaken by the credit assistance provider) [NCCPA s 120], or the written assessment (if undertaken by the credit provider) [NCCPA s 132] as to the unsuitability of the loan. There is no mandatory form of the assessment, but at the minimum it should show whether the lender has in fact complied with responsible lending obligations. For more detail about these obligations see above.

Pre-contractual statement

Prior to the debtor either entering into a credit contract or making an offer to enter into a credit contract (whichever occurs first), the credit provider must give to the debtor a statement disclosing the information set out in section 17 of the NCC (set out in more detail below). The disclosure required by section 17 are required to be included in a credit contract, so the credit provider can simply provide a copy of that proposed credit contract to the debtor.

An alternative is for the credit provider to separately provide the disclosures required by section 17 in a pre-contractual statement, separate from the contract [s 16].

Information Statement

Prior to the debtor either entering into a credit contract or making an offer to enter into a credit contract (whichever occurs first), the credit provider must give the debtor a copy of an information statement in the form required by the NCCP Regulations setting out the debtor's statutory rights and obligations (Form 5: Things you should know about your proposed credit contract).

Form of credit contract

Section 17 of the NCC sets out information that must be included in a credit contract, as follows:

Of these matters, those in italic text are deemed "key requirements" under section 111 of the NCC. Key requirements are slightly different for continuing credit contracts [s 111(2)] and consumer leases [s 111(2A)].

These requirements have not been modified from the UCCC provisions.

After signing the contract

A debtor may, by written notice to the credit provider, terminate a credit contract at any time up until credit has been obtained under the contract [NCC s 11].

Under section 17 of the NCC, credit contracts must contain certain information as set out above under Formalities before entering a contract. Much of the information that must be provided is designated as "key requirement" under section 111 of the NCC. There are other key requirements, such as that a credit contract must not include prohibited fees and charges, a small amount credit contract must not require or accept payment of an unexpired monthly fee and a credit contract must not cost more than a rate of 48 per cent annually. In relation to consumer leases, key requirements include that:

For more information about these requirements in relation to consumer leases, please refer to Consumer leases. The full list of key requirements under the NCC is set out in section 111.

Part 6 of the NCC holds credit providers liable to make payment of a civil penalty to the debtor, or to a government fund, in respect of a failure to comply with a key requirements (set out generally above).

The payments are penalties because they are punitive, not compensatory, in nature, and Part 6 does not require that any loss be suffered by a debtor in respect of a contravention of a key requirement. However, unlike most penalties, they may be paid to an individual, i.e. the debtor under the credit contract.

Section 112 of the NCC grants standing to apply to a court for an order under Part 6 to:

Seeking orders under Part 6 is a two-stage process. The court will be required to determine:

Section 114(1) provides that the amount of a penalty payable to a debtor or guarantor is limited to the total amount of interest charges payable under the credit contract. However, section 114(2) provides that, if the debtor has suffered a loss, the court may impose a greater penalty that shall be not less than the amount of the loss.

The credit contract may allow the credit provider to vary essential terms of the credit contract, such as the interest rate and level of repayments. Under Division 1 of Part 4 of the NCC, the credit provider must give notice to the debtor of these changes so that the debtor can decide whether or not to terminate the facility and obtain credit elsewhere. However, there is no such requirement to give notice regarding: