The latest changes to the credit legislation
The Financial Sector Reform Act 2022 (Cth) (“FSRA22”) amends the national consumer credit legislation, mostly in relation to small amount credit contracts (“SACCs”) and consumer leases.
Background
The original Bill introduced on 8 September 2022 included other provisions on the financial accountability regime (“FAR”) and the financial services compensation scheme of last resort. These were jettisoned at the last minute because of delays in negotiating changes to the FAR in the Senate.
FSRA22 now only deals with consumer credit. The reforms reflect recommendations made way back in 2016 in the Review of Small Amount Credit Contracts.
Commencement
FSRA22 passed both houses of Federal Parliament on 2 December 2022 and will shortly receive Royal Assent. The commencement date for most of the reforms in FSRA22 is 6 months after assent.
Financial hardship
One change in FSRA22 in relation to financial hardship applies to all regulated credit, not just SACCs and consumer leases.
Section 72 of the National Credit Code sets out how a debtor can give a hardship notice to the credit provider, and what the credit provider must do in response. A note at the end of section 72 reads as follows:
Note: The credit provider need not agree to change the credit contract, especially if the credit provider:
(a) does not believe there is a reasonable cause (such as illness or unemployment) for the debtor’s inability to meet his or her obligations; or
(b) reasonably believes the debtor would not be able to meet his or her obligations under the contract even if it were changed.
FSRA22 makes a small change here to insert “family violence” after “such as” in paragraph (a) of the note, making “family violence” an example of a reasonable cause for a person being in financial hardship. The change does not mean that a credit provider must agree to a change to the contract in this situation, as is the case for any other cause of financial hardship; but the credit provider can always do so if it chooses.
The same change has been made to the corresponding section of the National Credit Code dealing with hardship under consumer leases.
Apart from this change on financial hardship, all of the other amendments in FSRA22 only concern SACCs and consumer leases.
Small amount credit contracts
A SACC is a special type of consumer credit contract offered by a non-ADI lender which has a term of 16 days or more (but no longer than 12 months) and a credit limit of no more than $2000.
Warning statements: The FSRA22 amendments will enable the prescribed warning statements for SACCs to be issued by ASIC rather than in the regulations.
Responsible lending: Previously the legislation included a presumption that a SACC was unsuitable if the consumer had two or more other SACCs in the past 90 days or was in default under another SACC. This rebuttable presumption has been repealed. Licensees must now document in writing their assessment that a SACC is not unsuitable for a consumer, including the inquiries and verifications made in relation to the assessment.
Protected earnings amount: Before the amendments, the legislation allowed for the regulations to specify a protected earnings amount for certain classes of consumers. The regulations require that for consumers who receive at least 50% of their gross income from social security payments, 80% of their gross income is protected and cannot be used to repay SACCs. The amendments allow this regulation making power to be used for all consumers, not just those in a certain class. Following this change it is expected that regulations will be made to provide for a protected earnings amount of 10% of net income for all consumers.
Equal payments: SACCs must now have equal repayments and equal repayment intervals over the life of the loan (subject to limited exceptions).
Monthly fees: It will now be unlawful to charge monthly fees for the residual term of a SACC where the consumer fully repays the loan early.
Anti-hawking: Licensees are now prohibited from making unsolicited communications to a consumer that contain an offer or invitation to enter into or apply for a SACC where the consumer is (or has at any time been) a debtor under a SACC with the licensee or another credit provider, or has at any time applied for a SACC with the licensee.
No referrals: SACC providers are prohibited from making referrals where it is reasonable to believe that as a result of the referral, the referred person may obtain unregulated credit.
Protection of information: Information about accounts that is obtained by a licensee in connection with a SACC or proposed SACC is now protected from disclosure, to prevent it from being sold to third parties or used to market other products and services. There are permitted exceptions, such as disclosure to the customer and where authorised or required by law.
Consumer leases
Warning statements: ASIC will be given the power to mandate forms of warning statements that must be given by licensees who offer consumer leases.
Responsible leasing: FSRA22 expands on the responsible leasing obligations to specifically require that lessors of household goods must obtain and consider a consumer’s account information for the preceding 90 days in the course of verifying the consumer’s financial situation. Lessors will also have to document their assessment in the same way as SACC providers.
Protected earnings amount: There is a new regulation-making power to prescribe a protected earnings amount for consumer leases for household goods. It is expected that regulations will be made to have the same protected earnings amount that is proposed for SACCs (10% of net income).
Price control: A price cap has been introduced on the total amount payable by a lessee in connection with a consumer lease. The maximum amount payable under a lease will be the base price of the goods, plus the permitted delivery and installation fees, and a charge which is calculated by multiplying the base price by 0.04 multiplied by the number of whole months of the lease (up to 48 months). For a lease with an indefinite period the charge is worked out by multiplying the base price by 1.92. Add-on fees are also counted in the price cap. Default fees and enforcement expenses are not counted and may be charged in addition, but there will be a limit in the regulations on how much can be charged as default fees.
Cost of finance disclosure: Lessors of household goods will now be required to disclose the base price of the goods being leased and the difference between the base price and the total amount payable by the lessee in connection with the lease.
Anti-hawking: Lessors of household goods will be generally prohibited from making unsolicited communications in public places (and other places which are not their ordinary business premises) in relation to consumer leases for household goods.
Indefinite leases now regulated: Consumer leases for an indefinite period were previously exempt from regulation but are now regulated. Consumer leases for less than 4 months continue to be exempt from regulation.
Protection of information: Provisions for consumer leases have been introduced which are the same as those now applying for SACCs (see above).
Consequences of non-compliance
New civil and criminal penalty provisions apply in relation to contraventions of the requirements brought about by FSRA22.
There are also provisions for some of the amendments that will result in a licensee in breach losing its right to recover the fees under the customer contract.
Anti-avoidance
A new anti-avoidance provision has been inserted in the National Consumer Credit Protection Act 2009 (Cth) which prohibits a person from entering into, beginning to carry out, or carrying out a scheme for an “avoidance purpose” in relation to SACCs, consumer leases or product intervention orders. This is an attempt to stop regulatory arbitrage – the exploitation of loopholes in the credit legislation. The anti-avoidance provision commences on the day after Royal Assent.
An “avoidance purpose” is broadly defined. For example, it can be an avoidance purpose to prevent a contract from being a SACC or a consumer lease – but it can also be an avoidance purpose to cause a contract to be a SACC or a consumer lease! Either way, you can be caught if you have the wrong intentions. There is another provision which presumes that a person entered into a scheme for an avoidance purpose if it is of a kind prescribed by regulations or determined by ASIC. This will enable specific kinds of avoidance schemes to be effectively banned.
Avoidance purposes for other forms of consumer credit are not covered by the amendments.
Patrick Dwyer and Kathleen Harris
Legal Directors