Federal Register of Legislation - Australian Government

Primary content

A Bill for an Act to amend the law relating to consumer credit and corporations, and for related purposes
Administered by: Treasury
For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.
Registered 22 Sep 2011
Introduced HR 21 Sep 2011
Table of contents.

2010‑2011

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Consumer Credit and corporations legislation Amendment (Enhancements) Bill 2011

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the
Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

 


Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1              Introduction............................................................................ 7

Chapter 2              Enhancements................................................................... 11

Chapter 3              Reverse mortgages............................................................ 31

Chapter 4              Small amount credit contracts.......................................... 51

Chapter 5              Caps on costs etc.  for credit contracts........................... 59

Chapter 6              Consumer Leases.............................................................. 71

Chapter 7              Application provisions....................................................... 95

Chapter 8              Voting at AGMs of Public Companies............................ 99

Chapter 9              Regulation impact statement......................................... 101

Chapter 10           Regulation impact statement......................................... 201

Chapter 11           Regulation impact statement......................................... 233

Index............................................................................................................... 313

 

Do not remove section break.


The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ACL

Australian credit licence

ADI

Authorised Deposit taking Institution

AGM

annual general meeting

APR

Annual percentage rate

ASIC

Australian Securities and Investments Commission

ASIC Act

Australian Securities and Investments Commission Act 2001

COAG

Council of Australian Governments

Code

National Credit Code.  This is Schedule 1 to the National Consumer Credit Protection Act 2009

Corporations Act

Corporations Act 2001

Credit Act

National Consumer Credit Protection Act 2009

EDR scheme

External dispute resolution scheme

Enhancements Bill

Consumer Credit and Corporations Legislation Amendments (Enhancements) Bill 2011

FAA

Financiers Association of Australia

KMP

key management personnel

licensee

A holder of an Australia credit license issued by ASIC under the National Consumer Credit Protection Act 2009

NCCP Act

National Consumer Credit Protection Act 2009

NFSF

National Financial Services Federation

RIS

Regulation Impact Statement

the Code

National Credit Code, Schedule 1 of the National Consumer Credit Protection Act 2009

Transitional Act

National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009

UCCC

Uniform Consumer Credit Code


Outline

The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill) amends the National Consumer Credit Protection Act 2009 (NCCP Act). 

The NCCP Act implemented a national framework for the regulation of credit by the Commonwealth. 

The key reforms introduced by the Enhancements Bill are:

       a number of specific changes to the provisions of the NCCP Act, to improve its operation (for example, changes to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship);

       product‑specific obligations in respect of reverse mortgages, including a statutory protection against negative equity and improved disclosure requirements, intended to assist consumers to make more informed choices in relation to the use of these products;

       caps on the maximum amount credit providers can charge under  both small amount credit contracts, and all other credit contracts, and additional obligations in relation to small amount contracts (namely, restrictions on multiple borrowings and new disclosure requirements); and

       changes to provide greater regulatory consistency between consumer leases and credit contracts (to address regulatory arbitrage arising from the current lower level of obligations applying to consumer leases).

The Enhancements Bill also amends the Corporations Act 2001 (the Corporations Act) to clarify that the chair of an annual general meeting can vote undirected proxies in a non‑binding shareholder vote on remuneration where the shareholder provides express authorisation.

Summary of regulation impact statement

Impact: The Enhancements Bill will affect businesses that engage in credit services, particularly in relation to consumer leases, short‑term small amount loans and reverse mortgages.  It will also affect ASIC as national regulator for consumer credit.  The main beneficiaries of the new laws will primarily be consumers of those types of credit products.

Main points:

       Enhancements to the NCCP Act:

      consumers will benefit as, first, licensees will be required to meet higher standards of conduct, and, second, the procedures for debtors seeking changes to their contracts on the grounds of financial hardship will be made more accessible;

      there will be a limited financial impact on persons engaging in credit activities as the changes largely target misconduct; and

       Reverse mortgages:

      consumers will be assisted to make more informed choices in respect of the balance between current access to credit and the future restrictions on lifestyle choices from reduced equity;

      consumers will have protections that reduce the risk of them being evicted from their home;

      the changes to procedures and to the content of contract documents will have a low level of compliance costs for reverse mortgage providers (as many already meet similar standards on a voluntary basis);

      third parties will find to easier to provide advice to consumers about reverse mortgages, because there will be consistent statutory requirements in relation to matters such as no negative equity guarantees, default clauses and the position of non‑title holding residents (reducing their time and cost, and making advice more accessible); and

       Small amount credit contracts:

      the prohibitions on multiple borrowing and refinancing will address the risk of debtors entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments;

      improving disclosure about the availability of alternatives will help consumers to make better and more informed financial decisions and to seek out lower cost alternatives to relatively higher cost short‑term credit contracts;

      the introduction of these requirements will have a low level of compliance costs (because of the limited nature of these obligations); and

       Caps on costs:

      specifying the maximum amount that can be charged will reduce the cost to customers, and particularly assist low‑income consumers (as currently the financial position of many borrowers, together with the level of costs that can be charged by credit providers can result in such a reduction in income that the debtor may, in a very short period, be placed in a position where the debt cannot be repaid);

      the introduction of the cap would generally not require significant compliance costs, given that the cap on small amount credit contracts is straightforward in its application, and that, in relation to other credit contracts, most larger credit providers will already be complying with a similar cap that is in force in the Australian Capital Territory, New South Wales and Queensland; and

      the introduction of the cap may have a significant impact on the revenue generated by individual credit providers, although this will vary depending on their business models; and

       Consumer leases:

      consumers who enter into consumer leases will have rights similar to those available to consumers in relation to credit contracts (and that have proved effective in that context); and

      the application to consumer leases of obligations that currently apply to credit contracts will require changes to internal procedures, but the cost would be limited given that these obligations are already well understood. 

Date of effect:  Sections 1 to 3 commence on the day the Act receives the Royal Assent.  Schedules 1, 2, 3, 5 and 6 (which respectively cover  general enhancements to the NCCP Act, reverse mortgages, prohibitions and disclosure obligations in relation to small amount credit contracts, consumer leases, and application provisions), commence on 1 July 2012.  Schedule 4, which introduces the caps on costs, commences on 1 January 2013.  Schedule 7, relating to the amendment to the Corporations Act, commences on the day after the Act receives the Royal Assent.

Proposal announced: The reforms in Schedule 2 in respect to the regulation of reverse mortgages are part of the Government’s Delivering for Seniors package, announced on 7 August 2010.

The remaining reforms, in respect to enhancements, consumer leases and short term small amount lending, are implemented as part of Phase Two of the COAG National Credit Reform agenda announced in July and October 2008.


Chapter 1         
Introduction

Outline of chapter

1.1                  This chapter provides a summary of reforms implemented by the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill). 

Context of amendments

1.2                  At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection. 

1.3                  The NCCP Act implemented Phase One of the implementation plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, primarily lenders and brokers. 

1.4                  The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 introduced reforms in relation to home loans (by requiring credit providers to make available a Key Facts Sheet to enable consumers to compare different products more effectively) and credit card contracts (to address specific practices that had developed in relation to these products, for example, by introducing a payment allocation hierarchy, so that the highest interest bearing component of a consumer’s liability would be repaid first). 

1.5                  The Enhancements Bill introduces a number of specific changes to the regulation of credit to improve its effectiveness.  It also provides additional obligations and protections in respect of three further classes of credit products: reverse mortgages, small amount credit contracts and consumer leases (to address particular risks identified with those products).     

Summary of new law

1.6                  The Enhancements Bill amends the NCCP Act to provide protections to consumers when they use credit and to assist consumers to make more efficient use of credit contracts and consumer leases.

1.7                  These reforms will:

       enhance the regulation of credit by a number of specific reforms (for example, introducing a remedy for unfair or dishonest conduct by credit service providers);

       implement the Government’s election commitments in relation to reverse mortgages through the introduction of a statutory protection against negative equity, pre‑contractual disclosure requirements and other protections relevant to seniors;   

       introduce protections for consumers who enter into small amount credit contracts (including a cap on the maximum amount credit providers can charge under these contracts); and

       address the current regulatory gap in respect of consumer leases. 

1.8                  The Enhancements Bill also amends the Corporations Act to clarify that the chair of an annual general meeting is able to vote undirected proxies in the non‑binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy. 

Detailed explanation of new law

Commencement

1.9                  Sections 1 to 3 and any other provision for which a commencement date is not specified commence on the day the Enhancements Bill receives the Royal Assent.

1.10              Schedules 1, 2 and 3 apply from 1 July 2012, immediately after the commencement of Part 2 of Schedule 1 to the National Consumer Protection Amendment (Home Loans and Credit Cards) Act 2011.  Schedule 1 contains general enhancements to the National Credit Code (Code).  Schedule 2 contains amendments relating to reverse mortgages.  Schedule 3 contains amendments relating to small amount credit contracts. 

1.11              Schedule 4 applies from 1 January 2013.  Schedule 4 introduces a cap on costs for small amount credit contracts, and a complementary cap for all other credit contracts. 

1.12              Schedules 5 and 6 apply from 1 July 2012, immediately after the commencement of Schedule 2 to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011.  Schedule 5 contains amendments relating to consumer leases.  Schedule 6 specifies the way in which the provisions in Schedules 1 to 5 will apply to conduct and to contracts before and after the commencement of those Schedules. 

1.13              Schedule 7 commences the day after the Bill receives Royal Assent.  This schedule contains amendments to the Corporations Act relating to voting at AGMs of public companies. 

1.14              These new reforms will:

       enhance the regulation of credit by:

      improving the capacity of borrowers to obtain hardship variations;

      introducing a remedy for unfair or dishonest conduct by credit service providers;

      restricting the use of high impact terms and representations by licensees;

      giving ASIC and consumers comprehensive standing in relation to contraventions of the Code; and

       implement the Government’s election commitments in relation to reverse mortgages through the introduction of:

      a statutory protection against negative equity;

      pre‑contractual disclosure requirements (including a requirement on licensees to present the consumer with different scenarios in relation to the impact of a reverse mortgage on the equity in their home before they enter into a reverse mortgage);

      other protections relevant to seniors (including an obligation to make reasonable attempts to personally contact a defaulting debtor); and

       introduce protections for consumers who enter into small amount credit contracts by:

      imposing a cap on the maximum amount credit providers can charge under these contracts (complemented by a more restrictive cap on all other credit contracts);

      introducing multiple contract prohibitions, to address the risk of a debtor entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments; and

      requiring credit providers and providers of credit assistance to disclose the availability of alternatives; and   

       addressing the current regulatory gap in respect of consumer leases, by requiring lessors to comply, where appropriate, with similar obligations to those that currently apply to credit providers. 

1.15              The Enhancements Bill also amends the Corporations Act to clarify that the chair of an annual general meeting is able to vote undirected proxies in the non‑binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy.    

Application provisions

1.16              Schedule 6 of the Enhancements Bill specifies the conduct and the contracts to which the provisions in Schedules 1 to 5 will apply


Chapter 2         
Enhancements

Outline of chapter

2.1                  The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Enhancements Bill) introduces a number of changes to enhance the operation of the NCCP Act.  The key elements of the reforms in Schedule 1 are that they:

       enhance the capacity of debtors who are in financial hardship to seek a variation of their credit contract;

       introduce a remedy for unfair or dishonest conduct by credit service providers;

       restrict the use of particular words or phrases;

       enhance the range of remedies available to consumers; and

       increase the circumstances in which ASIC has standing to apply to the court for an order.

Context of amendments

2.2                  At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two‑phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection.

2.3                  The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 

2.4                  COAG agreed that in Phase Two the Commonwealth would examine issues that had been identified in relation to the operation of the Uniform Consumer Credit Codes in force in the States and Territories, but that had not been resolved prior to the transfer to the Commonwealth of responsibility for the regulation of credit.

2.5                  The Enhancements Bill addresses the following issues:

       the current statutory procedures inhibit the capacity of debtors to apply for a variation to their credit contract;

       there is no counterpart to the remedy for unjust conduct in the Code in relation to the conduct of credit service providers (even though their conduct can result in debtors incurring significant liabilities to credit providers under credit contracts);

       a credit provider is able to commence enforcement action even while the consumer is waiting for a reply to their hardship variation request, and without their underlying hardship being addressed;

       certain high impact words and phrases are being used in ways which can mislead consumers; and

       some restrictions prevent both ASIC and consumers from seeking comprehensive remedies for contraventions of the National Credit Code.

Summary of new law

2.6                  The Enhancements Bill amends the NCCP Act, to give greater protections to consumers and provide greater certainty for licensees.  Key elements of these reforms are that they:

       make it easier for debtors to apply for hardship variations, by making the procedures more flexible;

       require credit providers to respond to an outstanding application for a hardship variation before commencing enforcement proceedings;

       introduce a remedy for unfair or dishonest conduct by credit service providers;

       restrict the use of particular words or phrases which have an emotional or high impact resonance with consumers, so that  these words and phrases will only be able to be used where they strictly describe or relate to particular types of conduct or arrangements;

       enhance the range of remedies available to consumers, so that  consumers can seek restitution or compensation for an offence, in addition to the remedy available under the civil effect of that offence; and

       improve ASIC’s enforcement capacity by giving it standing to apply to the court for an order under section 124 of the NCCP Act, irrespective of whether or not a specific civil effect is prescribed for a contravention of the Code. 

Comparison of key features of new law and current law

New law

Current law

All debtors have a statutory right to request a hardship variation regardless of the amount of credit that is provided under their contract.

The debtor only has a statutory right to request a hardship application where the amount of credit provided is less than $500,000.

There are no limits to the form of hardship variation that can be requested, making it easier for consumers to engage with their credit provider. 

An application for hardship variation must seek to change the contract in one of three ways stipulated in the Code. 

Credit providers must respond to an outstanding application for a hardship variation before commencing enforcement proceedings.

Credit providers are not required to respond to applications for hardship variations before they can commence enforcement proceedings

Consumers have a remedy for credit service providers’ conduct that is unfair or dishonest.

The NCCP Act does not provide consumers with a general remedy for credit service providers’ conduct that is unfair or dishonest

The use of particular words or phrases which have an emotional or high impact resonance with consumers is restricted to where they describe or relate to particular types of conduct or arrangements.

Use of the following terms or representations is regulated:

       independent, impartial and unbiased;

       financial counsellor and financial counselling; and

       representations that consumer is eligible for credit before an unsuitability assessment has been conducted.

There are no direct restrictions on the use of these terms. 

There are general prohibitions against providing misleading information and making false or misleading representations.  These prohibitions lack the clarity of prohibitions in respect of specified terms, and do not necessarily apply to all situations covered by the proposed restrictions.

ASIC has standing to apply to the court for an order regardless of whether a civil remedy is also available under another provision.

ASIC does not have standing under section 124 of the Code to apply to the court for an order in relation to offences which provide for a specific civil effect.

Consumers may seek restitution in relation to offences for which a specific civil effect is already provided.

Consumers are not able to seek restitution in relation to offences for which a specific civil effect is already provided.

Detailed explanation of new law

Part 1 — Protection of debtor in cases of hardship

2.7                  Part 1 amends the Code in relation to hardship applications made by debtors. 

2.8                  Where a debtor cannot meet their obligations under a credit contract, they  may give the credit provider notice of this (a hardship notice).  This notice may be given orally or in writing.  [Schedule 1, item 1, section 72]

2.9                  Within 21 days after receiving a hardship notice, the credit provider must give the debtor notice of whether or not they agree to negotiate a change to the credit contract.  Where the credit provider agrees to negotiate, the form of the notice will be prescribed in the regulations.  If the credit provider does not agree to negotiate, the credit provider must give a written notice that includes:

       the reasons for not agreeing to negotiate;

       the name of the external dispute resolution scheme which the credit provider is a member of; and

       the debtor’s rights under that scheme. 

[Schedule 1, item 1, subsection 72(2)]

2.10              The effect of this amendment is to expand the circumstances in which a credit provider will need to consider whether to change the terms of the credit contract, rather than the onus being on the debtor to make a request in a specific and limited way.

2.11              A breach of this section will attract a criminal penalty of 30 penalty units and is an offence of strict liability [Schedule 1, item 1, subsection 72(4)].   

2.12              The imposition of a strict liability offence is appropriate since:

       the requirement  for the credit provider to provide a response within 21 days is procedural in nature;

       it is important that the consumer receives the response from the credit provider in a timely manner, so that they can assess their options as quickly as possible; and

       it significantly enhances ASIC’s ability to enforce this requirement.

2.13              If a credit provider has given notice that they agree to negotiate, but subsequently decides not to change the contract they would need, within 21 days of the first notice, to give the debtor another notice to this effect [Schedule 1, item 1, subsection 72(3)].  This affords the credit provider an extended period of time to determine whether or not to provide a variation (noting that the credit provider has absolute discretion whether or not to vary the contract). 

2.14              If, as a result of negotiations, the credit provider agrees to a change to the terms of the credit contract, they must comply with the existing requirements in section 73 of the Code.

2.15              Where a credit provider does not agree to change the terms of the credit contract, a debtor still has the option to apply to a court for a change in the terms pursuant to section 74 of the Code.  The court is restricted from making any order that reduces the total amount ultimately payable by the debtor under the credit contract, and is therefore confined to orders affecting the amount and timing of individual payments made under the credit contract.

2.16              The requirements in section 88 of the Code, requiring credit providers to give a default notice before they can commence enforcement proceedings against a debtor continue to operate.  However, the cross‑references to sections 72 and 94 in subparagraphs 88(3)(f)(i) and (ii) are changed, so that their wording is consistent with the changes to those provisions.  [Schedule 1, item 5, subparagraphs 88(3)(f)(i) and (ii)]

2.17              A new section 89A is introduced to restrict the capacity of credit providers from commencing enforcement action until they have responded to any hardship notice under section 72.  [Schedule 1, item 6, section 89A]

2.18              A credit provider will be prohibited from commencing enforcement action where the following conditions apply:

       they are required to serve a default notice under section 88;

       the debtor has given a current hardship notice under section 72; and

       the debtor has not previously given a hardship notice or had given one not materially different from the current hardship notice in the four month period before the current hardship notice was given.

[Schedule 1, item 6, subsection 89A(1)]

2.19              The credit provider cannot begin enforcement proceedings until they have given the debtor notice of their refusal to negotiate and 14 days have passed from the day on which this notice was given.  [Schedule 1, item 6, subsection 89A(2)]

2.20              Under the current section 88, the credit provider must allow the debtor at least 30 days from the date of the default notice to remedy the default.  The 14 day period from the day the lessor gave the hardship notice may therefore occur before, during, or after the 30 day period. 

2.21              A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability [Schedule 1, item 6, subsection (2) and (4)].   

2.22              The imposition of a strict liability offence is appropriate since:

       it is important that debtors have certainty regarding whether or not their credit provider will negotiate or intends to commence enforcement proceedings;

       the requirement to give the debtor notice is procedural, so that the credit provider should be able to comply with it in all circumstances; and.

       it significantly enhances ASIC’s ability to enforce this requirement.

2.23              However, the credit provider may take possession of any mortgaged goods if the credit provider believes on reasonable grounds that:

       the debtor has, without the credit provider’s permission, removed or disposed of the mortgaged goods, or intends to do so; or

       urgent action is necessary to protect the goods. 

[Schedule 1, item 6, subsection 89A(3)]

2.24               The burden rests on the credit provider to show that they held this belief on reasonable grounds.  Repossession of mortgaged goods has a serious consequence for the debtor, mortgagor or guarantor.  Credit providers should therefore only be able to rely on these exceptions where they reasonably believe circumstances to be in existence which establish the requisite belief.   [Schedule 1, item 6, subsections 89A(2) and (3)]

2.25              A debtor who has been given a default notice can make a postponement request regarding postponement of enforcement proceedings or of any acceleration clauses.  There have been minor changes to the wording of this provision so that it operates more clearly.  [Schedule 1, item 7, subsection 94(1)]

2.26              If a debtor gives the postponement request the credit provider must not begin enforcement proceedings unless they have responded to the postponement request and 14 days has elapsed from when they gave that response.  [Schedule 1, item 9, subsection 94(3)]

2.27              A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability.   The imposition of a strict liability offence is appropriate since:

       it is important that debtors have certainty regarding whether or not their credit provider will negotiate or intends to commence enforcement proceedings;

       this requirement is strictly procedural, requiring no fault element; and

       it significantly enhances ASIC’s ability to enforce this requirement (which seeks to give the debtor an opportunity to assess their options following receipt of the notice). 

[Schedule 1, item 9, subsection 94(3) and (5)]

Part 2 — Remedies for unfairness or dishonesty by providers of credit services

2.28              Item 10 inserts section 180A into the NCCP Act.  This provision introduces a remedy for unfairness or dishonesty by providers of credit services, and sets out matters relevant to a court determining whether conduct has been unfair or dishonest.  [Schedule 1, item 10, section 180A]

2.29              The court will have power to make orders where it is satisfied that:

       a person (the defendant) provided a credit service to a consumer (the plaintiff);

       the defendant engaged in conduct that was connected with the provision of the service and that was unfair or dishonest; and

       the conduct had one or more of the following results:

      the consumer entered into a credit contract, consumer lease, mortgage or guarantee that they would not have entered into had the conduct not occurred;

      the consumer entered into a credit contract, consumer lease, mortgage or guarantee with different terms to one that they would have entered into apart from the conduct; or

      the consumer became liable to pay fees or costs to the defendant or a third party.

[Schedule 1, item 10, section 180A]

2.30              The conduct may precede or follow the provision of the credit service, provided that it is connected with the provision of those services. 

2.31              The requirement that the unfair or dishonest conduct had a result listed in paragraph 180A(1)(c) is to be determined objectively.  For example, if the defendant engaged in unfair conduct in relation to the supply of goods, and subsequently arranged a credit contract to finance the purchase of those goods, it could be reasonably concluded that their unfair conduct had the result the consumer entered into that contract as a result of the unfair conduct. 

2.32              The term engage in conduct is defined as meaning the doing of an act or omitting to perform an act, and would therefore encompass conduct such as failing, unfairly or dishonestly, to disclose information to the consumer.  [Schedule 2, item 6, subsection 204(1)]

2.33              If the defendant engaged in unfair or dishonest conduct a court can make orders:

       that the defendant take, or refrain from taking specified action;

       that the defendant pay the plaintiff a specified amount;

       that a specified sum is not due or owing by the plaintiff to the defendant; and

       orders that the court thinks are appropriate to redress the unfairness or dishonesty, or to prevent the defendant from profiting from the plaintiff in connection with the unfairness or dishonesty. 

[Schedule 1, item 10, subsection 180A(2)]

2.34              The power of the court to make orders to prevent the provider of credit services from profiting from their unfairness or dishonesty recognises that the provider of credit services may not be remunerated directly by the consumer, but may receive, and be motivated by, financial benefits such as commissions from third parties.  The purpose of giving the court the power to require them to disgorge these payments ensures these persons should not be able to profit from unfair or dishonest conduct in situations where the consumer was not charged a fee.  [Schedule 1, item 10, paragraph 180A(2)(d)]  

2.35              The court may not, however, make an order that affects a credit contract, consumer lease, mortgage or guarantee to which the conduct related.  Consumers have other remedies available to them in the NCCP Act in relation to credit providers and lessors, including where the transaction was unjust. 

Determining whether conduct was unfair or dishonest

2.36              Section 180A sets out elements that the court must consider in determining whether conduct was unfair or dishonest, but does not limit the matters to which the court may have regard.  A person providing credit services may therefore still have engaged in conduct that was unfair or dishonest even where none of the factors listed in subsection 180A(4) are present.

2.37              The effect of subsection 180A(3) is that the existence of factors listed in subsection 180A(4) will in all cases be relevant to a court considering whether conduct was unfair or dishonest. 

2.38              However, these factors are not prerequisites or necessary to a finding that conduct was unfair or dishonest.  For example, it would not be necessary to find a consumer was under a special disadvantage (as discussed in paragraph 180A(4)(a)) in order for conduct by the provider of credit services to be unfair or dishonest.      

2.39              The first element is whether the consumer was at a special disadvantage in dealing with the person in relation to the transaction [Schedule 1, item 10, paragraph 180A(4)(a)].  The concept of special disadvantage refers to the consumer being in a position where they are unable to protect their own interests, as discussed in Commercial Bank of Australia v Amadio (1983) 151 CLR 447. 

2.40              The  special disadvantage may exist in relation to:

        the provision of the credit service;

       a credit contract, consumer lease, mortgage or guarantee to which the conduct related; and

       any other contract requiring the consumer to make payments, for the purposes of which it is reasonable to expect that the consumer would or did enter into such a credit contract, consumer lease, mortgage or guarantee. 

2.41              The special disadvantage may exist in relation to all of these three categories or only a single one.

2.42              The court must consider whether the consumer was a member of a class whose members were more likely than others to be at such a disadvantage.  [Schedule 1, item 10, paragraph 180A(4)(b)] 

2.43              Where the plaintiff was a member of such a class, the court must determine whether a reasonable person would consider that the defendant’s conduct was directed at that class [Schedule 1, item 10, paragraph 180A(4)(c)].  The purpose of this provision is to address practices where a credit service provider will target a class of persons (for example, elderly or commercially unsophisticated persons) on the basis the perceived characteristics of the class mean that individuals within it are more likely to succumb to unfair or dishonest conduct (irrespective of whether the credit service provider is aware that any particular individual under the class was under a special disability). 

2.44              Another element is whether the plaintiff was unable or considered themselves unable to be able to enter into a credit contract, consumer lease, mortgage or guarantee other than with the credit provider, lessor, mortgagee or beneficiary to whom the conduct related [Schedule 1, item 10, paragraph 180A(4)(d)].  Where a plaintiff either had, or considered themselves to have, no other choices they are at greater risk of entering into transactions that exploit this vulnerability. 

2.45              A credit service provider may have contributed to this belief by, for example, representing that they can arrange credit or a consumer lease irrespective of the circumstances of the consumer, in order to attract potential clients who would then be prepared to accept whatever terms are offered, irrespective of the cost.    

2.46              Another element is whether the conduct involved a technique that in good conscience should not have been used, or that manipulated the plaintiff [Schedule 1, item 10, paragraph 180A(4)(e)].  These terms may largely overlap in practice, and are primarily intended to address coercive or manipulative marketing techniques. 

2.47              Some providers of credit services use sophisticated marketing techniques designed to persuade consumers to enter into a contract.  This process can be incremental rather than overt through, for example, a series of questions, where the consumer is directed or guided, through those techniques, to a position where it becomes increasingly difficult for the consumer to refuse to enter into the transaction (but where the conduct may not meet the higher threshold required by remedies such as unconscionability or duress). 

2.48              The court must also consider whether the defendant could determine or significantly influence either the terms of a credit contract, consumer lease, mortgage or guarantee to which the conduct related or any other contract where it is reasonable to expect the consumer entered into the credit contract or consumer lease to finance their liability under that other contract.  [Schedule 1, item 10, paragraph 180A(4)(g)]

2.49              The term ‘determine or significantly influence’ is used to describe situations where the provider of credit services has the capacity to actively influence the terms of a transaction beyond ordinary negotiations.  It would clearly apply in situations where the provider of credit services may have an agreement with a third party in which they can fix the price or cost within limits specified in the agreement, or subject to a right of veto by the third party. 

Example 2.1 

A broker attracts potential customers through running wealth creation seminars.  Attendees are encouraged to purchase investment properties, and to have finance arranged by the broker.  However, the broker has an arrangement with the developer selling the properties that it will receive as commission 50 per cent of the amount of the purchase price in excess of a base price.  The broker does not tell the consumer about this arrangement and it can be presumed that they were unlikely to have agreed to purchase the units, either at all or for the price for which they purchased it, had this been the case.  This conduct would therefore be unfair or dishonest. 

2.50              The final element the court must consider is whether the terms of the transaction were less favourable to the consumer than the terms of a comparable transaction [Schedule 1, item 10, paragraph 180A(4)(g)].  This factor recognises the role of the provider of credit services in arranging credit or consumer leases, and, commonly, in arranging other transactions as well (for example, for the purchase or supply of goods or services).  If the consumer could have entered into a comparable transaction with more favourable terms, this may suggest that they entered into the less favourable contract as a result of unfair or dishonest conduct. 

2.51              Applications for orders can only be made within 6 years after the defendant first started engaging in the conduct.  The court can only make an order under this section where either a plaintiff or ASIC specifically applies for such an order.  [Schedule 1, item 10, subsection 180A(5)]

2.52              ASIC may make an application on behalf of a plaintiff where the plaintiff has given their consent in writing, before the application is made [Schedule 1, item 10, subsection 180A(6)].  ASIC can apply on behalf of more than one plaintiff provided they all consent (for example, where they are members of a class as described in paragraph 180A(4)(b)). 

2.53              Where a provider of credit services engages in unfair or dishonest conduct, and it has a successful outcome, they can be expected to repeat that conduct.  Section 180A is therefore intended to address both individual and systemic conduct that is unfair or dishonest, and to enable ASIC to take action where a provider of credit services has engaged in similar unfair or dishonest conduct towards different consumers. 

2.54              Where the court orders that the defendant pay an amount to the plaintiff, the plaintiff may recover this amount as a debt due to them.  [Schedule 1, item 10, subsection 180A(7)]

2.55              This section does not apply to credit assistance by a person who is, or becomes, a credit provider under the contract to which the assistance relates.  The section also does not apply to lessors under a consumer lease to which the assistance relates, mortgagees under a mortgage connected to the credit contract to which the assistance relates, or beneficiaries of a guarantee connected to the credit contract to which the assistance relates.  [Schedule 1, item 10, subsection 180A(8)]

2.56              This provision is necessary as the definition of providing credit assistance in section 8 of the NCCP Act can include credit providers or lessors (where they engage in conduct as described in that section in relation to credit contracts or consumer leases where they will be the provider).  Consumer are provided with remedies in the Code and in other legislation against credit providers and lessors. 

Part 3 — Representations about eligibility to enter credit contracts, consumer leases etc.  without assessing unsuitability

2.57              Sections 125 and 128 of the NCCP Act are amended so that a credit provider is prohibited from representing to the consumer that they are eligible to enter into a credit contract, or to have the credit limit of an existing contract increased unless the credit provider has made an assessment that the contract or the increase will be suitable in accordance with the requirements of section 129.  [Schedule 1, items 12 to 16, sections 125 and 128],

2.58              The effect of these amendments is to prohibit credit providers from making representations to consumers that they are eligible to enter into a contract, or have their credit limit increased irrespective of, for example, their personal circumstances or credit history.  These types of representations can encourage a consumer to apply for credit because of the certainty their application will be accepted, but where the resulting terms on which the credit is provided may be more onerous than those offered by other credit providers.

2.59              As a result of the amendments the credit provider can represent to the consumer they are eligible to enter into the contract (or have the credit limit increased) once an assessment has been made.  This representation can only be made for the same period of time following an assessment that the credit provider is able to rely on the assessment in order to enter into the credit contract or increase its limit (that is,  for a period of 90 days or such other period as may be prescribed in the regulations). 

2.60              Item 19 replaces the existing section 151 of the NCCP Act with a replacement section.  The new section implements the same restrictions in respect of representations to a consumer that they are eligible to enter into a consumer lease.  [Schedule 1,  item 19, section 151]

2.61              There are consequential changes to section 148 of the NCCP Act and to the heading to Division 3 of Part 3‑4.  [Schedule 1, items 17 and 18, section 148 and heading to Division 3]

2.62              A breach of the requirements in section 151 attracts a civil penalty of 2,000 penalty units.  [Schedule 1, item 19, section 151]

2.63              These provisions will also prevent credit providers or lessors from using advertisements which represent that a consumer is eligible to enter into a contract, even where they have poor credit.  Advertisements of this type will need to be suitably qualified.

Part 4 — Prohibitions on certain representations and other matters

2.64              A new Part 3‑6A will be inserted into the NCCP Act, and will include a number of miscellaneous prohibitions that apply to persons who engage in credit activities.

2.65              As a result section 33, which prohibits a person from giving misleading information when they are engaging in credit activities, is more appropriately located in Part3‑6A, and has been repealed.  [Schedule 1,  item 24, section 33]

2.66               The repeal of section 33 results in a number of consequential amendments to the Guide to Part 2‑1 in section 27, and to the heading to Division 3 of Part 2‑1.  [Schedule 1,  items 22 and 23, section 37 and the heading to Division 3 of Part 2‑1]

2.67               The Enhancements Bill introduces a new Part 3‑6A and a Guide to the Part in section 160A.  [Schedule 1,  item 25, Part 3‑6A and section 160A]

2.68              Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee’s actions in providing the assistance:

       ‘independent’;

       ‘impartial’;

       ‘unbiased’; and

       any other term (in English or any other language) of similar meaning to those words.

[Schedule 1,  item 25, section 160B]

2.69              However, a licensee may use those terms if they satisfy all of the following requirements:

       the licensee does not receive any commissions  (apart from commissions that are rebated in full to the person’s clients) or any other gifts or benefits from a credit provider or lessor that may reasonably be expected to influence the licensee;

       the licensee’s employer (if any) or any other person (or class of person) that may be identified in the regulations does not receive any of the commissions, gifts or benefits described above;

       in providing a credit service, the licensee does not operate under any direct or indirect restrictions, other than restrictions imposed by the NCCP Act or by an Australian credit licence (so that this would cover, for example, directions from a credit provider that restrict the capacity of the provider of credit services to arrange credit contracts with other credit providers); and

       in providing a credit service, the licensee does not operate under any conflicts of interest that might arise from the person’s associations or relationships with credit providers and lessors, that may reasonably be expected to influence the person in providing the services.

[Schedule 1,  item 25, subsection 160B(2)]

2.70              The prohibition applies to any representation or means of communication, whether written, oral or otherwise.  

2.71              The reference to commissions does not include amounts paid to the licensee by consumers who use their services. 

2.72              Contravention of this prohibition attracts a civil penalty of 2,000 penalty units.  [Schedule 1,  item 25, subsection 160B(1)]

2.73              The licensee bears the evidentiary burden in relation to this defence.  This is appropriate as the circumstances which give rise to the defences  are matters which are particularly within the knowledge or control of the licensee, as they relate to their commercial arrangements with third parties.

2.74              Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee’s actions in providing the assistance:

       ‘financial counsellor’;

       ‘financial counselling’; and

       any other term prescribed by the regulations that is of similar import to these phrases (whether in English or any other language).

[Schedule 1,  item 25, subsection 160C(1)]

2.75              The power to provide for additional terms to be prescribed by regulations recognises that these terms may evolve or change over time.

2.76              However, a licensee may use those terms if :

       they are providing, or offering to provide, the credit service on behalf of another person (the principal);

       they are a representative (as defined in section 5 of the NCCP Act) of the principal;

       regulations exempt the principal from this prohibition in relation to a credit activity because the principal engages in the activity as part of a financial counselling service; and

       the person’s actions in providing or offering to provide the credit service are within the authority of the principal. 

[Schedule 1,  item 25, subsection 160C(3)]

2.77              The section applies to any representation or means of communication, whether written, oral or otherwise. 

2.78              Contravention of this prohibition attracts a civil penalty of 2,000 penalty units.  [Schedule 1,  item 25, subsection 160C(1)]

2.79              The effect of the defence is to allow these terms to only be used by Government funded or not for profit financial counsellors (who currently meet the exemption from the need to hold an Australian credit licence in subregulation 20(5) of the National Consumer Credit Protection Regulations 2010).  These organisations are exempted as they provide free services to consumers, including financial education and advice, and assisting consumers to communicate and negotiate with creditors and other organisations.

2.80              A licensee may also use those terms in the negative, for example, to represent that the licensee is not a financial counsellor.  [Schedule 1,  item 25, subsection 160C(4)]

2.81              The person providing or offering to a credit service bears the evidentiary burden in relation to both defences, as the defences relate to  matters which are largely or particularly within their knowledge or control (and in the case of financial counsellors where they have already identified that they do not need to be a licensee). 

2.82              There is a consequential amendment to the NCCP Act, so that section 33, which prohibits a person from giving misleading information when they are engaging in credit activities, is moved into Part3‑6A, and renumbered as section 160D.  [Schedule 1,  item 25, section 160D]

Part 5 — Civil remedies for contravention of the National Credit Code

2.83              Subsection 124(1) of the Credit Code will be amended to remove the words ‘other than one for which a civil effect is specifically provided by Division 1 or by any other provision of this Code’.  [Schedule 1,  item 27, subsection 124(1)]

2.84              This amendment results in two changes:

       consumers will be able to seek orders both for a specific civil effect (where this is provided for in the Code), and for compensation or restitution resulting from the contravention; and

       ASIC will have comprehensive standing under the Code, in relation to contraventions where a specific civil effect is provided for in the Code, and all other contraventions. 

2.85              The following entities can make an application to the court under this section:

       ASIC on its own behalf;

       ASIC on behalf of a person affected by the contravention, if that person has consented in writing to ASIC making the application; and

       a person affected by the contravention.

[Schedule 1,  item 28, subsection 124(4)]

2.86              The amendment does not create new offences for past conduct that did not previously give rise to a penalty or a liability to a consumer.  The amendment will mean that where the remedy available to a consumer for a past contravention was limited to the civil effect, they will now be able to obtain a more comprehensive remedy where they have suffered additional loss or damage.

2.87              There is no retrospectivity in regards to what constitutes a contravention, so entities would always have been operating with full knowledge about the legality of their conduct.  The amendment to section 124 therefore does not introduce new or retrospective obligations on persons who engage in credit activities.

Part 6 — Miscellaneous amendments

2.88              Part 6 contain consequential amendments to the Code to resolve ambiguities, clarify the operation of certain provisions and ensure internal consistency throughout the Code with the new amendments. 

2.89              In relation to alterations of documents, subsection 19(1) is amended to refer to a new contract document, instead of a contract document.  [Schedule 1,  item 29, subsection 19(1)]

2.90              Section 32 of the National Credit Code is repealed and replaced with a new section 32.  The amendment changes the language of section 32 to mirror the language of the proposed new section 176D under this Enhancements Bill.  [Schedule 1,  item 30, section 32]

2.91              In relation to statements of amounts owing under credit contracts, amendments are made to the operation of paragraphs 36(1)(c) and 36(1)(d) to clarify that any overdue amounts must be accompanied by the date they became due, and amounts currently payable must be accompanied by the date they become due.  [Schedule 1,  items 31 and 32, paragraphs 36(1)(c) and (d)]

2.92              Section 40 of the Code outlines when certain transactions are not to be treated as contracts in relation to credit contracts.  This section is amended to clarify its operation and ensure consistency with the new section 175J which applies to consumer leases.  [Schedule 1,  item 38, section 40]

2.93              Subsection 71(1) of the Code which refers to changes by agreement of parties is amended to clarify that it applies to changes made under existing credit contracts.  [Schedule 1,  item 39, subsection 71(1)]

2.94              Section 83 has two overlapping criminal offences.  The section is amended to remove the offence in subsection 83(1).  [Schedule 1,  items 40, 41 and 42, section 83]

2.95              Section 87 is amended to omit references to a direct debit default notice, and instead, refer to a notice complying with the section.  [Schedule 1,  items 43 and 44, section 87]

2.96                  Paragraphs 88(5)(a) and (d), subsection 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d) are amended to change the phrase ‘believes on reasonable grounds’ to ‘reasonably believes’.  The Code currently uses both expressions to refer to the same concept and it is preferable to use one expression only.  [Schedule 1,  items 45, 46, 47 and 48, paragraphs 88(5)(a) and (d), subsection 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d)]

2.97              Subsection 95(1) is amended to omit references to a default notice or demand for payment, and clarify its operation by referring to a default notice under section 88 or a demand for payment under section 90.  [Schedule 1,   item 49, subsection 95(1)]

2.98              Section 206 currently specifies that the way in which headings, notes and punctuations are to be used for the purposes of interpreting the Code.  This approach was inherited from the State and Territory predecessor to the Code, the Uniform Consumer Credit Code.  The provision is being repealed so that the interpretation of headings, punctuation and notes will be in accordance with the Acts Interpretation Act 1901, and therefore consistent with Commonwealth legislation generally.  [Schedule 1,  item 51,section 206]

Part 7 — Technical corrections

2.99              Part 7 contains a series of technical amendments.  The NCCP Act is amended:

       to amend incorrect cross‑ references in section 128 and subsection 130(1) [Schedule 1,  items 52 and 53,section 128 and subsection 130(1)]; and

       to correct the omission of the word ‘section’ in paragraph 181(b) [Schedule 1,  item 54, paragraph181(b)].

2.100          Part 7 amends the Code by:

       correcting a reference to ‘or’ instead of ‘and’ in subparagraph 88(3)(g)(i) [Schedule 1,  item 55, subparagraph 88(3)(g)(i)];

       correcting the reference to a tied continuing credit contract in subsection 127(2) [Schedule 1,  item 56, subsection 127(2)];

       changing a number of headings and sections in Division 3 of Part 7 that contain references to a provision, section 73 of the Trade Practices Act 1974, that has now been repealed [Schedule 1, items 57, 58, 59, 60 and 61, headings to sections 129, 130, 131, 132 and 133];  and

       correcting a grammatical error in the definition of approved external dispute resolution scheme in subsection 204(1) [Schedule 1,  item 51,subsection 204(1)]

 


Chapter 3         
Reverse mortgages

Outline of chapter

3.1                  Schedule 2 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (Enhancements Bill) introduces new obligations for persons who engage in credit activities in relation to reverse mortgage contracts.  The key elements of these requirements are:

       introducing a ‘no negative equity guarantee’ protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions);

       mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act:

      using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home;

      provide the consumer with a print out of these projections;

      notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and

      give the consumer a reverse mortgage information statement;  

       prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;

       disclosure of the way in which non‑title holding residents will be treated under a reverse mortgage contract;

       prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and

       new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.

Context of amendments

3.2                  At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two‑phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth.

3.3                  The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 

3.4                  Under Phase Two, COAG agreed the Commonwealth would consider reforms to the regulation of reverse mortgages.

3.5                  In August 2010, the Government announced the Delivering for Seniors package which included enhancements to protections for seniors seeking to access the equity in their homes using reverse mortgages and home reversion schemes. 

3.6                  Reverse mortgage contracts require targeted regulation because they differ from other credit contracts.  Some of the main differences are that:

       they are marketed exclusively to seniors or persons approaching an age where they will retire from the workforce;

       interest is capitalised as there is no obligation on the borrower to make regular repayments, meaning the amount owing increases over time;

       at the time they are considering taking out the loan, consumers have no way of accurately determining the value of the equity in their home over time; and

       debtors may be required to repay more than the value of the mortgaged property at a stage in their life when they may no longer have the financial resources to be able to do so.

3.7                  The Enhancements Bill contains amendments to the NCCP Act to address these issues.

Summary of new law

3.8                  The Enhancements Bill contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages. 

3.9                  In general terms a reverse mortgage contract is defined as a contract in which the balance of the credit contract will increase over time (as the borrower will ordinarily only repay the debt following sale of their residence).

3.10              The key elements of these amendments are:

       creating a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property;

       requiring licensees to undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act:

      using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home;

      provide the consumer with a print out of these projections;

      notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and

      give the consumer a reverse mortgage information statement. 

       prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;

       disclosure of the way in which non‑title holding residents will be treated under a reverse mortgage contract;

       prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and

       new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.

Comparison of key features of new law and current law

New law

Current law

Specific obligations will be introduced on credit providers and persons engaging in credit services in relation to reverse mortgage contracts.

 

The NCCP Act regulates reverse mortgage contracts consistently with all other credit contracts.  It does not include any responsible lending conduct obligations, requirements in relation to the reverse mortgages or disclosure requirements that are specific to reverse mortgages.

Credit providers cannot demand or accept payment of an amount to discharge the  debtor’s liability which exceeds the value of the reverse mortgaged property (subject to limited exceptions).

The NCCP Act does not include any specific requirements in relation to reverse mortgages.

Licensees must give consumers projections of equity before providing credit assistance or entering into a reverse mortgage credit contract.

The obligations under the NCCP Act do not require the disclosure of projections of future equity.

Licensees must make available a reverse mortgage information statement on their website or upon request by a consumer.

The obligations under the NCCP Act do not require the provision of a reverse mortgage information statement.

Detailed explanation of new law

Commencement

3.11              Schedule 2 commences on 1 July 2012, immediately after the commencement of Part 2 of Schedule 2 to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011

Schedule 2 — Reverse mortgages

Part 1 — Definitions

Division 1 — Definition of reverse mortgage

3.12              Part 1 inserts definitions of expressions relevant to these reforms into both section 5 of the NCCP Act and section 13A of the Code. 

3.13                  A reverse mortgage is defined for the purposes of the NCCP Act as having the same meaning as in section 13A of the Code.  [Schedule 2, item 1, subsection 5(1)]

3.14              A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor’s obligations under the contract and either:

       the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage [Schedule 2, item 2, paragraph 13A(1)(b) and subsection 13A(4)]; or 

       the arrangement meets the following two conditions:

      the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure less than that maximum amount [Schedule 2, item 2, paragraph 13A(1)(a) and subsection 13A(2)]; and

      the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation‑making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate) [Schedule 2, item 2, paragraph 13A(1)(a) and  subsection13A(3)]

Example 3.1 

A lender offers a credit product which provides the borrower with a $50,000 loan.   The credit contract allows the borrower to not have to make regular repayments but that full repayment has to be made if the borrower sells or permanently vacates their home, or upon the death of the borrower.  Until this time, interest on the loan is compounded with the total amount owing under the loan able to increase above the $50,000.  Since the credit contract allows the borrower’s total debt to exceed the initial $50,000 without any obligation to reduce that liability under that amount (and meets any of the additional prerequisites under the regulations) the contract would be a reverse mortgage for the purposes of the Code and the NCCP Act.

3.15              ASIC may, by a legislative instrument, declare a credit contract to be a reverse mortgage [Schedule 2, item 2, subsection 13A (4)].  This will allow ASIC, as the national regulator for consumer credit, to ensure that changes in product design do not have the result that those credit contracts which should be regulated under the NCCP Act as a reverse mortgage will not be subject to the protections introduced in Schedule 2.  ASIC’s power to make this type of declaration in respect to reverse mortgage contracts is analogous to its power under section 761AE of the Corporations Act 2001 in relation to margin lending facilities. 

3.16              There is a cross‑reference to the definition of a reverse mortgage in subsection 204(1) of the Code, with that subsection specifying that the term is defined in section 13A of the Code.  [Schedule 2, item 3, subsection 204(1)]

Division 2 — Other definitions

3.17                  For the purposes of the NCCP Act, a reverse mortgage information statement is defined as a document relating to reverse mortgages which complies with the regulations.  [Schedule 2, item 4, subsection 5(1)]

3.18              It is anticipated that the form of the reverse mortgage information statement will be a document containing generic information regarding the key features and implications of reverse mortgages.

3.19                  The Enhancements Bill also introduces a definition of a bridging finance contract, as a contract where, first, at the time the contract is made the debtor reasonably expects to receive a lump sum before the end of the contract and to use that sum as far as possible to meet their obligations under the contract, and, secondly, if the regulation prescribe any conditions, those conditions are meet.  [Schedule 2, item 5, subsection 204(1)]

3.20              Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary. 

3.21              It is anticipated that additional conditions that must be met in order for the definition of bridging finance contract to be met will be prescribed by regulations, including conditions in relation to the term of such contracts. 

3.22              The Enhancements Bill also introduces the following definitions:

        engage in conduct is defined as meaning the doing of an act or omitting to perform an act [Schedule 2, item 6, subsection 204(1)]

       practising lawyer is defined as a person admitted to the legal profession by a federal court or State or Territory Supreme Court who holds a practising certificate entitling them to practice law [Schedule 2, item 7, subsection 204(1)]; and 

       reverse mortgaged property in relation to a credit contract is defined as a dwelling or land that is mortgaged to secure a borrower’s obligation under a reverse mortgage contract.  [Schedule 2, item 8, subsection 204(1)]

Part 2 — Provisions applying to licensees

3.23              A note is inserted into section 133 of the NCCP Act to illustrate the consequences of a breach of section 133.  The example in the note states that if a person has suffered loss or damage from entering into a credit contract which is unsuitable, when a reverse mortgage would have been not unsuitable, that person may apply to a court under sections 178 or 179 for appropriate orders.  These orders may either compensate them for the loss or damage or reduce the loss or damage suffered, by putting the consumer in the position they would have been in had they been placed into a not unsuitable reverse mortgage.  [Schedule 2, item 9, section 133]

3.24              This note will assist licensees and debtors to understand the power of the court to make flexible orders to provide a remedy under section 179 where a licensee arranged a credit contract which was unsuitable. 

Part 3‑2D — Licensees and reverse mortgages

3.25              Part 3‑2D of Schedule 2 of the Enhancements Bill imposes obligations on licensees that are intended to enhance a consumer’s understanding of the potential outcomes of entering into a reverse mortgage, before they decide whether or not to enter into a particular reverse mortgage contract.  These obligations will be in addition to those currently required under Chapter 3 of the NCCP Act. 

3.26              The introduction of a new Part 3‑2D results in the need to include a Guide to this Part.  [Schedule 2, item 10, section 133DA]

3.27              The first obligation will be that licensees use an ASIC‑approved website to generate projections made in accordance with the regulations, and to show them to a consumer in person.  It is expected these projections will illustrate the effect a reverse mortgage contract may have on the equity the consumer has in their home over time, and the potential impact of interest rates and house price movements.  They may also show the effect on their equity of different types of loan payments (for example, the difference in the rate at which the consumer’s liability increases where they borrow a lump sum or drawdown regular monthly payments).  [Schedule 2, item 10, subsection 133DB(1)]

3.28              The licensee must also give the consumer a printed copy of the projections.   [Schedule 2, item 10, paragraph 133DB(1)(b)] 

3.29              The requirement to show the projections in person is intended to assist the consumer by enabling them to seek explanations directly from the licensee, or ask them questions prompted by the projections. 

3.30              It is a defence to these requirements if the licensee reasonably believes the consumer has been shown the projections and received a copy of them from another person [Schedule 2, item 10, subsection 133DB(3)(a)].  The projections would need to have been the same or substantially the same as those the licensee would otherwise be required to show the consumer [Schedule 2, item 10, subsection 133DB(3)]

3.31                  Licensees will also have a defence to these requirements in any circumstances that may be prescribed in the regulation.  This will enable the obligations to be applied flexibly and respond to changes in licensee procedures.  [Schedule 2, item 10, subsection 133DB(4)]

3.32              These defences will avoid duplication if, for example, the credit provider knows that a consumer has already received a copy of the projections from an intermediary such as a mortgage broker.

3.33              The second obligation will be that licensees tell the consumer in person certain matters that relate to reverse mortgages and are prescribed in the regulations [Schedule 2, item 10, paragraph 133DB(1)(c)].  It is anticipated these matters will include notifying the consumer that:

       there are alternatives to a reverse mortgage which they could consider (such as downsizing to a smaller house); and

       taking out a reverse mortgage may affect their entitlements to any government benefits they receive (if any).  For example, if the proceeds of a reverse mortgage are placed into a financial investment, such as a term deposit, then income from that investment would be assessed under the deeming rules that apply to all financial investments. 

3.34              The third obligation will be to give the consumer a reverse mortgage information statement (as discussed at paragraph 2.18).   [Schedule 2,  item 10,  paragraph 133DB(3)(d)]

3.35              It is a defence to this requirement if the licensee reasonably believes the consumer has already received a statement from another person within the previous 90 days.  [Schedule 2, item 10, subsection 133DB(5)]

3.36              A defendant will bear the onus of proving the defences under subsections 133DB(3) and (4).  This is appropriate since it would be relatively easier for the defendant to prove that they believed a consumer has been provided with either the projections or information statement by reference to internal procedures.

3.37              A breach of these requirements will attract a civil penalty of 2000 penalty units and also be an offence attracting a criminal penalty of 50 penalty units.  [Schedule 2, item 10, subsections 133DB(1) and (2)]  

3.38              In addition to the obligation to provide a reverse mortgage information statement under subsection 133DB(3),  the following classes of persons must also make available a reverse mortgage information statement:

       credit providers under one or more reverse mortgages; and

       licensees who provide, or hold themselves out as providing, credit assistance in relation to reverse mortgages. 

3.39              The circumstances in which they must provide an information statement are:

       through their website (where the person has a website which provides information about reverse mortgages) [Schedule 2, item 10, subsections 133DC(1) and (2)];

       when the consumer asks the licensee for an information statement, and the consumer has given the licensee their contact details as required by the regulations [Schedule 2, item 10, subsections 133DD(1) and (2)]; and

        the regulations require a consumer to be given an information statement (and the consumer has given the licensee their contact details as required by the regulations) [Schedule 2, item 10, subparagraph 133DD(1)(b)(ii)].

3.40                  Failure to provide an information statement in the above circumstances will attract a civil penalty of 2000 penalty units and is an offence attracting a criminal penalty of 50 penalty units.   [Schedule 2, item 10, subsections 133DC(2) and (3) and subsections 133DD(2) and (3)]  

3.41              There are two defences provided for a contravention of the requirement to provide a reverse mortgage information statement in response to a consumer’s request.  These are:

       that the licensee has already given the consumer, or reasonably believes the consumer has already been given, an information statement  [Schedule 2, item 10, subparagraph 133DD(4)(i)]; and

       if they are a credit provider who offers reverse mortgages, the licensee reasonably believes the consumer would not be eligible for a reverse mortgage from them.  [Schedule 2, item 10, subparagraph 133DD(4)(ii]

3.42              A defendant will bear the evidentiary burden in relation to these defences.  This is considered appropriate since it would be relatively easier for the defendant to prove that they believed a consumer need not be provided with an information statement (either because they establish facts or circumstances as to why they reasonably believe another person has done so or because the consumer would not be eligible for their products, by reference to internal procedures).

3.43              The regulations may also prescribe circumstances in which licensees are not required to give a consumer a reverse mortgage information statement.  [Schedule 2, item 10, paragraph 133DD(4)(c)]

3.44                  The Enhancements Bill will prohibit licensees, when providing or offering to provide a credit service to a consumer, from using the phrase ‘reverse mortgage’ or another term of similar import to it.  [Schedule 2, item 10, subsections 133DE(1)and (2)]

3.45              This provision ensures that consumers can have confidence that the term ‘reverse mortgage’ will be used to describe only those contracts where they will have the benefit of the statutory protections introduced by the Enhancements Bill.  Licensees should not be able to use this term where the effect or result may be to encourage a consumer to enter into a credit contract with none of these protections (for example, where they are required to repay the contract after five years).

3.46              A breach of the prohibition on the use of the term ‘reverse mortgage’ will attract a civil penalty of 2000 penalty units.  [Schedule 2, item 10, subsection 133DE(2)]

3.47              It is a defence to this requirement if the use of the phrase reverse mortgage (or phrase of similar import) accurately represents that the credit contract or mortgage being referred to:

       is or will be a reverse mortgage: or

       is not or will not be a reverse mortgage. 

[Schedule 2, item 10, subsection 133DE(3)]

3.48              Section 179 of the NCCP Act is amended to provide for specific consequences where a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for orders to let the plaintiff reside in a reverse mortgaged property to prevent or reduce any loss or damage they have suffered, or are likely to suffer if they were otherwise required to vacate the property.  [Schedule 2, item 11, paragraph 179(6)(d)]

3.49              Under section 179 the court is given power to make orders to compensate a consumer or to reduce the loss or damage suffered by a consumer.  The power to reduce the loss or damage suffered by a consumer can be exercised through specifying that an unsuitable contract should operate in accordance with orders of the court.

3.50              In the case of a consumer who is placed into a contract that is unsuitable, where a reverse mortgage would have been not unsuitable, this power would allow the court to make orders so that the unsuitable credit contract is rewritten to apply in the way that the suitable reverse mortgage would have (for example, by allowing the consumer to remain in their residence until they permanently vacate it). 

3.51              The effect of the amendment to section 179 is to specify circumstances in which a consumer may apply for such orders, and where the court would be able to make such orders. 

3.52              The circumstances under which a plaintiff may apply for such an order are:

       the defendant is a credit provider who has contravened section 133 of the NCCP Act in relation to a credit contract that is not a reverse mortgage;

       the debtor’s obligations under that contract are secured by a mortgage over their principal place of residence; and

       the court is satisfied that, at any time when the assessment needed to be made in relation to the contract under section 128 of the NCCP Act:

      a credit provider was offering reverse mortgages;

      the debtor would have been eligible to enter into a reverse mortgage; and

       the reverse mortgage would not have been unsuitable under section 133 of the NCCP Act. 

[Schedule 2, item 11, subsection 179(6)]

3.53                  If these circumstances are met and a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for the orders, the court must consider the order appropriate and make the order, unless it would adversely affect a person other than the debtor and the defendant.  [Schedule 2, item 11, subsection 179(7)]

3.54              This approach reflects the importance of protecting elderly consumers who may be placed in unsuitable credit contracts, and the desirability, where this is the case, of allowing these consumers to be able to remain in their residence (rather than, for example, being provided with compensation through a lump sum).  It is considered appropriate to protect these consumers and to avoid the consequences of this class of borrowers having to vacate their residence (such as social dislocation and potential isolation). 

Part 3 — Provisions applying to credit providers generally

3.55              Some potential debtors will be concerned about the rights of a fellow resident to remain in the property after they vacate it; for example, a debtor may want their spouse (who does not share title to the residence) to be able to remain in the residence after they themselves move into aged care accommodation. 

3.56                  If a reverse mortgage contract gives residency protections for non‑title holding residents, the Enhancements Bill regulates the way in which those protections are to be provided.  The contract document must provide that the debtor may at any time nominate to the credit provider a person who will be allowed to occupy the property under the same rights as the debtor.  The debtor must also be able to revoke any such nomination.  [Schedule 2, item 12, subsection 17(15A)]

3.57              This provides a consistent and minimum level of protections for non‑title holding residents across all credit providers who elect to who offer such protections.

3.58              This requirement only applies if a reverse mortgage contract provides for non‑title holding resident protections.  This provision:

       does not require all credit providers to offer protections to non‑title holding residents; and

       does not regulate or prescribe who can be a non‑title holding resident (so that credit providers can adopt different  eligibility criteria).

Example 3.2 

A credit provider offers reverse mortgages that do not provide residency protections to persons living the home over which the reverse mortgage is secured, apart from the title holder.  Therefore, subsection 17(15A) would not apply to the credit provider in relation to its reverse mortgages. 

Example 3.3 

A credit provider offers a reverse mortgage under which non‑title holding residents nominated by the borrower are allowed to remain in the property after the borrower has died.  This credit provider will need to comply with subsection 17(15A). 

This credit provider could also have their own criteria regarding who can be nominated by the borrower to have these residency protections (for example, they must be over a certain age).

3.59              Subsection 17(15A) will be inserted into Part 2, Division 1 of the Code.  A consequence of this is that it becomes subject to the operation of existing section 22 of the Code.  This section prohibits a credit provider from entering into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. 

3.60              A breach of this requirement will attract a criminal penalty of 100 penalty units and is an offence of strict liability.   

3.61              The imposition of a strict liability offence is considered appropriate since:

       a credit provider can easily determine or control whether those matters are to be included in their contract documents; and

       it enhances ASIC’s ability to enforce this requirement.

3.62              A credit provider is prohibited from both entering into a reverse mortgage, or subsequently changing the terms of a reverse mortgage contract, to allow them to commence enforcement proceedings against the debtor for any of the following categories of default:

       the debtor:

      failing to inform the credit provider that someone else lives in the property, or failing to provide evidence they or a nominated person occupies the property;

      leaving the property unoccupied (but only whilst it is still their principal place of residence) or;

      failing to pay a cost they are required to pay apart from the contract (for example, council rates or insurances);

       a provision which does not make clear what the debtor must do to comply with the obligation;

       a cross default (for example, the debtor defaulting on another credit contract with the same credit provider); or

       any act or omission by the debtor prescribed by regulations. 

[Schedule 2, item 13, section 18A]

3.63              As a result of the exclusion of these terms from reverse mortgage contracts borrowers should not be in default (and at risk of enforcement action) because of minor oversights or for reasons which bear no relationship to the risk to the credit provider from the default.

3.64              Section 18A will be inserted into Part 2, Division 1 of the Code and will therefore also attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division.  Therefore, a breach of this item will attract a criminal penalty of 100 penalty units and is an offence of strict liability.   

3.65              The imposition of a strict liability offence is considered appropriate since:

       a credit provider can easily take steps to ensure those matters are not included in their contract documents; and

       it enhances ASIC’s ability to enforce this requirement.

3.66              If a proposed reverse mortgage contract does not provide residency protection provisions for person other than the debtor, a person must inform the proposed debtor of this before providing credit services to them in relation to the contract.  [Schedule 2, item 13, subsections 18B(1) and (2)]

3.67              This disclosure will enable the consumer to make a fully informed decision about whether a particular reverse mortgage contract is suitable for their requirements in respect of the consequences for non‑title holding residents (such as a partner whose name is not on the title of the property).  If the borrower wants to protect this person, they would then be on notice and could choose to find a credit provider who offers reverse mortgages with the appropriate protections.

3.68              Credit providers must also meet this requirement before entering into a contract for a reverse mortgage.  [Schedule 2, item 13, subsection 18B(4)]

3.69              This disclosure must occur in writing in the form prescribed by the regulations (if any).  [Schedule 2, item 13, subsections 18B(2) and (4)]

3.70              A breach of this requirement will attract a criminal penalty of 50 penalty units and is an offence of strict liability.   The imposition of a strict liability offence is considered appropriate since it will significantly enhance ASIC’s ability to enforce this requirement.

3.71              The Enhancements Bill will enable regulations to be made that may regulate or prohibit a credit provider from entering into a reverse mortgage without the debtor having received legal advice.  [Schedule 2, item 13, section 18C]

3.72              Section 18C will be included in Part 2, Division 1 of the Code, and therefore attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division.  Therefore, a breach of this section will attract a criminal penalty of 100 penalty units and is an offence of strict liability.   

3.73              The deferral of this obligation until a commencement date has been prescribed is to enable the provision to come into force when the Government can have certainty that there are appropriately accredited solicitors available to provide legal advice. 

3.74              The imposition of a strict liability offence is considered appropriate since it significantly enhances ASIC’s ability to enforce this requirement.

3.75              Items 14, 15, 16 and 17 amend subsection 22(3) and 26(5) and paragraphs 33(2)(a) and (b) make consequential amendments to the Code as follows:

       item 14 amends subsection 22(3) to provide that a contravention of section 18B attracts the penalties under subsections 18B(4) and (5) rather than section 22 [Schedule 2, item 14, subsection 22];

       item 15 amends subsection 26(5) to provide that section 26, which relates to debtors making payments before they are due, does not apply to payments made in accordance with section 86A (which specifically addresses the ability of a borrower to make payments which terminate their reverse mortgage) [Schedule 2, item 15, section 26]; and

       items 16 and 17 amend subsection 33(2) to provide that in the case of a reverse mortgage (whether it be a continuing credit contract or not) the maximum  period for a statement of account  period is 12 months [Schedule 2, items 16 and 17, subsection 32(2)].

3.76              A purported change to a reverse mortgage contract is void to the extent that it:

       removes a provision required to be in the contract by subsection 17(15A)  [Schedule 2, item 18, paragraph 67A(a)]; or

        varies the contract so as to limit the ability of a debtor to nominate to the credit provider a person who is to be allowed to occupy the property or varies the rights they are provided under the contract (so that if a debtor entered into the contract because they had the right to later be able to nominate a non‑title‑holding resident, that right cannot be taken away).   [Schedule 2, item 18, paragraph 67A(b)]

Subdivision B — Ending of reverse mortgage by credit provider receiving value of reverse mortgaged property

3.77              The Enhancements Bill inserts Subdivision B which relates to the debtor’s accrued liability upon the conclusion of the reverse mortgage credit contract, whether by the sale of the reverse mortgaged property or other payment by the debtor.

3.78              As a result of the introduction of this Subdivision, there is a need to amend the heading to Division 1, and to introduce an additional heading, specifying that sections 82 to 86 of the Code are included in Subdivision A.  [Schedule 2, item 19 , Division 1 of Part 5 (heading)]

3.79              The Subdivision introduces a statutory ‘no negative equity’ guarantee, so that the debtor cannot be required, subject to specific exceptions, to pay more than the market value of any property that is mortgaged to the credit provider.

3.80              In summary, the Subdivision introduces requirements so that where the credit provider receives an amount equal to the adjusted market value of the property that is secured under the reverse mortgage:

       the effect of such a payment will be to discharge the debtor’s liability to the credit provider;

       the credit provider must not demand or accept payments in excess of the adjusted market value, and must refund any such payments; and

       exceptions to these restrictions are introduced (for example, where the debtor deliberately damaged the secured property). 

3.81              Where a credit provider receives an amount at least equal to the adjusted market value of the reverse mortgage property, the debtor’s obligations and the mortgage securing those obligations is discharged.  [Schedule 2, item 20, sections 86A and 86B]

3.82              A credit provider may receive those amounts either as a payment from the debtor or the proceeds of the sale of the reverse mortgaged property [Schedule 2, item 20, subparagraphs 86A(b)(i) and (ii)]. 

3.83              This allows a debtor to voluntarily pay out a reverse mortgage contract if they repay an amount at least equal to the property’s market value.   

3.84              The effect of a payment of the adjusted market value is to discharge all the debtor’s liabilities and the mortgage over their property.  [Schedule 2, item 20, subsection 86B(2)]

3.85              Regulations may be made to determine how the adjusted market value of a property is to be worked out or adjusted.  This will enable a mechanism to be introduced to address situations where there may be a dispute about how this figure should be calculated or determined.  [Schedule 2, item 20, subsection 86A(2)] 

3.86              Where a reverse mortgage credit contract has been terminated under section 86A, a credit provider must refund any payments received in excess of the adjusted market value, and must not demand or accept further payments under the credit contract.  [Schedule 2, item 20, sections 86C and 86D]

3.87              There are specific circumstances where the payment of an amount equal to the adjusted market value will not terminate the credit contract and that the credit provider may seek further payment from the debtor.  These circumstances are:

       where the market value of the reverse mortgaged property was reduced due to deliberate damage caused by the debtor or a person who occupied the property with the debtor’s consent;

       where the debtor engaged in fraud, or made a misrepresentation relating to the reverse mortgage; or

       any other circumstance prescribed in the regulations. 

[Schedule 2, item 20, section 86E]

3.88              The regulation‑making power will allow flexibility in accommodating other situations that may be identified where it would be appropriate for the credit provider to be able to demand and receive an amount in excess of the adjusted market value.

3.89              Before commencing enforcement proceedings against a debtor or mortgagor under a reverse mortgage, a credit provider must either contact or make reasonable attempts to contact the debtor or mortgagor (or their lawyer, or a person who has a power of attorney over their financial affairs).   [Schedule 2, item 21, subsection 88(1) and (2)]

3.90              This contact must occur between when the credit provider issues a default notice under section 88 of the Code and the 30 day period required under default notices for the recipient to rectify the default.  The contact must be in person or by telephone, with the credit provider required to confirm whether the debtor or mortgagor received the default notice and to also inform them of the consequences of failing to remedy the default.

3.91              These additional requirements in relation to contacting debtors and mortgagor about defaults recognises the impact age and declining health may have on this class of borrowers, their reliance on others to assist or advise them, and the consequent need for greater requirements on credit providers in respect of potentially senile delinquents.  For example:

       many reverse mortgage borrowers may better understand that they are in default and how to remedy it when this is disclosed to them verbally, rather than in writing; and

       a default occurring during a period that a debtor is temporarily absent from the reverse mortgaged property due to circumstances such as illness or hospitalisation, is more likely to be resolved when the credit provider attempts to personally contact the debtor.

3.92              A breach of this requirement will attract a criminal penalty of 50 penalty units.  [Schedule 2, item 21, subsection 88(1) and (2)]

3.93              Under section 18A a credit provider is prohibited from specifying in a reverse mortgage contract that certain types of conduct will constitute a default.  If a credit provider issues a notice relating to a reverse mortgage for an alleged default of the contract because the debtor or mortgagor has not complied with a contract term prohibited under section 18A, the notice is not a default notice for the purposes of subsections 88(1) and (2) or section 93 of the Code.  [Schedule 2, item 22, subsection 88(7A)]

3.94              However, the notice will still be effective as a default notice for the purposes of sections 89, 94 or 95 of the Code.  [Schedule 2, item 22, subsection 88(7B)]

3.95              Section 93A applies to reverse mortgages where the liability of the debtor or mortgagor to the credit provider can exceed the adjusted market value because one of the exemptions in section 86D applies.

3.96              If a credit provider is required under Section 88 of the NCCP Act to give a debtor or mortgagor a default notice before beginning enforcement proceedings, the default notice sent by the credit provider must include the following additional matters:

        the amount received by the credit provider;

        the debtor’s liability under the reverse mortgage contract just before that amount was received; and

        the ground or grounds under section 86D under which they are seeking payments in excess of the adjusted market value (such as deliberate damage or fraud or misrepresentation by the debtor). 

[Schedule 2, item 23,  subsection 93A(2)]

3.97                  The Code currently provides that contravention of particular provisions of the Code will be a breach of a key requirement under section 111, with the credit provider liable for additional penalties in accordance with Part 6 of the Code.

3.98                  Section 111 is amended to provide that a breach of section 17(15A) will be a breach of a key requirement under section 111.  [Schedule 2, items 24 and25, subsections 111(1) and (2)]

3.99              Credit providers that allow a debtor to nominate a person who may occupy the reverse mortgaged property on the same terms of the debtor (as discussed in paragraphs 1.28 to 1.33 above), must keep records of any nomination or revocation of a nomination by a debtor.  [Schedule 2, item 26, subsection 185A(1)]

3.100          A breach of this requirement will attract a criminal penalty of 50 penalty units.  [Schedule 2, item 26, subsection 185A(2)]


Chapter 4         
Small amount credit contracts

Outline of chapter

4.1                  The Consumer Credit and Corporations Legislation (Enhancements) Bill 2011 (Enhancements Bill) introduces new requirements for credit providers and persons who provide credit assistance in relation to small amount credit contracts.

4.2                  Small amount credit contracts are defined, in general terms, as contracts where the amount of credit provided is less than $2,000 and the term is less than 2 years.

4.3                  The following obligations will apply in relation to small amount credit contracts:

       licensees who have websites where they offer credit assistance in relation to small amount credit contracts, or where consumers can apply for or inquire about a small amount credit contract, will need to meet disclosure requirements (to be prescribed by the regulations); and

       licensees will be prohibited from offering or arranging concurrent small amount credit contracts, refinancing an existing small amount credit contract into a new small amount credit contract, or from increasing the credit limit of a small amount credit contract. 

Context of amendments

4.4                  At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two‑phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth.

4.5                  The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 

4.6                  Under Phase Two, COAG agreed the Commonwealth would consider additional reforms to the regulation of credit, including whether or not to introduce measures to address practices in relation to small amount credit contracts.

4.7                  The Enhancements Bill introduces specific obligations in relation to this class of credit contracts because of the particular risks that arise to consumers from their use.  In particular there are risks that the repeated or continued use of credit provided through these this form of credit result in consumers entering into multiple contracts where the overall level of indebtedness increases over time so that:

       an increasing proportion of their income will need to be used to meet the repayments; and

       the capacity of the borrower to use the credit for purposes that can improve their standard of living is diminished.

4.8                  The Enhancements Bill addresses these issues by:

       new disclosure requirements — so that consumers are alerted to alternatives that may avoid the need to enter into a small amount credit contract; and

       prohibitions on repeat and multiple borrowing — to address the risk of the debtor’s liability escalating through entering into a number of small amount credit contracts. 

Summary of new law

4.9                  The Enhancements Bill introduces website disclosure requirements for licensees in relation to small amount credit contracts.

4.10              These obligations will apply to:

       licensees who have a website where they represent that they are able to provide credit assistance in relation to small amount credit contracts; and

       licensees who have a website that can be used by a consumer to apply for or make an inquiry about a small amount credit contract (where the licensee would be the credit provider).

4.11              The regulations will prescribe the disclosure requirements.  It is proposed the disclosure requirements will consist of a short, high impact statement advising the availability of both sources of assistance and alternative no cost or low cost sources of credit. 

4.12              The Enhancements Bill will also introduce prohibitions to repeated and continued use of credit provided through small amount credit contracts (the multiple contract prohibitions).

4.13              Licensees will be prohibited from providing credit assistance by either suggesting that a consumer apply for, or assisting a consumer to apply for:

       a small amount credit contract, if they know or are reckless as to whether the consumer is already a party to a small amount credit contract; or

       an increase to the credit limit of a small amount credit contract.

4.14              Licensees who are credit providers will be prohibited from:

       entering into a small amount credit contract, if they know or are reckless as to whether the consumer is already a party to a small amount credit contract;

       entering into a small amount credit contract, if some or all of the credit provided under that contract will be used to refinance some or all of the credit provided under another small amount credit contract; or

       increasing the credit limit of a small amount credit contract.

Comparison of key features of new law and current law

New law

Current law

Specific obligations will be introduced on persons engaging in credit activities in relation to small amount credit contracts to:

       disclose alternatives to credit; and

       comply with the multiple contract prohibitions. 

The NCCP Act currently does not include any specific requirements relation to disclosure obligations or prohibitions in relation to multiple small amount credit contracts  that apply to persons engaging in credit activities. 

Detailed explanation of new law

4.15              Schedule 3 of the Enhancement Bill introduces a number of additional conduct obligations for persons engaging in credit activities in relation to small amount credit contracts.

4.16              The obligations in Schedule 3 commence on 1 July 2012, immediately after the commencement of Part 2 of Schedule 2 to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011[item 3 in the table in subsection 2(1)]

4.17              A definition of small amount credit contract will be included in section 5 of the NCCP Act.  It is defined as a credit contract:

       that is not a continuing credit contract;

       where the credit provider is not an Authorised Deposit‑taking Institutions (ADI);

       that is not secured by a mortgage (over any type of property);

       where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations);

       where the term of the contract is 2 years or less (or any term prescribed by the regulations); and

       where the contract meets any other requirements that may be prescribed by regulations. 

[Schedule 3, item 1, subsection 5(1)]

4.18              A power to change aspects of the definition under the regulations has been introduced to allow flexibility in the application of the consequent obligations.  Credit providers may adopt different legal structures in relation to their contracts according to whether or not they consider it preferable for their contracts to be subject to the obligations applying to small amount credit contracts.  The regulation‑making power will allow the Commonwealth to respond more promptly to such responses, where necessary.   

4.19              Additional conduct obligations are to be included in the NCCP Act as follows:

       obligations that apply to licensees who are providing credit assistance will be set out in a new Division 7 to Part 3‑1; and

       obligations that apply to licensees who are  credit providers under small amount credit contracts will be set out in a new Part 3‑2C.

4.20              There is a consequential change to the Guide to Part 3‑1 in section 111 (to refer to the new Division 7), while section 133C will introduce a Guide to Part 3‑2C.  [Schedule 3, items 2 and 4, sections 111 and 133C]

4.21              The effect of section 112 of the NCCP Act is that the obligations that will apply to licensees who are providing credit assistance in Division 7 will not apply to licensees where they are providing credit assistance in relation to a credit contract where they would be the credit provider under that contract.

Division 7—Small amount credit contracts

4.22              A licensee who has a website that represents that they are able to provide credit assistance in relation to small amount credit contracts must ensure the website complies with requirements specified by the regulations.  [Schedule 3, item 3, section 124A]

4.23              It is proposed to implement, through the regulation‑making power, a requirement for  licensees to include on their websites a short high impact statement disclosing the availability of, first, sources of assistance (such as financial counselling services and specialist consumer legal advice services), and, second, alternative and cheaper sources of credit.  For example, the last decade has seen the development of alternative no or low cost loan schemes specifically designed for low‑income consumers. 

4.24              It is expected that the disclosure will be generic, that is, it will have the same content for all licensees.

4.25              A licensee will be prohibited from providing credit assistance by suggesting that a consumer apply for, or assisting the consumer to apply for, a small amount credit contract if the licensee knows or is reckless as to whether the consumer is already a party to a small amount credit contract.  [Schedule 3, item 3, section 124B]

4.26              The licensee will have a defence where they reasonably believe that the consumer is not a debtor under a small amount credit contract.  It is expected it would usually be established through the licensee being able to demonstrate the inquiries they made or the basis they had for believing the debtor was not already a party to a small amount credit contract, when in fact this was the case.  The provision therefore places the onus on the licensee to establish the facts or circumstances on which this belief is based.  [Schedule 3, item 3, subsection 124B(3)]

4.27              A licensee must not provide credit assistance by suggesting that a consumer apply for, or assisting them to apply for an increase to the credit limit of a small amount credit contract.  [Schedule 3, item 3, section 124C]

Part 3‑2C—Licensees that are credit providers under credit contracts: additional rules relating to small amount credit contracts

Division 2 — Small amount credit contracts

4.28              Part 3‑2C will insert new obligations on licensees that are credit providers under small amount credit contracts. 

4.29              A licensee that has a website that can be used to apply for, or make an inquiry about, a small amount credit contract (where the licensee would be the credit provider), must ensure that the website complies with the requirements in the regulations.  [Schedule 3, item 4, section 133CA]

4.30              It is expected that, first, the disclosure have the same content for all licensees, and, second, the requirements will be triggered where the consumer makes an application or inquiry in a way that is readily identifiable (so that licensees can have certainty when the obligation arises). 

4.31              It is expected that the regulations will prescribe a short high impact statement disclosing the availability of both sources of assistance and alternative no cost or low cost sources of credit. 

4.32              A licensee will be prohibited from entering into, or offering to enter into, a small amount credit contract if the licensee knows or is reckless as to whether the consumer is already a party to a small amount credit contract.  [Schedule 3, item 4 , section 133CB]

4.33              The licensee will have a defence where they reasonably believe that the consumer is not a debtor under a small amount credit contract.  The defence would therefore require the licensee to demonstrate the inquiries they made or the basis they had for believing the debtor was not already a party to a small amount credit contract, when in fact this was the case.  The provision therefore places the onus on the licensee to establish the facts or circumstances on which this belief is based.  [Schedule 3, item 4, subsection 133CB(3)]

4.34              A licensee will be prohibited from entering into, or offering to enter into, a small amount credit contract if some or all of the credit provided under the contract would refinance some or all of the credit provided to the consumer under another small amount credit contract.  It is irrelevant whether or not the other credit contract is with the same credit provider or a third party.  [Schedule 3, item 4, section 133CC]

4.35              The licensee will have a defence where they reasonably believe that the consumer is not a debtor under a small amount credit contract (so that the defence would not be available where the earlier credit contract was with that credit provider).  As with the defence in subsection 133CB(2), the licensee will be in the best position to make out the grounds that establish the defence, for example, by demonstrating the inquiries they made that led them to believe the debtor was not already a party to a small amount credit contract.  [Schedule 3, item 4, subsection 133CC(3)]

4.36              A licensee who is a party to a small amount credit contract is prohibited from increasing the credit limit of that contract.  [Schedule 3, item 4, section 133CD]

4.37              Section 180 of the NCCP Act is amended to provide additional remedies to consumer against a provider of credit assistance or a credit provider for breaches of the multiple contract prohibitions.  For example, a consumer will be able to seek a remedy such as recovery of any fees paid to the provider of credit assistance or commissions earned as a result of the transaction.  This remedy would be at the discretion of the court.  [Schedule 3, item 5, paragraph 180(1)(b)]

4.38              Section 180 of the NCCP Act has been extended as:

       the disclosure requirements and the multiple contract prohibitions are intended to assist debtors who are particularly vulnerable (principally because of their low incomes and inability to access alternative sources of mainstream credit); and

       experience under State and Territory legislation has been that credit providers and providers of credit assistance can enter into commercial arrangements designed to maximise the costs that can be charged to this class of debtors.


Chapter 5         
Caps on costs etc.  for credit contracts

Outline of chapter

5.1                  The Consumer Credit and Corporations Legislation (Enhancements) Bill 2011 (Enhancements Bill) introduces new obligations to provide for a tiered cap on the costs that can be charged under credit contracts. 

5.2                  The key elements of these obligations are:

       credit providers under small amount credit contracts (in general terms, contracts where the amount of credit is less than $2,000 and the term is less than 2 years) will only be able to charge the following amounts:

      an establishment fee that can be a maximum of 10 per cent of the adjusted credit amount (defined as, in practice  the amount of credit the debtor receives in their hand);

      monthly fees that can be a maximum of 2 per cent of the adjusted credit amount;

       fees payable in the event of default; and

      any government fee, charge or duty payable in relation to the contract;  

       all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent; and

       the introduction of penalties against credit providers for breaching either cap, and penalties against providers of assistance for suggesting credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap.

Context of amendments

5.3                  At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two‑phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth.

5.4                  The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 

5.5                  Under Phase Two, COAG agreed the Commonwealth would consider whether or not to regulate the costs that can be charged under credit contracts.

5.6                  The Enhancements Bill introduces caps on credit contracts to address specific risks of financial detriment or harm to consumers, through the use of relatively high‑cost credit.

5.7                   The risk to a consumer of this financial detriment increases according to the following factors:

       the borrower’s income — the lower the income the greater the reduction in income that will result from having to meet repayments under a credit contract (noting that a significant percentage of borrowers who use these products will have very low incomes);

       the term of the credit contract  — the shorter the term the less income the borrower can expect to receive from other sources while they need to repay it, so that there is less opportunity for a borrower to receive sufficient income to either repay the debt or avoid an immediate need for additional credit to meet expenses temporarily deferred in order to make that repayment;

       the number of credit contracts — the more credit contracts that the borrower takes out within a short period of time (whether concurrently or successively), the more likely it is that income is being diverted to meet repayments, rather than ongoing expenses; and

       the level of costs charged by the credit provider — there can be significant differences in the level of costs charged by credit providers, in part reflecting the difficulties some debtors have in being able to obtain credit from other credit providers (with the result they enter into contracts irrespective of the costs being charged).

5.8                  The combination of these factors can result in such a reduction in income that the borrower may, in a very short period, be placed in a position where the debt cannot be repaid, or can only be repaid through a significant drain on the borrower’s financial resources. 

5.9                  The tiered approach to the cap on costs reflects the need to allow credit providers to receive a greater return for small amount credit contracts, given the relatively higher establishment costs they may incur. 

Summary of new law

5.10              Schedule 4 of the Enhancements Bill introduces new obligations in relation to the restricting the maximum amount that can be charged in under both small amount credit contracts and all other credit contracts regulated by the Code.

5.11              The obligations will commence on 1 January 2013.

5.12              Schedule 4 will introduce the following obligations:

       a cap on small amount credit contracts so that the maximum cost (other than in the event of default) will be the total of:

      10 per cent of the amount of credit the debtor receives in their hand;

      monthly fees of 2 per cent of this amount; and

      any government fees, charges or duties payable in relation to the contract;  

       all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent;

       credit providers are liable to penalties for breaching either cap;

       providers of assistance who suggest credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap are liable to penalties (including being required to refund any fees or charges paid by the consumer); and

       a number of provisions are introduced to address specific avoidance practices that have developed in response to the operation of similar caps currently in force in some Australian States and the Australian Capital Territory.

Comparison of key features of new law and current law

New law

Current law

Specific obligations will be introduced:

       to restrict the maximum amount that credit providers can charge under a credit contract; and

       to ensure compliance through complementary obligations on persons providing credit assistance.

 

The NCCP Act currently does not regulate the maximum amount that can be charged under credit contracts. 

In the Australian Capital Territory, New South Wales and Queensland, there is currently in force a cap of 48 per cent which includes interest, fees and charges.  In Victoria there is a 48 per cent interest rate cap excluding fees and charges.  There is no cap in place in the Northern Territory, South Australia, Tasmania or Western Australia.

Detailed explanation of new law

Schedule 4 — Caps on costs etc.  for credit contracts

5.13              The obligations in Schedule 4 will commence on 1 January 2013.  [item 3 in the table in subsection 2(1)]

5.14              The definition of small amount credit contract will be included in section 5 of the NCCP Act.  It is defined as a credit contract:

       that is not a continuing credit contract;

       where the credit provider is not an Authorised Deposit‑taking Institutions (ADI);

       that is not secured by a mortgage (over any type of property);

       where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations);

       where the term of the contract is 2 years or less (or any term prescribed by the regulations); and

       where the contract meets any other requirements that may be prescribed by regulations. 

[Schedule 3, item 1, subsection 5(1)]

5.15              Section 17 of the Code prescribes disclosure requirements for credit providers.  The changes proposed in relation to small amount credit contracts means that credit providers will only be able to impose an upfront establishment fee and monthly fees (and not interest charges in respect of this class of contracts.  As a result, there is a consequent need to exempt providers of small amount credit contracts from the disclosure requirements that relate to annual percentage rates and interest charges.  [Schedule 4, item 1, subsections 17(4) to (6)]

5.16              Section 23A will introduce prohibited monetary obligations that only apply to small amount credit contracts.  As a result amendments are introduced to, first, change the heading for section 23 (to clarify the distinction between that section and section 23A), and, secondly, to amend section 23 so that it does not apply to small amount credit contracts.  [Schedule 4, items 2 and 3, section 23  and subsection 23(1)]

5.17              Section 23A will introduce a prohibition on a provider of a small amount credit contract from charging, under the contract, the following amounts:

       interest charges (irrespective of whether there has been a default by the debtor);

       fees and charges prohibited by the Code (which would not include the establishment fee and monthly fees permitted under section 31A); or

       an amount that is greater than the amount of a permitted fee and charge (for example, overcharging a government fee). 

[Schedule 4, item 4, section 23A]

5.18              Subsection 23A(2) provides a specific penalty for contravention of this requirement.  A credit provider who, under a small amount credit contract, imposes a prohibited liability will lose their entitlement to all fees and charges (including the establishment fee and monthly fees).  The credit provider is therefore not only required to refund the amount of any excess fee, charge or cost, but cannot retain any amounts, including those that would otherwise be permitted under section 31A.  The debtor can recover any such amounts as a debt.  [Schedule 4, item 4, subsection 23A(2)]

5.19              The purpose of this provision is to create a greater financial incentive for credit providers to comply with the prohibition.  The nature of small amount credit contracts means that if credit providers charge amounts in breach of the prohibition they are likely to be relatively low in dollar terms.  Allowing a penalty whereby the consumer can recover all fees and charges that were imposed will therefore encourage stricter compliance. 

5.20              Section 24 of the Code will be amended to introduce a criminal penalty of 100 penalty units for a breach of section 23A, or for a credit provider requiring or accepting payments in breach of the prohibition.  [Schedule 4, items 6 and 7, subsections 24(1A) and (2)]

5.21              The effect of this amendment is that a credit provider who breaches the prohibition in section 23A will have committed an offence under subsection 24(1A), with the contravention also being an offence of strict liability under subsection 24(2).  A contravention of section 23A will be an offence of strict liability to encourage credit providers to maintain rigid compliance with the cap on costs (given that the amount they charge in respect of a small amount credit contract is within their control).

5.22              In order for the caps on small amount credit contracts to be effective it is considered necessary to introduce strict penalties against providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap.  This will address situations where small amount credit provider have commercial relationships with brokers who may direct consumers to that credit provider irrespective of the cost, or where the credit provider has adopted a legal structure that they consider  avoids the cap, but where the broker may not be willing to assume the same risks as the credit  provider.  [Schedule 4, item 8, section 24A]

5.23              The introduction of section 24A has resulted in a need to change the heading of section 24, to clarify that the two sections apply to prohibited monetary obligations in relation to credit providers and providers of credit assistance respectively.  [Schedule 4, item 5, section 24]

5.24              Part 2 Division 3 of the Code prescribes requirements in relation to the charging of interest under credit contracts.  The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges.  As a result there is a consequent need to exempt small amount credit contracts from this Division.  [Schedule 4, item 9, section 27A]

5.25              Section 31 of the Code provides a power to make regulations prohibiting credit providers from imposing particular credit fees of charges, or particular classes of such fees or charges.  The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose any credit fees of charge other than those expressly permitted under section 31A.  There is a consequent need to amend this provision so that the regulation‑making power does not apply to small amount credit contracts.  [Schedule 4, items 10 and 11, section 31]

5.26              Section 31A prohibits a provider of a small amount credit contract from charging fees and charges other than: 

       an establishment fee that can be a maximum of 10 per cent of the adjusted credit amount;

       monthly fees that can be a maximum of 2 per cent of the adjusted credit amount;

        fees payable in the event of default; and

        a government fee, charge or duty payable in relation to the contract. 

[Schedule 4, item 12, section 31A]

5.27              The adjusted credit amount is defined in section 204 of the Code as the first amount of credit that is to be provided under the contract (excluding fees).  The meaning of this term is discussed in detail at paragraph 5.56, but in substance it refers to the amount of money that the debtor will receive under the contract.

5.28              The prohibition applies to all fees and charges imposed or provided for under the contract.  It is therefore not restricted to credit fees and charges as defined in section 204 of the Code.  The use of the broader term is deliberately used to restrict the debtor’s liability under a small amount credit contract, by only allowing credit providers to charge those amounts specifically listed in subsection 31A(1). 

5.29              The Enhancements Bill introduces a different cap on costs for all other contracts other than small amount credit contracts.  Section 32A will introduce a prohibition on a credit provider entering into a credit contract where the annual cost rate exceeds 48 per cent.  [Schedule 4, item 13, subsection 32A(1)]

5.30              As with the caps on small amount credit contracts, strict penalties are introduced for providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap.  [Schedule 4, item 13, subsections 32A(2) and (3)]

5.31              The 48 per cent cap does not apply in the following circumstances: 

       where the credit provider is an ADI (to give this class of credit providers certainty where they may otherwise inadvertently breach the cap, particularly in relation to contracts where both credit and debit facilities are provided);

       where the credit contracts is a small amount credit contracts (as the cap in section 31A will apply); or

       where the credit contracts is a bridging finance contract (where a combination of a short term and relatively high upfront costs may result in the 48 per cent cap being exceeded). 

[Schedule 4, item 13, subsection 32A(4)]

5.32                  A definition of a bridging finance contract is included in the Enhancements Bill.  It is defined as a contract where:

         at the time the contract is made the debtor:

       reasonably expects to receive a lump sum before the end of the contract; and

       intends to use that sum as far as possible to meet their obligations under the contract; and

        if the regulation prescribe any conditions, those conditions are meet. 

[Schedule 2, item 5, subsection 204(1)]

5.33              Section 32B sets out the formula for calculating whether or not the 48 per cent annual cost rate has been exceeded.  This formula largely adopts the model currently in force in New South Wales, pursuant to Division 2 of the Credit (Commonwealth Powers) Act (NSW) 2010.  [Schedule 4, item 13, section 32B]

5.34              The use of an existing formula avoids the need for changes by credit providers who currently have developed practices to comply with the New South Wales cap on costs.

5.35              Section 32B will, however, allow for amounts to be prescribed by regulation that would need to be taken into account in calculating the annual cost rate.  The introduction of this regulation‑making power will enable the Government to quickly respond to attempts to circumvent the objective of these reforms.  [Schedule 4, item 13, paragraph 32B(3)(c)]

5.36              This power is provided in recognition, in the Australian jurisdictions that have a cap on costs, of the development of a range of methods of charging the borrower additional amounts that do not meet the definition of costs to be included in calculating the cap in State or Territory legislation.  Credit providers have adopted a range of practices in order to be able to generate a return of more than 48 per cent while still complying with the cap. 

5.37              A contravention of the annual cost rate requirement in section 32A will be a consequential breach of the current prohibition in section 23 on credit providers charging amounts in excess of those allowed under the Code.

5.38              Subsection 34(6) of the Code prescribes requirements in relation to the disclosure of interest charges in a statement of account.  The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose interest charges.  As a result there is a consequent need to exempt small amount credit contracts from subsection 34(6).  [Schedule 4, item 14, subsection 34(6)]

5.39              A credit provider under a small amount credit contract (or any person prescribed by the regulations) will be prohibited from receiving any part of the amount of the credit provided under the contract.  [Schedule 4, item 15, subsection 39A(1)]

5.40                  Any amount of credit provided under the contract retained or paid to the credit provider or to any person prescribed by the regulations is defined as a prohibited credit amount[Schedule 4, item 25, subsection 204(1)]

5.41              The intention of this prohibition is to address existing practices that have developed following the introduction of similar caps on credit contracts in some States and the Australian Capital Territory.  The purpose of the provision is to prevent credit providers from increasing the amount that must be paid by the debtor under the contract through, for example, practices such as requiring the debtor to also purchase goods or services at inflated prices, with the cost of those goods or services included in the amount of credit provided under the contract. 

5.42              This practice enables a credit provider to obtain a higher return in two ways: first, the debtor must pay an inflated price for the goods relative to the cost to the credit provider of providing them; and, second, the debtor pays interest on the cost of the goods or services. 

5.43              Similar arrangements between credit providers and third parties have developed to avoid the restriction on costs, so that the amount of credit is increased by fees or amounts payable to those third parties (with commercial arrangements between those parties in relation to the charging of the fees or costs).  The regulation‑making power, that will enable payments to prescribed third parties to be included in the prohibited credit amount, will enable the Government to respond promptly to any such practices.  [Schedule 4, item 15, paragraph 39A(1)(b)]

5.44              Subsection 39A(2) provides that this prohibition does not apply to the permitted establishment and monthly fee, government fees or charges or to any types of payments permitted by regulations (so that credit providers can include those  charges in the amount of credit provided (although subject to other restrictions).  [Schedule 4, item 15, subsection 39A(2)]

5.45              The regulation‑making power will enable exemptions from  from the prohibition to be made where it would be appropriate for the credit provider to pass on the cost to the debtor.  [Schedule 4, item 15, paragraph 39A(2)(c)]

5.46              The effect of Section 39B is to cap the amount the credit provider can charge by way of default fees, by specifying that the maximum amount that can be recovered under a contract in the event of default by the borrower must not exceed an amount that is twice the adjusted credit amount.  [Schedule 4, item 15, subsection 39B]

5.47              The effect of this provision is that the total of the permitted establishment and monthly fees and the default fees can, at most, only be equal to twice the adjusted credit amount.  For example, in relation to a small amount credit contract where the adjusted credit amount was $1000 and the period of the contract was four months, the total of the establishment and monthly fees would be $180.  If the debtor then defaulted the total amount the credit provider could recover would be $1000, or a maximum of $820 in default fees. 

5.48              If a term of a small amount credit contract allows the credit provider to recover default fees in excess of the maximum amount, that term or provision is void to the extent it authorises the credit provider to collect the excess.  The credit provider would, however, still be allowed to receive or retain default fees up to the maximum amount.  [Schedule 4, item 15, subsection 39B(2)]

5.49              The rate at which default fees can be charged is not regulated by the Enhancements Bill.  However, credit providers would be subject to other requirements that apply more broadly (including common law principles that the default fees must reflect their loss from any default by the debtor).

5.50              The restriction on the maximum amount that can be recovered under a contract — so that this figure must not exceed an amount that is twice the adjusted credit amount — does not apply to enforcement expenses.  [Schedule 4, item 15, subsection 39B(3)]

5.51              The Code already regulates the way in which enforcement expenses can be charged, and expressly provides, in section 107, that the amount must not exceed those reasonably incurred by the credit provider. 

5.52              The amendments will provide that a contravention of the annual cost rate requirement in section 32A will be a breach of a key requirement under section 111.  The effect of this amendment is that it enables a debtor or guarantor to seek a penalty up to a maximum of all credit charges, and also enables ASIC to seek a penalty of up to $500,000.  The amount of the penalty depends on a range of factors, and, in this context, would be likely to include the number of contracts affected, whether the overcharging was deliberate or not, and the steps taken by the credit provider to rectify the situation.  For example, if the cap was regularly exceeded because the credit provider deliberately elected to overcharge debtors, the penalty could be expected to be greater than if the overcharging was an isolated occurrence.  [Schedule 4, items 16 and 17, subsection 111(1) and paragraph 111(2)(f)]

5.53              There are a number of key requirements that a credit provider can breach other than in relation to prohibited monetary obligations.

5.54              The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges.  As a result there is a consequent need to modify section 114, which sets out the orders a court can make where a credit provider has breached a key requirement in relation to a small amount credit contract. 

5.55              The Enhancements Bill therefore makes consequential amendments to section 114 as follows:

       small amount credit contracts are excluded from subsection 114(1) (which enables orders to be made in relation to interest charges payable under a credit contract); and

       subsection 114(1A) is inserted, which provides that the maximum penalty that a court may impose is the total of the permitted establishment and monthly fees payable under the contract. 

[Schedule 4, items 18 and 19, subsections 114(1) and (1A)]

5.56              The term adjusted credit amount is relevant to calculating the permitted establishment and monthly fees (as discussed in paragraph 5.27).  A definition of this term is to be included in section 204 of the Code as the amount of credit that is to be provided under the contract, excluding the following amounts:

       the permitted establishment and monthly fees;

       any amount of credit provided under the contract retained or paid to the credit provider or to any person prescribed by the regulations, in breach of the prohibition in section 39A; and

       any other amount that may be prescribed by the regulations. 

[Schedule 4, item 20, subsection 204(1)

5.57                  The Enhancements Bill will insert a number of ‘signpost’ definitions, referring to terms that are central to the operation of these provisions and specifying the sections in which they appear.  These terms are annual cost rate, credit cost amount, permitted establishment fee, permitted monthly fee, prohibited credit amount and small amount credit contract[Schedule 4, items 21, 22, 23, 24, 25 and 26]


Chapter 6         
Consumer Leases

Outline of chapter

6.1                  The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill) introduces new requirements for persons who engage in credit activities in relation to consumer leases.  The key amendments relate to:

       the form of consumer lease documents;

       obligations on the lessor to provide statements of account — both ongoing and at the end of the lease;

       changes to obligations under a consumer lease;

       changes on the grounds of hardship and on the grounds the consumer lease was unjust;

       the rights of the lessor in regards to repossessing goods under a consumer lease;

       terminating a consumer lease;

       enforcement procedures and expenses;

       the liability of lessors for misrepresentations by suppliers of the leased goods; and

       offences for false or misleading representations and for harassment in relation to consumer leases.

Context of amendments

6.2                  At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two‑phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection.

6.3                  In phase one, the National Consumer Credit Protection Act 2009 (the NCCP Act) introduced a Commonwealth statutory framework for the regulation of lenders and brokers.  Under phase two, COAG agreed the Commonwealth would consider reforms to the regulation of consumer leases under the National Credit Code (the Code). 

6.4                  Leases that contain a right or option to purchase are functionally the same as a credit contract and are therefore deemed to be credit contracts by the Code in section 9. 

6.5                  Part 11 regulates consumer leases where there is no right or obligation to purchase the leased goods.  However, due to the regulatory difference between leases and other credit contracts, there have been instances of inappropriate uses of consumer lease arrangements to avoid the Code completely. 

6.6                  The difference in regulation of consumer lease arrangements and other consumer credit contracts stems from the different nature of the products.  However, in respect of some of the obligations under the Code, there is little rationale for varying treatment. 

6.7                  Some of the main regulatory differences between the two include:

       the form of consumer leases;

       the obligation to provide an information statement or statement of account;

       the content of the disclosure requirements;

       liability for conduct such as false and misleading representations; and

       the rights of lessees and lessors in respect of enforcement proceedings.

6.8                  The regulatory arbitrage in this context may lead to avoidance behaviour and adverse competitive impacts on suppliers of credit contracts relative to suppliers of consumer leases.  Due to these differences, lessees have a lower level of rights relative to other consumers of credit. 

6.9                  Furthermore, in the context of consumer leases, lessees are particularly vulnerable to unscrupulous behaviour including:

       lessees mistakenly believing that they have an ability to buy the goods when they do not; and

       the amount paid under the lease may be significant (that is, greater than that paid under a credit contract to purchase similar goods) but the lessee has no right to the goods when the lease ends.

Summary of new law

6.10              Schedule 3 of the Enhancements Bill addresses the current risks arising from the regulatory arbitrage arising from the lower level of obligations applying to lessors.  It extends, as appropriate, the consumer protection measures that currently apply to credit contracts to consumer leases.  A comparison table of the provisions of the Code which are being applied to consumer leases is included at the end of this Explanatory Memorandum at paragraph 5.81.

6.11              Schedule 3 of the Enhancements Bill introduces the following amendments in relation to consumer leases:

       amendments to Division 2: form of and information to be included in consumer leases;

       introduction of a new Division 4: fees and charges under a consumer lease;

       introduction of a new Division 5: the lessor’s obligation to account including the provision of ongoing statements of account, and end of lease statements;

       introduction of a new Division 6: certain transactions not to be treated as consumer leases;

       introduction of a new Division 7: changes to obligations under consumer lease arrangements including changes by agreement, as well as changes on the grounds of hardship and unjust transactions;

       introduction of a new Division 8: repossession of goods, termination of a consumer lease and enforcement procedures

       introduction of a new Division 9: introducing the concept of linked lessors and the liability of the lessor for a suppliers’ misrepresentation;

       introduction of a new Division 10: regulate specific conduct relating to consumer leases — namely, false or misleading representations and harassment;

       introduction of a new Division 11: relocating the deeming provision which extends Part 12 relating to miscellaneous matters to consumer leases

       amendments to Part 13 of the Code: introduce new defined terms to reflect the new obligations imposed by the Amendment Bill; and

       minor technical amendments to the Code. 

6.12              The Enhancements Bill will also introduce consequential and technical changes to the provisions applying to credit contracts. 

Comparison of key features of new law and current law

New law

Current law

A consumer lease:

       must be in written form;

       must be signed by both the lessor and lessee;

       may be made up of multiple documents; and

       may be made in a form other than in writing. 

A consumer lease must be in writing and signed by the lessee under section 173. 

A unilateral alteration of a lease document by the lessor will be void, unless the lessee agrees to the change.

No equivalent for consumer leases.  The requirement only applies to credit contracts under section 19 of the Code. 

The new law will prohibit lessors from overcharging fees payable under a consumer lease.

No equivalent for consumer leases.  The requirement only applies to credit contracts under sections 31 and 32 of the Code. 

Lessors are required to provide:

       an ongoing statement of account if requested by the lessee; and

       an end of lease statement.

No equivalent for consumer leases.  The obligation to provide an ongoing statement of account only applies to credit contracts under section 33 of the Code. 

Consumer leases can be changed on the grounds of hardship or on the basis the transaction is unjust.

Part 4 Division 3 previously applied to consumer leases by virtue of the former deeming provision in section 177(1)(a) (except section 78). 

Imposes an obligation on the lessor to provide a statement of the amount payable on termination. 

No equivalent for consumer leases.  The obligation only applies to credit contracts under section 83 of the Code. 

Imposes an obligation on the lessor to inform the lessee when a direct debit default occurs. 

No equivalent for consumer leases.  The obligation only applies to credit contracts under section 87 of the Code. 

Lessee have a right to terminate a lease in two different circumstances:

       before the goods have been provided; and

       after the goods have been provided. 

The lessor is also required to provide a statement of account to the lessee upon termination. 

A lessee may terminate the lease after goods have been provided by returning the goods under section 179 of the Code. 

There is no equivalent obligation under the old law to provide a statement of account. 

The following enforcement matters are extended to consumer leases:

       enforcement proceedings;

       postponement of enforcement proceedings;

       procedures for goods hired under a consumer lease; and

       recovery of enforcement expenses from the lessee.

Those enforcement matters only apply to credit contracts:

       enforcement proceedings under sections 88, 89 and 93

       postponement of enforcement proceedings under sections 94 to 97

       enforcement procedures for goods mortgaged under sections 98 to 101

       recovery of enforcement expenses under section 107

Sections 98 to 101 currently apply to consumer leases by virtue of the deeming provision section 177. 

Lessors are liable for a suppliers’ misrepresentation. 

The new law also imposes a criminal penalty on a lessor or supplier for harassment. 

No equivalent for consumer leases.  Credit contracts are regulated in relation to linked credit providers and false or misleading representations under sections 125 to133. 

Detailed explanation of new law

Part 11 — Consumer leases

6.13              Items 1 to 9 make minor consequential amendments to the NCCP Act.  These are outlined below in Consequential Amendments at paragraphs 5.84 to 5.87. 

Amendments to Division 2 — Form of and information to be included in consumer leases

Form of consumer lease

6.14              The Enhancements Bill makes a number of amendments to Division 2 of Part 11 of the Code.  This Division currently regulates both the form and content of consumer leases. 

6.15              Lessors will be required to ensure that a consumer lease is in the form of a written document and that it is signed by both the lessor and the lessee.  [Schedule 5, item 14, subsection 173(1)]

6.16              The amendments also allow a lessor to have a consumer lease that is made up of multiple documents [Schedule 5, item 14, subsection 173(1A)].  In these instances, the lease will be regarded as signed in accordance with subsection 173(1) if one of the documents is signed, and the other documents are referred to in that document [Schedule 5, item 15, subsection 173(2A)].

6.17              The amendments will allow for regulations to be made which authorise consumer leases to be formed other than by a party signing a contract, such as by specified conduct [Schedule 5, item 16, section 173A].  Under the Code, credit contracts can also be formed by conduct and this same power is being extended to consumer leases.  This will allow flexibility in relation to the way in which  consumer lease contracts can be formed to reflect changes in practice (for example, by potentially allowing contracts to be formed by the consumer accepting goods). 

6.18              Finally, there are restrictions on consumer lease documents being altered that operate in a similar manner to the way credit contracts are regulated under the Code.  A lessor will be prohibited from making unilateral changes to a lease document (other than alterations that reduce the liabilities of the lessee) unless the lessee agrees to the change in writing.  [Schedule 5, item 17, section 174A]

Division 4 — Fees and charges

6.19              A new Division 4 is introduced which reflects the provisions of the Code in respect of fees and charges that currently apply to credit contracts.  The Code will allow for consumer lease fees and charges to be prohibited by regulation.  [Schedule 5, item 18, section 175A]

Division 5 — Lessor’s obligation to account

Subdivision A — Statements of account

6.20              A new Division 5 is introduced into the Code to impose obligations on the lessor to provide statements which provide information in relation to the history of the lessee’s account.  Credit providers are obliged under the Code to provide statements of account, and the Enhancements Bill extends similar requirements to lessors.  The underlying policy considerations for requiring a statement of account for credit contracts equally extends to lessees under a consumer lease arrangement, primarily in that it provides an opportunity for the consumer to review their account and identify any discrepancies.

6.21              The Enhancements Bill will introduce obligations on the lessor to provide statements of account both every 12 months and in response to a request by the lessee [Schedule 5, item 18, section 175C and 175E].  The information that must be included in the statements of account will be prescribed in the regulations [Schedule5, item 18, section 175D].  It is anticipated that regulations will be made requiring the lessee to provide information such as a record of ongoing payments over a specified period of time, and the remaining term of the lease. 

6.22              Failure to provide a statement of account annually, or upon the request of the lessee, will be an offence of strict liability [Schedule 5, item 18, section 175C].  Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences.  The offence also attracts a criminal penalty of 100 penalty units.  The rationale for this penalty is historic as the penalty provision for the offence under section 33 which applies to credit contracts was carried over from state legislation.  As this new provision is intended to mirror the current provisions that apply to credit contracts, to maintain consistency, the same penalty is also applied to lessors. 

6.23              In the event the lessor does not provide a statement of account within the timeframes specified, the lessee can apply to a court to order provision of the statement or itself determine the amounts under the statement.  [Schedule 5, item 18, section 175F]

6.24              The Code enables a lessee to seek written explanations from the lessor, as the trigger for the mechanisms to resolve disputes.  A lessor is required to give a lessee a written explanation where a lessee disputes a particular liability, within 30 days of receiving the statement of account.  A lessor must not commence enforcement action until at least 30 days after the written explanation is provided.  Where the court has been asked to determine liability within 30 days of the lessor’s explanation, the lessor must not commence enforcement proceedings without leave of the court.  Failure to observe this requirement is a strict liability offence with a maximum penalty of 50 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence.  [Schedule 5, item 18, section 175G]

Subdivision B — End of lease statement

6.25              Section 175H makes it an offence of strict liability if a lessor fails to provide a statement to the lessee at least 90 days before the end of the term of the consumer lease.  The information that must be included in the statement will be prescribed by the regulations [Schedule 5, item 18, section 175H].  It is anticipated this will include information in relation to the lessee’s options about whether or not they can negotiate to purchase the goods at the end of the lease.  The regulations will also outline circumstances where the requirement would not apply (which could cover, for example, situations where the notice is unnecessary).  [Schedule 5, item 18, subsection 175H(2)]

6.26              Failure to provide an end of lease statement within the prescribed time frame is an offence of strict liability and will attract a criminal penalty of 100 penalty units.  The provision imposes 100 penalty units to maintain consistency with the other offence provisions related to statements of accounts.  The penalty is necessary because of the importance of the lessee being given information before the lease ends, that will maximise the opportunity for the lessee to begin negotiations in relation to the leased goods prior to the termination of the lease.   

Example 6.1 

In January, a lessee enters into a 12 month contract to lease a washing machine.  Before the end of September, the lessor is obliged to provide an end of lease statement which outlines the costs remaining under the lease.  It is expected the statement will notify the lessee that the lease is coming to an end soon.  This will give the lessee an opportunity to negotiate terms to purchase the washing machine for a reduced price.  This helps mitigate the risk of the situation arising where the lessee continues paying for the goods as long as she retains possession of them, even after the lease has ended. 

Division 6 — Certain transactions not to be treated as new consumer leases

6.27              Section 175J provides that certain types of changes to a consumer lease will not be regarded as creating a new consumer lease. 

6.28              These changes are:

       the provision of further goods;

       the deferrals or waiver an amount under an existing consumer leases; and

       a postponement relating to an existing consumer lease.

6.29              The effect of section 175J is that the requirements in relation to making new consumer leases will not apply in those three situations.  [Schedule 5, item 18, section 175J]

Division 7 — Changes to obligations under consumer leases

Subdivision A — Changes by agreement of parties

6.30              The Enhancements Bill will set out notice requirements where a lease is changed as a result of an agreement between the contracting parties.  Notice of any such change to the lease must be given to the lessee not later than 30 days after the agreement.  It will be a strict liability offence not to comply with the appropriate procedure and noncompliance attracts a maximum penalty of 100 penalty units.  [Schedule 5, item 18, subsection 177A(1)]

6.31              The notice requirements in subsection 177A do not apply where the change defers or reduces the obligations of the lessee for a period of not more than 90 days.  [Schedule 5, item 18, subsection 177A(2)]

6.32              This is a strict liability offence.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences.  The offence also attracts a criminal penalty of 100 penalty units.  The rationale for this penalty is historic as the penalty provision for the offence under section 71 which applies to credit contracts was carried over from state legislation.  As this new provision is intended to mirror the current provisions that apply to credit contracts, to maintain consistency, the same penalty is also applied to lessors. 

6.33              It is anticipated that regulations will be made, which replicate those that currently apply to credit contracts in the same context, requiring the following information to be contained in the written notice provided in relation to the changes:

       the date of the changes to the consumer lease;

       current and future payment details; and

       any proposed increase in the term of the consumer lease and new expiry date for the lease.

6.34              These notice provisions do not apply to changes made on the grounds of hardship or where the change was the result of the transaction giving rise to the consumer lease being found to be unjust.  [Schedule 5, item 18, subsection 177A(3)]

Subdivision B — Changes on grounds of hardship and unjust transactions

6.35              The Code mirrors the hardship variation and unjust transactions provisions that currently apply to credit contracts under Part 4 Division 3 of the Code, and extends the regulation to leases.  The Enhancements Bill has repealed the former paragraph 177(1)(a) which extended these provisions to consumer leases in a shorthand way [Schedule 5, item 21].  The Code now sets out in detail the way in which these provisions apply to consumer leases. 

6.36              The operation of the hardship provisions has been changed, consistent with the changes made to the equivalent provisions in respect of credit contracts to make it simpler for lessees to seek a variation of the terms of their contract. 

6.37              The procedures for making and resolving hardship applications are:

        where a lessee considers they will be unable to meet their obligations under the consumer lease arrangement, they are entitled to notify the lessor, in writing or orally, and request a change to the lease [Schedule 5, item 18, subsection 177B(1)];

       the lessor will have an obligation to respond to the lessee’s notice within 21 days by either:

      notifying the lessee that they are prepared to negotiate a change [Schedule 5, item 18, paragraph 177B(2)(a)]; or

      where they refuse to change the contract, providing a written notice setting out the reasons why they do not agree to the change and provide details of the external dispute resolution scheme and the rights the lessee will have under that scheme [Schedule 5, item 18, paragraph 177B(2)(b)];

       a lessor who is prepared to initially negotiate a change and who subsequently decides not to change the contract must send a written notice (containing the same information referred to in the previous paragraph), and must do so within 21 days of giving the notice required under paragraph 177B(2)(a) (so that in practice a lessor can have up to 42 days to obtain relevant information about the lessee’s circumstances and then decide whether to vary the contract) [Schedule 5, item 18, subsection 177B(3)].      

6.38              A contravention of subsection 177B(2) will also be an offence of strict liabilityStrict liability is necessary to ensure the effectiveness of the enforcement regime for these offences, so that lessees are clearly and promptly informed of the options available to them where they are unable to meet their obligations under a lease.  [Schedule 5, item 18, subsection 177B(4)]  

6.39              If a lessor refuses to change the lease, the lessee may apply to a court for changes to the terms of the lease.  The court may make orders to change the terms of the lease after giving the lessee and lessor a reasonable opportunity to be heard.  The court is also empowered to stay enforcement proceedings and to make other orders until it determines the application.  A lessor is also entitled to apply to the court to vary the original order.  [Schedule 5, item 18, sections 177D and 177E]

6.40              Sections 177F to 177K cover a court’s power to reopen unjust transactions.  A court can reopen transactions giving rise to a lease (or a variation of a lease) if it is satisfied that the circumstances in which the lease was entered into or changed were unjust.  [Schedule 5, item 18, subsection 177F(1)]

6.41              Unjust is defined in subsection 204(1) to include unconscionable, harsh or oppressive.  The following principles apply to the interpretation of the term ‘unjust’ and the phrase ‘unconscionable, harsh’ and ‘oppressive’:

        they should be given a construction consistent with the beneficial policy intentions of the legislation;

       the meanings of each concept may overlap but each word may also have an independent operation (so that a contract may be unjust because a term is oppressive or burdensome but not unconscionable);

       the phrase is inclusive so that a consumer lease can still be unjust even if it is not  unconscionable, harsh or oppressive; and

        the reference to ‘unconscionable’ encompasses both common law and statutory unconscionability. 

6.42              Section 177F also sets out criteria which assist the court in determining whether or not the lease or change in the lease was unjust [Schedule 5, item 18, subsection 177F(2)].

6.43              A contract, mortgage or guarantee will not necessarily be unjust because one or more of these criteria applies to the transaction.  Conversely it may still be unjust even where none of these factors is made

6.44              The application of the unjust contract provisions requires a two stage inquiry.  First, the court must determine whether the contract is unjust and, second, where this is the case, the court must decide what relief if any is appropriate.  [Schedule 5, item 18, subsection 177F(5)]

6.45              Different considerations may apply in relation to each stage, so that, for example, the conduct and knowledge of the lessee may not prevent the consumer lease being found to be unjust, but may result in a lesser remedy, or no remedy, being provided to the lessee.

6.46              Where a transaction is reopened as unjust, the court is given power to make a range of orders that allow it flexibility in reshaping the bargain.  [Schedule 5, item 18, section 177G]

Division 8 — Repossession, termination and enforcement of consumer leases

Subdivision A — Repossession of goods under consumer lease

6.47              Item 20 will make a technical amendment to the heading of Division 8 to refer to the repossession, termination and enforcement of consumer leases.  [Schedule 5, item 20]

6.48              The existing requirement in section 178 of the Code, for lessors to give notice before repossessing goods subject to the lease, is retained.  Section 178 requires the lessor to give 30 days written notice of an intention to repossess goods which are the subject of a consumer lease.  Failure to do so is a strict liability offence with a maximum penalty of 50 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence.  This is important as a lessee should be given sufficient opportunity to rectify a default. 

6.49              The existing exceptions to this requirement are also retained, so that notice is not required where:

       repossession at the end of the term is a right under a fixed term lease;

       the lessor believes on reasonable grounds that the lessee has, or intends to dispose of leased goods;

       the lessor cannot locate the lessee, having made reasonable attempts;

       the lessee becomes insolvent after entering into a consumer lease; or

       the court authorises repossession. 

Subdivision B — Termination of consumer lease by lessee

6.50              Section 178A will introduce a right for the lessee to terminate a lease by written notice if the leased goods have not yet been provided.  The lessor is still entitled to demand payment of fees or charges which were incurred before the lease was terminated (but not, for example, amounts in relation to rental payments).  The amount charged by lessors for these fees will be subject to regulation by the unfair contract terms provisions in the Competition and Consumer Act 2010.  This complements the lessor’s existing right to terminate a lease under section 179.  [Schedule 5, item 22, section 178A]

6.51              The existing requirement in section 179 enables lessors to end a consumer lease at any time by returning the goods hired under the lease.  However, the heading has been changed to clarify the distinction between this provision, and the right to terminate in section 178A.  [Schedule 5, item 23, section 179]

6.52              Section 179A imposes an obligation on the lessor to provide a statement summarising the amounts payable by the lessee on termination.  The lessee may make a request for such a statement at any time.  Failure to provide a statement of the amounts payable upon termination of the lease is an offence of strict liability that attracts a criminal penalty of 50 penalty units [Schedule 5, item 24, section 179A].  The rationale for the penalty being strict liability is that lessees should be promptly informed about the amount necessary to be paid to end a lease, rather than incurring additional liabilities where there is a delay. 

6.53              In the event the lessor does not provide a payout figure, a lessee has a right to apply to a court to determine the amount payable.  [Schedule 5, item 24, section 179B]

6.54              The Enhancements Bill will also impose an additional obligation on the lessor to notify lessees about direct debit defaults.  Lessees commonly arrange to meet their repayments under a lease by authorising the lessor to deduct amounts by a direct debit from an account held by the lessee.  Direct debits generally occur automatically at pre‑arranged intervals (for example, monthly).  If a lessee has insufficient funds in their account, they may not become aware that they are in default for some time.  This may result in the lessee accruing charges and fees to third parties before they become aware of the default. 

6.55              Section 179C addresses this issue by requiring the lessor to give the lessee a notice within 14 days of the first direct debit payment failing in relation to a direct debit instruction.  Failure to do so is an offence of strict liability which gives rise to a criminal penalty of 50 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences.  [Schedule 5, item 24, section 179C]

Subdivision C — Enforcement of consumer leases

6.56              The Code sets out notice procedures a lessor must follow before they can begin enforcement proceedings against a defaulting lessee.  Before commencing enforcement proceedings, the lessor must give a default notice, which provides the lessee a period of 30 days from the date of the notice to remedy the default.  Failure to do so amounts to a strict liability offence with a maximum penalty of 50 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence to protect the lessee’s interests.  The default notice must contain a number of matters under subsection 179D(2) including information prescribed by the regulations; this information is expected to ensure the person in default has relevant information relating to the default itself, the date after which enforcement action may begin, and the lessee’s rights.  [Schedule 5, item 24, section 179D]

6.57              The provisions also outline certain circumstances where a default notice is not required, such as where the lessor has made reasonable attempts to locate the lessee without success or the court has authorised the start of enforcement proceedings.  [Schedule 5, item 24, subsection 179D(3)]

6.58              A lessee will have the right to remedy any default within the period specified in a default notice.  This ensures that the lessee has the opportunity, where they are able to do so, of avoiding enforcement action, and then continuing to comply with their obligations under the consumer lease.  [Schedule 5, item 24, section 179E];

6.59              Section 179F limits the capacity of a lessor to begin enforcement proceedings against a lessee where the lessee gives a hardship notice under section 179D [Schedule 5, item 24, subsection 179F(1)].  The effect of section 179F is that a lessor cannot commence enforcement proceedings against a lessee until 14 days from when they have provided the lessee with their reasons for refusing to negotiate a change to the lease [Schedule 5, item 24, subsection 179F(2)].  However, there is an exception to this restriction where a lessor had previously received a hardship notice from the lessee in the last 4 months and the lessee reasonably believes the basis for the most recent notice is not materially different from any earlier notices.  Failure by the lessor to comply with subsection 179F(2) is a strict liability offence which incurs a penalty of 50 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences, because of the effect enforcement proceedings can have on the lessee’s rights. 

6.60              However, provision is also made to allow the lessor to take possession of the goods in a situation where it is necessary to protect the goods (for example, if the lessor believes the lessee may be intending to remove or dispose of the goods).  [Schedule 5, item 24, subsection 179F(3)]

6.61              Some consumer lease contracts may contain acceleration clauses that enable the lessor to require the lessee to pay a lump sum to terminate the lease.  Subsection 204(1) defines an acceleration clause as a clause that allows the lessor, either on default, or at the lessor’s discretion, to require repayment, therefore requiring the lessee to pay the outstanding balance under the lease immediately.  [Schedule 5, item 25, subsection 204(1)];

6.62              Where a lessor has included an acceleration clause in their contract (enabling the lessor to require the lessee to pay the outstanding balance as a lump sum), the Code restricts the operation of such clauses so that the lessor cannot demand an acceleration in payments until a default notice is provided.  The Code specifies circumstances where this restriction does not apply (for example, where the lessor is unable to locate the lessee).   [Schedule 5, item 24, section 179G] 

Subdivision D — Postponement of enforcement proceedings

6.63              The lessee has the right to request the lessor to postpone enforcement proceedings where the lessee has been provided with a default notice.  The lessor must respond to the request within 21 days, and if they do not agree to the request, they must give reasons for their decision to the consumer.  This is an offence of strict liability and failure to comply attracts a penalty of 30 penalty units [Schedule 5, item 24, section 179H].  Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence.  The section will also outline the procedures that must be satisfied before a lessor is entitled to begin enforcement proceedings against the lessee following a postponement request.  However, provision is also made to allow the lessor to take possession of the goods in a situation where it is necessary to protect the goods (for example, if the lessor believes the lessee may be intending to remove or dispose of the goods).  [Schedule 5, item 24, subsection 179H(4)]

6.64                  Section 179J sets out the consequences where a postponement is negotiated.  The default notice is taken to not have been given if the lessee complies with the conditions of postponement.  A lessor must give written notice of the agreed conditions no later than 30 days after the agreement is reached.  This is also an offence of strict liability and failure to comply attracts a penalty of 100 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence and give the parties certainty as to their varied obligations.  [Schedule 5, item 24, section 179J]

6.65              A lessee may also apply to a court for a postponement if they are unable to negotiate a postponement with the lessor [Schedule 5, item 24, section 179K].  The lessor may also subsequently apply to the court for a variation to a court order made under this Subdivision.  [Schedule 5, item 24, section 179L]

Subdivision E — Enforcement procedures for goods hired under a consumer lease

6.66              The provisions regarding enforcement procedures for goods hired under a consumer lease are intended to provide the same protections as those which apply in relation to mortgaged goods under a credit contract.  These provisions previously applied to consumer leases by virtue of paragraph 177(1)(b) of the Code .  This Enhancements Bill repeals that provision and instead the Code now sets out in detail the obligations that apply in relation to consumer leases. 

6.67              The provisions:

       require the lessee to inform the lessor of the location of the goods hired under the consumer lease.  If the goods are no longer in their possession, the lessee must give any information that would assist the lessor in tracing the goods.  This is a strict liability offence, and non‑compliance attracts a penalty of 50 penalty units (because of the importance of the lessee being able to establish the location of their property) [Schedule 5, item 24, section 179M];

       restrict lessees from entering residential premises to seize the goods, unless the occupier has given written consent to enter or the Court has authorised entry.  The regulations may also prescribe procedures for obtaining and giving consent (with it anticipated the regulations will provide for similar requirements to those that apply to credit providers in regulation 87 of the National Consumer Credit Protection Regulations 2010).  This is a strict liability offence, and non‑compliance attracts a penalty of 50 penalty units.  Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence and recognises the importance of the lessee’s rights over their property [Schedule 5, item 24, section 179N];

       allow a court to order entry to residential premises to allow the lessor to take possession of the goods hired under a consumer lease [Schedule 5, item 24, section 179P]; and

       allow a court to order a person to deliver the goods hired under the consumer lease to a lessor at a specified time or place or within a specified period [Schedule 5, item 24, section 179Q]

Subdivision F — Enforcement expenses

6.68              Section 179R prohibits a lessor from recovering any amount greater than reasonable enforcement expenses from a lessee.  A penalty is imposed if the lessor does not comply.  The court may determine a dispute about the amount of enforcement expenses that may be recovered by the lessor.   [Schedule 5, item 24, section 179R]

Division 9 — Linked lessors and tied leases

Subdivision A — Interpretation and application

6.69              A new Division 9 is introduced into the Code which addresses the relationships between linked lessors and suppliers of goods.  These provisions address the situation where a consumer’s primary or exclusive contact in relation to a lease will be with a supplier of goods, but the goods are ultimately supplied to the consumer by a third party, the lessor (with the supplier arranging for title to pass to the lessor). 

6.70              Section 179T will provide the consumer with a remedy for specified conduct where the lessor is linked to the supplier.  This approach, which already applies in relation to linked credit contracts, recognises that the lessor may be in a commercial relationship with the supplier where they largely regulate or supervise their conduct, but where common law principles of agency may not necessarily provide the consumer with a remedy against the lessor for the conduct of the supplier.

6.71              The Enhancements Bill introduces definitions for the terms ‘a linked lessor’ and ‘a tied consumer lease’.  A linked lessor means a lessor:

       with whom the supplier has a contract, arrangement or understanding relating to the goods;

       to whom the supplier regularly refers persons for the purpose of providing a consumer lease;

       whose contracts and application forms are made available to potential lessees by the supplier (by arrangement with the lessor); or

       with whom the supplier has a contract, arrangement or understanding under which contracts or applications for a consumer lease may be signed by persons at the supplier’s premises.

[Schedule 5, item 24, subsection 179S(1)]

6.72              A tied consumer lease is defined as a consumer lease which is entered into where the goods hired under the consumer lease are supplied by a supplier to the lessor, and the lessor is a linked lessor of that supplier [Schedule 5, item 24, section 179S(2)]

Subdivision B — Liability of lessors for suppliers’ misrepresentations

6.73              Under section 179T, a linked lessor will be held liable for a supplier’s misrepresentations about the leased goods, the lease itself or services, supplied or arranged by the lessor, that are incidental to the hire of goods under the lease.  A lessor is liable for any representations, warranties or statements made by the supplier of the goods to the lessee in relation to the tied consumer lease.     

Example 6.2 

The lessor is a linked lessor with a supplier of computers and software.  Consumers sign leases at the premises of the supplier and have no direct contact with the lessor.  The supplier misrepresents both the quality of the software and the terms of the service warranty provided with the lease.  The consumer would have a remedy against the lessor as a linked lessor. 

6.74              The lessor is entitled to be indemnified by the person who made the representation, warranty or statement and any person on whose behalf it was made.  Because of their ongoing commercial relationships it is usually anticipated that there would be contract between the lessor and the supplier which would specifically address the liability of the supplier to indemnify the lessor in these circumstances.  [Schedule 5, item 24, section 179T]

Division 10 — Conduct relating to consumer leases

6.75              The Enhancements Bill also creates two new offences in relation to consumer lease arrangements.  These offences are:

       making false or misleading representations [Schedule 5, item 24, section 179U]; and

       harassing a person into entering a consumer lease arrangement [Schedule 5, item 24, section 179V]

6.76              Section 179U creates an offence for making false or misleading representations.  The offence applies to any person who makes representations about matters material to entry into a consumer lease or a related transaction, or attempts to induce a person to enter such a consumer lease or transaction.  It therefore applies to lessees and persons providing credit services, and also to third parties.  A maximum fine of 50 penalty units applies.  [Schedule 5, item 24, section 179U]

6.77              For example, if a person represented to the consumer that they had the right to purchase the goods at the end of the lease (when this would not be the case because of the definition of a consumer lease) then this would be ordinarily be a representation within both paragraphs (a) and (b) of section 179U.

6.78              The Code also contains a prohibition in section 179V on lessors or suppliers harassing a person in attempting to have them apply for, or enter, a consumer lease or related transaction.  A maximum criminal penalty of 100 penalty units applies [Schedule 5, item 24, section 179V]

6.79              The criminal penalties under sections 179U and 179V are consistent with the penalties under sections154 and 155, which in turn reflect those that previously applied under State and Territory legislation. 

Division 11 — Other Code provisions applicable to consumer leases

6.80              The Enhancements Bill repeals section 177 [Schedule 5, Item 21].  Previously, section 177 extended Part 4 Division 3 (except for section 78), sections 98, 99, 100 and 101 and the miscellaneous provisions in Part 12 of the Code to consumer leases.  The Enhancements Bill now has provisions in respect of the matters covered by these sections that specifically apply to consumer leases.  It is therefore no longer necessary to deem these provisions to apply to consumer leases.  Section 179W provides that both Part 12 of the Code, and the definition of ‘associated’ in subsection 204(2), extend to consumer leases.  [Schedule 5, Item 24, section 179W]

Comparison table

6.81              The table below outlines the provisions which have been extended to apply to consumer leases. 

Table 6.1 

Credit Contracts

Consumer Leases

Topic

Section 14

Subsection 173(1)

Form and expression of contract document

Section 15

Section 173A

Contract documents in a form other than writing

Section 18

Subsection 173A(1A)

One or more separate documents

Section 19

Section 174A

Unilateral changes to a contract document

Section 31

Section 175A

Regulation of fees and charges

Section 32

Section 175A

Prohibits the overcharging of fees and charges

Section 33

Section 175C

Obligation to provide an ongoing statement of account

Section 34

Section 175D

Information to be contained in statements of account

Section 36

Section 175E

Statement of account on request

Section 37

Section 175F

Court ordered statement of account

Section 38

Section 175G

Disputed accounts

Section 40

Section 175J

Certain transactions not treated as consumer leases

Section 71

Section 177A

Changes by agreement

Section 72

 

Section 177B

Changes on the grounds of hardship and unjust transactions

Under the old law, these matters applied to consumer leases by virtue of the former deeming provision in 177(1)(a):

       Changes on grounds of hardship

       Notice of change

       Changes by court

       Applying for variation of change

       Court may reopen unjust transactions

       Orders on reopening of transactions

       Applications by ASIC

       Time limit

       Joinder of parties

Section 73

 

Section 177C

Section 74

 

Section 177D

Section 75

 

Section 177E

Section 76

 

Section 177F

Section 77

 

Section 177G

Section 79

 

Section 177H

Section 80

 

Section 177J

Section 81

Section 177K

Section 83

Section 179A

Obligation to provide statement of amount payable on termination

Section 84

Section 179B

Court may also determine the amount payable on termination

Section 87

Section 179C

Obligation to notify about a direct debit default

Section 88

 

Section 179D

Enforcement proceedings:

       Requirements before enforcement

       Defaults may be remedied

       Extra requirements before lessor can enforce

       Enforcing acceleration clauses

Section 89

 

Section 179E

No equivalent

 

Section 179F

Section 93

Section 179G

Section 94

 

Section 179H

Postponement of enforcement proceedings:

       Postponement of exercise of rights

       Effect of negotiated postponement

       Postponement by court

       Applying for variation of postponement order

Section 95

 

Section 179J

Section 96

 

Section 179K

Section 97

Section 179L

Section 98

 

 

Section 179M

Enforcement proceedings for goods mortgaged

Under the old law, these matters applied to consumer leases by paragraph 177(1)(b) of the former deeming provision:

       Information about the location of mortgaged goods

       Entry into residential property to take possession of goods

       Court may order entry

       Order for possession

Section 99

 

 

Section 179N

Section 100

 

 

Section 179P

Section 101

 

Section 179Q

Section 107

Section 179R

Recovery of enforcement expenses

Section 127

Section 179S

Definitions for linked lessor and tied consumer lease

Section 128

Section 179T

Liability for linked contracts

Section 154

Section 179U

False or misleading representations

Section 155

Section 179V

Harassment

 

Part 13 — Principal definitions

General definitions

6.82              Section 204 contains definitions of words and expressions used in the Code.  In some cases, the definition expands the usual meaning of the word.  The Enhancements Bill will introduce new terms, as well as repeal and substitute existing terms, into the general definitions.  These are:

       Acceleration clause (item 13 removes the definition from section 92 of the Code, and the definition is reproduced in the general definitions) [Schedule 5, items 13 and 25, subsection 204(1)];

       Bulk electronic clearing system (item 12 removes the definition from subsection 87(6) of the Code, and the definition is reproduced in the general definitions) [Schedule 5, items 12 and 25, subsection 204(1)];

       Consumer lease fees or charges (inserts a new definition into the general definitions) [Schedule 5, item 32, subsection 204(1)];

       Default notice (inserts a new definition into the general definitions) [Schedule 5, item 27, subsection 204(1)];

       Direct debit (item 12 removes the definition from subsection 87(6) of the Code, and it is reproduced in the general definitions) [Schedule 5, item 28, subsection 204(1)];

       Enforcement proceedings (the definition is clarified to take into account consumer leases) [Schedule 5, item 29, subsection 204(1)];

       Hardship notice (inserts a new definition into the general definitions) [Schedule 5, item 30, subsection 204(1)];

       Lessee (the definition is removed from the section 5 dictionary in the NCCP Act and reproduced in the general definitions) [Schedule 5, item 31, subsection 204(1)];

       Lessor (the definition is removed from the section 5 dictionary in the NCCP Act and reproduced in the general definitions) [Schedule 5, item 32, subsection 204(1)];

       Linked lessor (as discussed above in paragraph 5.71) [Schedule 5, item 33, subsection 204(1)];

       On demand facility (the definition is removed from section 92 and reproduced in the general definitions) [Schedule 5, item 34, subsection 204(1)];

       Postponement request (inserts a new definition into the general definitions) [Schedule 5, item 35, subsection 204(1)];

       Tied consumer lease (as discussed above in paragraph 5.72) [Schedule 5, item 36, subsection 204(1)]; and

       Unjust (as discussed above in paragraph 5.41) [Schedule 5, item 37, section 204].  The definition of unjust in subsection 76(8) is also repealed [Schedule 5, item 11, subsection 76(8)].

6.83              These definitions are necessary to reflect the amendments that have been made to the NCCP Act and the Code under this Enhancements Bill. 

Consequential amendments

6.84              Under items 1 to 10, minor technical amendments are made to the NCCP Act under these amendments.  This is to ensure consistency between the provisions of the NCCP Act and the amendments to the Code.  Item 1 amends the definition of lessor in the NCCP and replace it with a reference to the section 204 in the Code [Schedule 5, item 1, subsection 5(1)].  The Enhancements Bill will amend the text for the definition of value of a credit contract, mortgage, guarantee or consumer lease in subsection 5(1) to ensure consistency in the Code [Schedule 5, item 2 and 3, subsection 5(1)].  Subsection 199(3) will similarly be amended so that the text refers to a credit contract, mortgage, guarantee or consumer lease [Schedule 5, item 9, subsection 199(3)]

6.85              The Enhancements Bill will also amend subsection 147(7) which outlines a defence for suggesting an unsuitable consumer lease.  Paragraph 147(7)(b) is amended to refer to the new sections 177B and 179H which outline the procedures for consumers in hardship, instead of sections 72 and 94 of the Code [Schedule 5, item 4, subsection 147(7)].  Amendments are also made to repeal Note 2 as the reference to sections 72 and 94 is no longer relevant [Schedule 5, items 5 and 6, subsection 147(7)]

6.86              Item 7 and 8 will make amendments to the table in subsection 199(2) to reflect the new sections introduced into the Code in relation to consumer leases [Schedule 5, items 7 and 8, subsection 199(2)].  Similarly, Item 10 amends paragraph 200(1)(b) to include references to sections 177D and 179K [Schedule 5, item 10, paragraph 200(1)(b)]

6.87              Item 19 will repeal section 176 which relates to further goods and deferrals or waivers under consumer leases [Schedule 5, item 19]

Do not remove section break.


 

Chapter 7         
Application provisions

Schedule 6 — Applications provisions

Part 2 — Schedule 1 (enhancements) to the amending Act

7.1                  Schedule 6 of the Consumer Credit and Corporations Legislation (Enhancements) Bill 2011 (Enhancements Bill) sets out the application provisions in relation to the amendments introduced by the other Schedules.

7.2                  Schedule 6 provides that the following amendments in Schedule 1 will only apply to credit contracts, mortgages and guarantees (as relevant) that were entered into on or after the commencement of the amendment:

       changes to clarify the operation of provisions in relation to prohibited fees and charges (section 32 and 40 of the Code as amended) and to specifying that certain transactions will not be new credit contracts (section 40 of the Code as amended);

       changes to the provisions in relation to changes on the grounds of hardship, default notice requirements and postponement requests (sections 72, 73, 74, 88 and 94 of the Code as amended); and

       changes to the effect of hardship notices on enforcement proceedings introduced by section 89A of the Code.

7.3                  Schedule 6 provides that the following amendments in Schedule 1 will only apply as follows:

       changes to section 128 of the NCCP Act (as amended) in relation to the liability of linked lessors for representations made by suppliers will only apply to representations made on or after the commencement of the Schedule; and

       the remedy for unfair or dishonest conduct by providers of credit services introduced in section 180A will only apply in relation to credit services provided on or after the commencement of the Schedule.

7.4                  Schedule 6 provides that section 124 of the Code (as amended) will apply to applications made on or after the commencement of Part 5 of Schedule 1 (whether the contraventions occurred before, on or after that commencement date).

7.5                  The effect of the amendment to section 124 is not to make a conduct that was previously not a contravention of the Code a contravention.  The effect is to increase the remedies available to a consumer from a contravention, and to also allow ASIC to have standing in relation to conduct that is a contravention of the Code (irrespective of whether the contravention has a civil effect or not). 

Part 3 — Schedule 2 (reverse mortgages) to the amending Act

7.6                  Schedule 6 provides that the following amendments in Schedule 2 will only apply to credit contracts that were entered into on or after the commencement of the Schedule:

       a presumption that under certain circumstances a court must consider orders appropriate if the order will let the plaintiff reside in their residence to prevent or reduce loss or damage suffered or likely to be suffered by the plaintiff vacating the residence (subsection 179(6) and (7));

       arrangements relating to the residency protections given to a person nominated by the debtor under a credit contract for a reverse mortgage (subsection 17(15A));

       credit contract for a reverse mortgage must not prohibit an early repayment of an amount that is more than (or at least equal to) the adjusted market value of a reverse mortgaged property (subsection 26(6));

       certain purported changes to a credit contract for a reverse mortgage relating to arrangements for nominated residents are void; and

       the requirement for credit providers to keep records of a debtor’s nominations that another person be allowed to occupy the reverse mortgaged property.

7.7                  Schedule 6 provides that section 18A of the Code will only apply to entry into, and changes to credit contracts on or after the commencement of the Schedule.  The effect of section 18A is that credit providers are prohibited from entering into a credit contract for a reverse mortgage that provides a basis for enforcement proceeding in certain events such as the debtor breaching another credit contract with the credit provider.

7.8                  Schedule 6 provides that paragraphs 33(2)(aa) and (ab) of the Code will only apply to credit contracts entered into, before, on or after commencement of the Schedule.  The effects of these paragraphs are that the maximum period for a statement of account for a credit contract for a reverse mortgage is 12 months. 

7.9                  Schedule 6 provides that the following amendments in Schedule 2 will only apply to credit contract and mortgages that were entered into before, on or after commencement of the Schedule:

       requirements that apply when a credit provider receives a payment which ends a reverse mortgage;

       circumstances under which a notice is not to be taken as a default notice; and

       notice requirements a credit provider must provider a debtor of a credit contract for a reverse mortgage if the credit provider seeks to enforce the debtor’s liability above the value of the reverse mortgaged property.

7.10              Schedule 6 provides that subsection 88(1) and (2) only applies to credit contracts and mortgage entered into before, on or after commencement of the Schedule.  These subsections relate to requirements on credit providers before they can begin enforcement proceedings against a debtor in relation to a credit contract or credit contract for a reverse mortgage.

Part 4 — Schedule 3 (small amount credit contracts) to the amending Act

7.11              Schedule 6 provides that the following amendments to the NCCP Act apply in relation to small amount credit contracts entered into on or after commencement of Schedule 3:

       a prohibition on licensees suggesting, or assisting with, credit limit increases under a small amount credit contract (section 124C); and

       a prohibition on credit providers for increasing the credit limit under a small amount credit contract (section 133CD).

Part 5 — Schedule 4 (caps on costs etc.  For credit contracts) to the amending Act

7.12              Schedule 6 provides that the following amendments to the NCCP Act apply in relation to small amount credit contracts entered into on or after the commencement of the Schedule:

       prohibited monetary obligations that only apply to small amount credit contracts (section 23A);

       a prohibition on  providers of a small amount credit contracts from charging fees and charges other than certain prescribed  charges (section 31A);

       limits on the application of amount of credit provided under a small amount credit contract (section 39A); and

       limits in the amount that may be recovered if there is a default under a small amount credit contract (section 39B).

Part 6 — Schedule 5 (consumer leases) to the amending Act

7.13              Schedule 6 provides that subsection 199(2) of the NCCP Act only applies to consumer leases entered on or after commencement of the Schedule.  This subsection relates to proceedings which can be dealt with under a small claims procedure.

7.14              Schedule 6 provides that the amendments in relation to Part 11 of the Code apply in relation to consumer leases entered into on or after the commencement of Schedule 5. 


Chapter 8         
Voting at AGMs of Public Companies

Context of amendments

8.1                  Currently, the Corporations Act 2001 (Corporations Act) requires listed companies to prepare a remuneration report, and put the report to a non‑binding shareholder vote at the annual general meeting.

8.2                  Recently, the Government enacted reforms to prohibit key management personnel (KMP) from voting in remuneration resolutions, although it provided an exception where shareholders give an undirected proxy to the chair of an annual general meeting, and the shareholder provides their informed consent for the chair to exercise the proxy.  This exception for the chair is contained in sub‑section 250BD(2) of the Corporations Act.  Some confusion has arisen as to whether this exception applies in respect of the non‑binding vote required under section 250R.

Summary of new law

8.3                  The new law clarifies that the chair of an annual general meeting, who is a member of the KMP or a closely related party of a KMP, is able to vote undirected proxies in the non‑binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy.

Comparison of key features of new law and current law

New law

Current law

The new law clarifies that a chair of the meeting, who is also a KMP or a closely related party of a KMP, is able to vote undirected proxies in the non‑binding vote if the shareholder provides express authorisation for the chair to exercise the proxy.

 

KMP and their closely related parties are able to vote undirected proxies on remuneration related resolutions when they are the chair of the meeting and the shareholder has expressly given their informed consent, under section 250BD.  However, there is uncertainty as to whether the exception for the chair applies to the non‑binding vote required under section 250R.

Detailed explanation of new law

8.4                  Under subsection 250R(4) of the Corporations Act, a KMP or their closely related party must not cast a vote in the non‑binding resolution on the remuneration report.  However, the Corporations Act provides an exception to this requirement, under subsection 250BD(2), where a shareholder gives an undirected proxy to the chair and the shareholder provides their express authorisation for the chair to exercise the proxy.

8.5                  However, confusion has arisen over whether this exception applies in respect of the non‑binding vote required under section 250R, which was silent on the exception for the chair. 

8.6                  For the avoidance of any doubt, the new law clarifies this issue by stating that the chair of an annual general meeting, who is a member of the KMP or a closely related party of the KMP, is able to vote undirected proxies in the non‑binding vote required under section 250R where the shareholder provides express authorisation for the chair to exercise the proxy.  [Schedule 7, Item 1, subsection 250R(4)]

Application and transitional provisions

8.7                  The measure applies in relation to voting on or after the day after this Act receives the Royal Assent.


Chapter 9         
Regulation impact statement

Phase Two of the National Consumer Credit Reforms: Consumer Leases and Enhancements to the National Credit Code June 2011

Executive summary

9.1                  In 2008, the Council of Australian Governments (COAG) agreed to transfer responsibility for the regulation of consumer credit from the States and Territories to the Commonwealth under a two phase implementation plan. 

Phase One of the National Consumer Credit Protection Reforms

9.2                  Phase One of the National Consumer Credit Protection Reforms substantially commenced on 1 July 2010, through requirements introduced by the National Consumer Credit Protection Act 2009 (Credit Act).  The main features of Phase One were that it introduced:

       a comprehensive licensing regime for all providers of consumer credit and credit related brokering and intermediaries in the industry; 

       responsible lending conduct requirements on all licensees to not provide credit products and services that are unsuitable, either because they do not meet the consumers’ requirements or because the consumer does not have the capacity to meet the repayments, either at all or only with substantial hardship;

       improved sanctions and enhanced enforcement powers for the sole national regulator the Australian Securities and Investments Commission (ASIC);

       expanded redress for consumer protection through universal external dispute resolution membership for licensees, streamlined court arrangements, and remedies for consumers for licensee misconduct; and 

       a largely replicated version of the key state‑based legislation, the Uniform Consumer Credit Code (UCCC), as the National Credit Code (Code). 

Phase Two of the National Consumer Credit Protection Reforms

9.3                  At its meeting of 19 April 2010, COAG endorsed a two part implementation plan for Phase Two of the credit reforms, under which there is a longer timeframe to consider more complex topics (such as the need to regulate the provision of credit to small business or lending for investment purposes). 

9.4                  Part One consists of:

       changes to the obligations applying to consumer leases;

       enhancements to particular provisions of the Code;

       extending the regulation of credit for personal use;

       small‑amount short‑term lending; and

       improvements to the regulation of reverse mortgages and credit cards.

9.5                  It is intended that legislation to give effect to part one will be in place in 2011, and for part two by mid‑2012 at the latest.  This Regulation Impact Statement (RIS) considers reforms in relation to the first two topics.   

9.6                   In August 2010, the Government announced election commitments in relation to the regulation of credit cards under the Fairer, Simpler Banking policy, and to the regulation of equity release products under the Delivering for Seniors policy.  These commitments will be implemented in Part One of Phase Two of the credit reforms, and have been addressed in separate Regulatory Impact Statements (RISs).  The reforms in relation to credit cards have are being progressed through the introduction of the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011, introduced into the House of Representatives on 24 March 2011.

9.7                  The following summary analyses the reasons for pursuing reforms in relation to consumer leases and enhancements to the Code.

Consumer Leases

9.8                  There are significant differences in the application of the Credit Act to credit contracts and to consumer leases.  This disparity results in the following problems for consumers:

       The lesser obligations applying to consumer leases regulated under the Credit Act has created opportunities for regulatory arbitrage, and contributes to consumers being misled before entering into a contract.

      Different regulatory outcomes arise according to whether or not the consumer will be able to own goods at the end of a lease.  This creates a tension for lessors between seeking to avoid regulation (by utilising a lease for this purpose), and not discouraging customers (who may only enter into a contract where they believe they will own the goods at the end of the contract).  This causes an inherent structural tendency for consumers to be either actively mislead or not fully informed. 

       There are information asymmetries in relation to:

      whether or not the consumer will have ownership of the goods at the end of the contract, and consequently on the impact this legal distinction will have on the consumer’s rights under the contract (as there are no statutory obligations for lessors to disclose this information); and

      the capacity of consumers to determine the cost of a consumer lease relative to a credit contract. 

       Classes of consumers who are particularly vulnerable may be targeted by fringe operators who use leases to finance the provision of goods because of the absence of regulation, and offer leases on terms where the benefit is minimal relative to the costs incurred.

      Consumers may be particularly susceptible where they are on pensions or low incomes, and have few or no other alternative sources of finance.

       Consumers have more difficulty in obtaining redress (because they either have fewer statutory rights where they enter into a consumer leases rather than a credit product, or because the type of lease is completely unregulated by the Credit Act).

9.9                  It is proposed to address these problems by:

       amending the Credit Act to ensure greater regulatory consistency between leases and credit contracts (including developing options for allowing more effective comparison on price and disclosing whether or not the consumer will own the goods); and

       using existing financial literacy programs to deliver specific information to consumers in relation to the uses of leases as a means of acquiring goods.  

9.10              These reforms would make a significant difference for consumers in that:

       Consumers will be able to make more effective purchasing decisions, as they will be able to more readily compare the costs of entering into a consumer lease with the cost of entering into a credit contracts, and be better informed about whether or not they own the goods at the end of the contract.

       Consumers will have greater access to remedies in the event they suffer loss or damage.

       Vulnerable consumers will be at less risk of being targeted by fringe operators as those operators will need to hold an Australian credit licence, and therefore meet the standards of conduct applicable to licensees (or else cease offering these products).  Fringe operators have been associated with problems such as the use of pressure selling tactics; failure to deliver leased goods or delivery of goods other than those specified in the lease; and the use of itinerant, untrained labour with poor levels of compliance. 

9.11              These reforms would have the following impact on industry:

       Lessors who currently offer consumer leases (a product already regulated by the Credit Act) would incur relatively low compliance costs.  They would find themselves able to compete more effectively with providers of exempt leases, but, in turn, would no longer have the benefit of their current competitive advantages relative to credit contracts (and may have to reduce the cost of their products in order to maintain their market share). 

       Lessors who currently offer products unregulated by the Credit Act would incur higher compliance costs, and it could be expected some would cease offering these products (particularly those fringe operators who operate without any business infrastructure). 

       Credit providers who offer regulated products that are more competitive than leases may increase market share due to greater transparency in pricing, and the enhanced capacity of consumers to assess the relative merits of competing products.  These providers will not incur any new compliance costs.

Enhancements to the National Consumer Credit Protection Regime

9.12              During the course of Phase One of the National Consumer Credit Protection reforms, concerns were raised by various stakeholders about possible improvements to specific provisions in the State‑based UCCC, which have been replicated in the National Credit Code.[1]  It was agreed these issues would be considered during Phase Two of the credit reforms and were the topic of Chapter 7 of the Green Paper.

The following issues have been identified in relation to the operation of the Code where the UCCC did not adequately address problems for consumers:

       The provisions enabling  borrowers to request a variation of their credit contracts or consumer leases on the grounds of financial hardship (whether before or after enforcement action) are highly prescriptive, and subject to a restriction in that they only apply to persons who have borrowed up to $500,000.  This restricts the capacity of borrowers to obtain a variation, even where they only need a variation to address a short‑term change in their circumstances.

       There is no general remedy provided for unjust conduct by brokers or other intermediaries (as the Code only provides a remedy where there has been unjust conduct by lenders).  This creates a gap as consumers otherwise need to rely on general prohibitions that may not always provide a remedy where they have suffered loss because of the conduct of a broker. 

       The Code does not prohibit or restrict the use of particular words or phrases.  In the credit context, some words or phrases have an emotional resonance with consumers (for example, ‘impartial’ or ‘interest free’).  Consumers may be more susceptible to entering into contracts where brokers or lenders have used these terms in advertising, even where they may not be strictly correct or are subsequently qualified, and where therefore the contract is inconsistent with the use of these words. 

       The Code only contains a partial prohibition against door‑to‑door canvassing of credit.  The prohibition does not apply where goods are being sold on credit or provided through a lease.  Given the range of alternative distribution channels available today, door‑to‑door selling in this way is largely associated with targeting of vulnerable consumers, and often with high‑pressure or manipulative sales tactics.

9.13              It is proposed to address these problems by:

       simplifying the procedures for consumers to obtain a variation of the repayments under their contract due to financial hardship, removing the restriction so that a consumer can rely on the statutory procedures irrespective of the amount they have borrowed, and provide borrowers with an additional opportunity to rectify defaults prior to their lender being able to take enforcement action;

       extending the existing remedy for consumers for unjust conduct by lenders to also include conduct by brokers and intermediaries;

       prohibiting lenders and lessors from selling goods and services on finance through unsolicited door‑to‑door canvassing; and

       restricting the capacity of lenders and brokers to use certain words or phrases (for example, claiming to be ‘independent’ where they receive commissions).

9.14              It is expected that consumers will benefit from these changes as:

       they will have a reduced the risk of default in the event of a short‑term change to their financial circumstances.  Therefore, they will not need to refinance (incurring transaction costs) or risk losing security for the debt;

       they will have an enhanced capacity to make brokers and intermediaries accountable for unjust conduct;

       they will be at less risk of entering into contracts for the supply of goods as a result of high‑pressure or manipulative sales tactics, or without actively seeking out credit for financing the purchase of goods; and

       they will be at less risk of being misled by advertising claims.

9.15              It is expected that these changes will have the following impact on industry:

       Greater and simplified capacity to seek hardship variations:

      For those lenders who have voluntarily adopted a code of conduct with similar obligations and are already fully complying with the code — the change to their business would be minimal; and

      For those lenders who are not signatories to such a code, or who are complying inconsistently with it — the introduction of these obligations in law would introduce greater accountability and responsibility for non‑compliance, and could be expected to result in greater internal changes to their practices to ensure they were now meeting these requirements.

       Introduction of a remedy for unjust conduct by providers of credit services:

      It would have no impact on credit providers or lessors. 

      It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct.

       Prohibition on door‑to‑door canvassing: A relatively small number of businesses who engage in unsolicited selling practices may need to change their business practices (noting that only 67 persons who had applied for an ACL with ASIC by 31 December 2010 nominated their function as ‘Door‑to‑Door or Phone Sales’). 

       Restricted use of specified terms: The only class of providers who would be affected would be those who currently use any of these terms, who would need to decide between ceasing to use a restricted term or changing their business model so that they meet the conditions to be able to use it.

Consultation

9.16              The Government has conducted extensive consultations in the consideration of issues under Phase Two of the credit reforms through the following consultation groups: 

       The primary vehicle for consultation with stakeholders was the Industry and Consumer Representatives Consultation Group (ICRCG).  Its membership comprised of representatives of the banking, financial services, mortgage and finance brokers industries, consumer credit legal services, consumer advocates, ASIC, and the Department of the Treasury.  All major industry bodies are on this group, and are able to disseminate information to their members and provide their feedback. 

       Consultation with this group has generally occurred on a monthly basis.  Between January 2010 and October 2010, 7 meetings were held in relation to the Phase Two reforms.  The usual structure for these meetings was for Commonwealth Treasury staff to circulate papers on Phase Two topics, with the topics then discussed in detail at the meetings.  This format allowed members of the group to provide comments and feedback at all stages of the development of options canvassed in this RIS, and also enabled differences in views to be explored in detail.  This structure enabled prompt and detailed exploration of issues with stakeholders and was important in the refinement and development of different options. 

       The Financial Services and Credit Reform Implementation Taskforce (FSCRIT), comprises representatives from State and Territory departments and agencies, ASIC and the Department of the Treasury.  Its main role in relation to Phase Two is to ensure proposals are developed in accordance with the COAG timetable.  FSCRIT consultations have been conducted on a monthly or bimonthly basis, according to need. 

9.17              A full membership list of each of the consultation groups is provided at Attachment A.

9.18              In addition, to ensure a broader level of public consultation, the Government released the Green Paper National Credit ReformEnhancing confidence and fairness in Australia's credit law in July 2010.  The Green Paper set out a range of options in relation to each of the Phase Two topics.  It enabled interested parties to provide their views directly to the Government.  Approximately 60 submissions were received, enabling the Government to more fully assess the impact of the options canvassed in the Green Paper in developing its reforms (as noted in this RIS in relation to particular topics).  To facilitate consultation with small businesses, the Green Paper was also released on the Australian Government business consultation website.

9.19              Draft chapters of the Phase Two Green Paper were also circulated to the ICRCG, ERCWG and FSCRIT for their comment.

Implementation

9.20              Phase Two of the Credit Reforms will be implemented by legislation to be introduced in the 2011 and 2012 sittings of Parliament.  Regulations to support the legislation may also be made.  ASIC will continue to act as the national regulator of consumer credit and will be responsible for administering and monitoring compliance with the Credit Reforms. 

9.21              Changes to deliver financial literacy messages to consumers will need to be developed through those programs.  Some of these changes will be contingent on the passage of the legislation to implement the reforms; for example, the ASIC website already has information in relation to consumer leases, but the reforms will enable consistent, simpler and more effective information and messages to be provided.  These messages could also include information about possible alternative sources of funding in certain circumstances, such as Centrelink products and non‑commercial microfinance schemes.

9.22              The Government will continue to consult with stakeholders regarding implementation timeframes and transitional issues, particularly through the ICRCG and ERCWG groups (as regular meetings of these groups will continue).  In addition, the Commonwealth Treasury also has well developed links with ASIC and industry bodies that ensure complex issues can be identified early, allowing prompt responses to be provided.  The effectiveness of these relationships was demonstrated throughout Phase One, where a range of transitional and implementation issues were able to be addressed in relatively short periods of time, resulting in both the registration and licensing processes working smoothly for industry players.   

Review

9.23              The terms of the National Credit Law Agreement agreed by the Commonwealth and all States and Territories in 2009, require the Commonwealth to commence a review of the operation of the National Credit Law, no later than two years from commencement.


Regulation of consumer leases

Background

9.24              Differences in the way a lease (a hiring of goods) is structured will determine whether or not it is regulated by the Credit Act, and, if so, the extent of the regulation.  There are two threshold requirements that must be met in order for the Code to apply to a lease:

       The hired goods must be used predominantly for personal, domestic or household purposes.

       The total amount payable by the consumer exceeds the cash price of the goods.

9.25              Assuming these requirements the different categories of leases and their regulatory treatment can be summarised as follows:

       Leases deemed to be a sale by instalments: This occurs if the person who hires the goods has a right or obligation to purchase the goods, and where the total amount payable exceeds the cash price of the goods.  The lessor is required to meet all of the disclosure and conduct requirements that apply to credit contracts; the rationale being that this type of lease will have the same commercial outcome as a sale of goods by instalments, in that the only difference is whether the consumer will have ownership of the goods at the beginning of the finance contract, or at its end.    

      This RIS will not examine leases that are deemed to be sale by instalments as they do not present consumers with the problems or risk of harm that can arise in relation to consumer leases and exempt leases.

       Consumer leases: The hiring of goods is a consumer lease where the person who hires the goods does not have a right or obligation to purchase the goods and where the total amount payable exceeds the cash price and the lease is not exempt.  Part 11 of the Code regulates consumer leases and sets out requirements, including disclosure requirements, which are significantly less extensive than the analogous obligations applying to credit contracts. 

      For example, if a car is rented for six months and the total amount of rental payments is less than the cash price of the car, the lease will not be regulated under the Code.  Alternatively, if a television is hired for 36 months and the total rent payable is more than the cash price of these goods, the transaction will be a consumer lease. 

       Exempt leases: Notwithstanding that some specific categories of leases may otherwise meet the criteria above they have been exempted from the Credit Act, under section 171 of the Code.  The categories of exempt leases are leases for 4 months or less, leases for an indefinite period and employment‑related leases.  The discussion below primarily concentrates on leases that are exempt because they run for an indefinite period, or where the initial term is for a fixed period of less than 4 months in order to take advantage of the exemption, but both the lessor and the consumer anticipate that the contract will be rolled over on a regular basis.

9.26              The following table summarises the different types of leases, and their regulatory outcomes.

Characteristics of Lease

Regulatory Outcome

1.  Consumer has a right or obligation to purchase the leased goods at the end of the contract.

 

2.  The total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value)..

Deemed to be a sale of the goods over time pursuant to section 9 of the Code, and the provider must meet the same requirements as a person offering credit contracts.

The cost to the consumer is the amount by which the total amount payable exceeds the cash price..

1.  Consumer has no right or obligation to purchase the leased goods at the end of the contract.

 

2.  The contract is for a fixed period of more than 4 months.

 

3.  The total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value).

Regulated as a consumer lease under Part 11 of the Code.

 

More limited disclosure and conduct obligations apply to the lessor relative to leases deemed to be a sale of goods. 

1.  Consumer has no right or obligation to purchase the leased goods at the end of the contract.

2.  The contract is for an indefinite period, or for an initial term of less than four months.

3.  The total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value).

Exempted from regulation under the Code by subsection 171(2).

 

9.27              There are two different types of retail outlets that offer consumer leases:

       In mainstream retail outlets, including national or multi‑store operations that only provide household goods through consumer leases.

       Smaller retail outlets, often with only a single store, that largely rely on local custom.

9.28              As at July 2010, 52 entities had registered with ASIC as providing consumer leases.  Nearly all of the 52 entities who registered with ASIC as providing leases would fall into the last category, as there are only four major lessors.

9.29              In addition, industry sources estimate that exempt lessors have 20 per cent of the market share (based on the number of contracts rather than the value of those contracts).   

9.30              There are a number of situations where leases are regularly used:

       In mainstream retail outlets, where consumers may be offered a choice for financing goods between credit contracts, particularly continuing credit contracts, and consumer leases.

       Smaller retail outlets where the consumer is only given the choice of financing the acquisition of goods through consumer.  These goods include refrigerators, washing machines and other household electrical goods.  These leases are often used to finance the provision of goods to lower income consumers (particularly those who are unable to afford to pay either through cash or the use of credit cards). 

       Consumer leases and exempt leases have been used by a number of different operators in door‑to‑door marketing of household goods to indigenous communities, particularly in rural New South Wales and the Northern Territory.

       Some car dealerships offer consumer leases rather than credit contracts as a means of consumers obtaining possession of a motor vehicle. 

9.31              A significant number of lessors bundle the leased goods with other services.  These services include:

       Warranties for the service or repair of the leased goods;

       Products that address the risk of the goods being stolen while they are in the possession of the lessee.

       Products similar to unemployment or disability insurance, where the lessee’s liability to make rental payments may be extinguished or reduced if they become disabled or unemployed). 

9.32              These products are typically automatically included in the agreement; that is, the consumer is not charged a separate cost for them and the consumer has no choice whether or not to accept them.  It is therefore not possible to assess the price being charged to the consumer relative to the value of the services being provided.

Problem identification

Introduction

9.33              The differences in regulatory treatment between credit contracts and consumer and exempt leases can cause the following problems for consumers:

       The current regulatory differences between credit contracts, consumer leases and exempt leases create an information asymmetry in relation to:

      The terms of the contract, and, in particular, whether or not the consumer has the right to own the goods, and the consequences this has in respect of their rights under the contract; and

      The cost of the contract (with consumers unable to assess the cost of a lease except in dollar terms). 

       Fringe operators may use the absence of regulation to exploit the vulnerabilities of particular classes of consumers (particularly Indigenous communities).  They are more likely to use leases for an indefinite term, where the benefit to the consumer is minimal relative to the costs incurred (as the consumer must pay for the goods as long as they retain possession, even where they are household items such as beds or tables).

       Consumers have more difficulty in obtaining redress (whether because they have lesser rights attaching to consumer leases rather than a credit product, or because the Code does not apply at all).

9.34              Some of the analysis below is based on a 2007 report into consumer leases by the Micah Law Centre,  titled ‘A loan in lease clothing: problems identified with instalment based rent/purchase contracts for household goods’ (Micah Report).[2]  The Micah Report states that the research for the study is based on the direct experience of consumers from 20 case studies sourced from community legal centres and financial counselling services, and from reviews of the operation of lessors in retail outlets in Melbourne. 

Information asymmetry in relation to terms of the contract 

9.35              Leases differ from credit contracts in that the consumer does not have a right to retain ownership of the goods at the end of the contract.  Consumers are therefore only paying for the use of the goods during the period of the contract rather than the cost of purchasing them outright over time.

9.36              Where the consumer does not have a right or obligation to purchase the hired goods and the lease is regulated by the Code the following obligations apply:

       they are under no statutory requirement to specifically inform the consumer that under the lease the consumer will not own the goods; and

       the lessor is only required to provide a copy of the contract document to the consumer after they enter into the contract, and, therefore, after they make a purchasing decision.  The consumer may therefore only be informed that they are only renting the goods when they receive a copy of the contract, and when this information does not need to be highlighted in the contract.

9.37              Persons offering leases for an indefinite period are under no statutory obligations as to how they inform consumers about the fact that the payments they make will not result in them owning the goods.

9.38              As noted in the above table in the background section, the distinction between a sale by instalments and a consumer lease is based on a technical distinction, as to whether or not the contract gives the consumer the right or obligation to purchase the goods at the end of the term of the contract.  In practice therefore financiers can elect to avoid the higher level of regulation imposed on credit contracts by not giving the consumer the right or obligation to purchase the leased goods. 

9.39              This dynamic has created two problems for consumers.  The first is that consumers will enter into leases because of a regulatory preference of the provider, and will do so in situations where it is reasonable to expect that the consumer’s purpose is to own the goods at the end of the contract. 

9.40              There are two situations where consumers will prefer to own the goods at the end of the contract, according to:

       The nature of the goods being supplied — the goods are of a type where they usually are used by consumers for a period longer than the term of the (for example, beds or tables, or fridges where the term of the contract may only be a period of three years or less, but where the consumer has paid more than the cash value of the goods). 

       The financial circumstances of the consumer — low‑income consumers are more likely, because of their financial constraints, to want to continue using the goods at the end of the term, rather than wanting to upgrade to newer or replacement goods.  This particularly applies to contracts under which they lease cars for periods such as three years, without having an asset at the end of the contract that they can continue using or can trade in order to be able to upgrade.

9.41              The use of a lease is therefore an economically inefficient way of the consumer having these goods in these circumstances.  Generally these consumers would not need to use leases if they were either able to access other mainstream options to pay the relatively modest amounts necessary to own the items outright, particularly either by purchasing the goods for cash, or obtain credit through other retailers utilising the widespread ‘interest free’ options that they can facilitate.  Conversely, the smaller retail outlets have a niche market and have broad assessment criteria that that allows leases to be approved to consumers can often be pensioners or Centrelink recipients.[3] 

9.42              Low‑income consumers are more likely to use leases to acquire goods because they do not meet the eligibility criteria of lenders who offer credit contracts.  However, this class of persons is also more likely to be renting cheap or basic household goods where it is more reasonable to expect them to want to own the goods at the end of the contract (rather than return them or continue paying for them).  There is therefore a systemic risk of these consumers being misled or not properly informed, and entering into lease contracts where they believe they will be able to own the goods.[4] 

9.43              The second problem that arises for consumers from the use of leases relative to credit contracts is that they receive fewer statutory protections.  Consumers are generally unable to make informed choices when choosing between these products as they neither appreciate both the differences between the two types of products and the differences in regulation.

9.44              The key areas in which there are differences are:   

       The lessor may not be liable for misrepresentations by a third party at the point of supply of the goods — this is particularly important given, as noted above, the structural risk of the consumer being misled prior to entering into the contract.

       The consumer may be charged significant sums of money in order to retain possession of the goods once the contract has expired (either a one‑off payment or continued payments until the goods are returned) — with the consumer not having ownership after meeting the payments specified in the lease contract.    

       The consumer does not receive any benefit for early payments — as the contract is a rental agreement the consumer does not receive any financial advantage from making payments in addition to the regular repayments (unlike a credit contract where the amount of interest payable is reduced), nor do they receive any statements or information from the lessor that would alert them to this adverse consequence.

9.45              The problems identified above are exacerbated where exempt or indefinite term leases are used.  The extent of the use of this model is significant, and is estimated at 20 per cent of the total lease market.  The adverse financial consequences to consumers where they enter into such a lease believing they will own the goods are greater, as in effect they are required to make payments for an indefinite period, as long as they retain possession of the goods.  There is no ‘trigger’ to alert consumers to this, unlike consumer leases where payments cease at the end of the term of the contract; consumer groups have reported instances of lessees making payments for items such as beds or tables for five to eight years under these types of leases, and paying several times the market value of the goods. 

9.46              Lessors who currently provide exempt leases also do not have to comply with the responsible lending obligations (as these requirements only apply to lessors where they enter into leases regulated by the Credit Act).  As a result, these lessors do not need to undertake credit checks or test the capacity of the consumer to meet the payments due under the contract.  Consumers are therefore at greater risk of defaulting, and being liable for additional costs and charges. 

9.47              Where the consumers are in remote or regional areas, and have entered into the lease as a result of a visit by the lessor to their locality they face an additional difficulty.  In practice, returning the goods to the lessor will be impractical, with the result that consumers are required to maintain payments even if the goods are no longer required or perhaps even working.

Information asymmetry in relation to price

9.48              The following disclosure requirements in relation to the cost of their products apply to lessors:

       If they are providing consumer leases:

      The only disclosure the lessor is required to make is the cost in dollar terms of each repayment, and the total amount of the repayments.

      The lessor is not required to separately disclose charges for other services (such as warranties for the service or repair of the leased goods or quasi‑insurance products, where the lessee’s liability to make rental payments may be extinguished or reduced if they become disabled or unemployed).

      The information about the cost in dollar terms only needs to be included in the contract (not in any pre‑contractual document) and the lessor is not required to provide the contract to the consumer before they enter into it except for the purposes of signing it (or, therefore, make their purchasing decision) but only within 14 days of the consumer entering into the lease. 

       If they are providing exempt leases — the timing and content of disclosure is unregulated.

9.49              By comparison credit providers are required to provide pre‑contractual disclosure of a range of matters relevant to the consumer’s decision, including an interest rate and information in relation to fees and charges payable under the contract.  They are also required to use a comparison rate (calculated according to a uniform formula) when advertising the cost of their products, to ensure consumers compare the cost based on the same assumptions.  Credit providers are also required to disclose the amount of credit being provided; this means that a credit provider cannot bundle services with goods in the same way, and the cost of the services would be reflected in the annual percentage rate.[5]

9.50              These differences in the content and timing of disclosure in relation to cost result in an information asymmetry between lessors and consumers.  This creates two distinct problems for consumers:

       A cost of finance can be charged that is so high it would be discouraging or prohibitive to consumers if disclosed in a way comparable to an interest rate.

       Consumers can be encouraged to use leases because of the availability of services bundled with the goods, without the cost of those services being separately disclosed (or, in some cases, promoted as free). 

       Consumers cannot readily compare the cost of different finance options, and may choose more expensive finance arrangements, or may be steered towards them by suppliers of goods where their conduct is influenced by commission payments.    

9.51              These problems arise because the lessor is only required to disclose the total amount to be repaid in dollar terms.  In order to assess the cost of making payments over time relative to purchasing the item for cash the consumer needs to undertake a two‑step process.  They initially need to determine the cash price of the goods, and then assess the amount being charged in excess of that figure and the time they are being given to pay it.

9.52              Neither of these steps may be straightforward.  Determining the cash price of the goods according to the advertised or nominated price by the retailer may not reflect or be broadly consistent with their market value.[6]  Assessing the cost of paying over time is an even more complex calculation.

9.53              The bundling of additional services with the leased goods, and their promotion as benefits, can also make it harder for the consumer to assess the overall cost of the package they are being presented with.  This practice reduces the likelihood of the consumer declining to proceed with the transaction because the overall cost is high relative to the market value of the goods. 

9.54              These limitations mean that consumers are unable to make informed judgements before entering into a consumer lease, and the absence of such disclosure means that consumers are less likely to reject finance where the cost is high and to seek alternative cheaper finance.

9.55              The impact of this information asymmetry in practice is demonstrated by the charges levied by some lessors; consumers can pay amounts for the use of goods at a cost equivalent or greater than interest rates in excess of 40 per cent (if the cost of the lease was calculated as if the transaction was a credit contract).[7]  The following table, which summarises information from the Micah report, sets out the total amount payable under the lease by consumers for three common household items, and the equivalent interest rate.

Goods and Cash Value

Cost-charged by lessor (interest rate)

81cm LCD TV ($1,600)

$2,800 over 36 months (41%)

260L Fridge ($700)

 $1,552 over 36 months (62%)

Washing machine ($598)

$2,020 over 36 months (109%)

 

9.56              These interest rates are consistent with the experience of ASIC which has also identified lessors providing finance at rates at over 40 per cent, particularly in relation to leases of goods to remote Indigenous communities. 

9.57              By contrast, there are no providers offering credit contracts for the purchaser of goods who regularly charge consumers interest in excess of 40 per cent.  It is considered that the ability of some lessors to provide finance at this cost is evidence of a non‑competitive market, primarily because consumers are unable to readily discern the cost of the finance, and therefore are prevented from making more efficient purchasing decisions.

9.58              Consumer Credit Legal Centre (NSW) has also identified the use of consumer leases in one business model in order to avoid the UCCC disclosure requirements in relation to the cost of credit.  This model was utilised by a financier that, in 2008, had over 30 staff, and over $10 million of finance.  This model had the following features:

       the consumer would sell goods they owned to the lessor, and receive a lump sum equivalent to their financial needs (rather than the cash value of the goods);

       the lessor would then lease these goods to the consumer and receive payments over a period of time greater than the sum paid to the consumers; and

       complex documentation was used that disguised the nature of the transaction to the consumer.

9.59              While this model is not indicative of practices in the mainstream it is consistent with these practices in the sense that the use of a lease avoids a need for the more detailed disclosure requirements attaching to credit contracts, and increases.

9.60              The second situation in which consumers are disadvantaged is where they may choose more expensive finance arrangements because they cannot readily compare the cost of different finance options.  This risk is particularly likely to arise where an intermediary has arrangements with financiers so that they can offer consumers either a credit contract or consumer lease.  The lack of any requirement to disclose costs in a comparable way can allow the lessor to pay higher commissions to the intermediary to promote their product to consumers , even though it may be more expensive (in part because the consumer is paying for the cost of these commissions through the charges on the finance product).  This channelling of consumers by intermediaries to higher cost products is known as ‘reverse competition’ where competition among providers for access to distribution channels can drive up the price paid by the consumer. 

9.61              It is accepted that there are situations in which a consumer will prefer a lease for reasons other than cost (for example, other features of the contract that may result in a higher price).  However, this demonstrates the need for an informed discussion to allow the consumer to assess the competing features of the products, including the cost of other features that may attach to a lease. 

9.62              The risk of consequent financial detriment to the consumer is that they will pay a higher amount for the goods.  This amount will vary according to the cost of credit under a consumer lease relative to a credit contract.

9.63              The precise extent of steering as a result of reverse competition is not measurable in any way, and is therefore unknown.  However, it has been identified as a significant concern in a number of the submissions to the Green Paper, suggesting the commission‑driven nature of the conduct means the problem is structural in nature.  Where consumers are therefore paying higher amounts to finance goods through a lease, when they would be eligible for alternative forms of cheaper credit, the current regulatory arrangements are lessening competition in markets for the supply of goods. 

9.64              Consumers who enter into indefinite leases are particularly disadvantaged in respect of cost, as the cost is potentially both greater than that for a fixed term contract, and not readily comparable with other finance options.  Consumers are required to keep making payments for as long as they retain possession of the goods.  This can be for a period that can be open‑ended. 

Use of leases in targeting vulnerable communities

9.65              Both consumer leases and exempt leases have been utilised by door‑to‑door traders marketing goods in Indigenous communities.  The analysis below is based on information obtained by ASIC and on the reported experience of some consumers.[8] 

9.66              Some operators target these communities in that they only, or almost only, solicit consumers in areas with high Indigenous populations.  This practice means they do not have a model in which they need to compete on price or service with mainstream providers, and rely on sales only to a relatively vulnerable group.  They are therefore not subject to the same competitive pressures as mainstream providers.

9.67              The communities are commonly located in remote or regional Australia, and its members usually have very few alternatives for finance, or, therefore, for obtaining even basic household goods, such as beds or tables.  Individual borrowers are commonly in receipt of Centrelink payments and the operator relies on payment through direct debit arrangements that are rarely cancelled in practice.  As a result, the operator will continue to receive payments notwithstanding that it may result in financial hardship for the consumer. 

9.68              Further, irrespective of whether a consumer lease or an indefinite lease is used, it will usually be the case that the lessor can continue charging the consumer for hire of the goods until the goods are returned.  This can be difficult or impractical for consumers in remote areas.  In this situation the lessor has a financial incentive not to advise the consumer, before they enter into the contract, that they will not own the goods or that they will have to keep making payments while they have possession.  If the consumer was advised of these matters upfront they would be more likely not to enter into the contract, either at all or on those terms.

9.69              The conduct of these types of operators has been associated with the following problems: the use of pressure selling tactics; incomplete or incorrect documentation (including contracts with no specified terms for the repayments); failure to deliver goods or delivery of goods other than those specified in the lease; failure to service damaged items; and the use of itinerant, untrained agents with poor levels of compliance. 

9.70              Consumers suffer financial harm in that:

       They enter into contracts as a result of high pressure tactics;

       They can pay significantly more, particularly where they are required to make ongoing payments because it is not practical to return the goods;

       They are paying for goods they have not received or that are different from those they are contracted for.

9.71              The broader problems resulting from unconscionable or exploitative conduct are an indirect consequence of the use of leases in that operators deliberately elect to use a product which does not require them to meet the entry standards to hold an Australian credit licence (ACL), and where ASIC is unable to ban them from providing those products, irrespective of the nature of the conduct they engage in.  They also gain commercial advantages from using leases, as outlined in more detail previously; for example, they do not need to disclose an interest rate (this is particularly relevant where the cost is high enough to discourage purchasers if they were informed of the cost); and there are fewer or no statutory obligations (for example, where exempt leases are utilised the lessor does not need to be licensed or be a member of an EDR scheme, or assess the borrower’s capacity to meet repayments without substantial hardship).

Inadequate remedies

9.72              As noted above, consumers may enter into leases without necessarily appreciating the differences between leases and other forms of credit.  There are particular risks that consumers will only become aware of problems at the end of the lease or after they have been making payments for a significant period of time.  Consumer are only likely to identify problems at this time when they realise or are informed, contrary to their expectations, that they will only be able to keep the goods if they make additional payments. 

9.73              Where this is the case, or where consumers have suffered financial loss in relation to a consumer lease or an exempt lease, the Code currently provides fewer and less adequate remedies to assist them in seeking compensation, compared to a credit contract. 

9.74              Consumers also have fewer remedies against the conduct of an intermediary if they obtain goods by way of a consumer lease rather than a sale by instalment.  This is because under the Code, some of the provisions in relation to liability apply only to credit contracts (for example, the remedy for false and misleading representations in sections 128 and 154).

9.75              Lessors who only provide exempt leases are completely unregulated by the Credit Act.  In addition to the gaps identified in relation to consumer leases, they also are not required to be a member of an EDR scheme.  As a result, consumers can experience significant difficulty in resolving complaints unless they take court action.  This is often not a viable option, particularly for low‑income consumers. 

9.76              This lack of accountability can encourage lower standards of conduct and supervision on the part of lessors, as they can deny liability for misconduct by third parties who have arranged the lease with the consumer, or do not even need to respond to complaints unless the consumer instigates court proceedings. 

Objectives of Government action

       To reduce the occurrence of the detriment suffered by consumers that, to a large extent, is unnecessary and avoidable.

       To improve consumer choice by ensuring that they are provided with relevant information in a form and manner that increases their capacity be able to make comparisons between consumer leases and other functionally similar products.

       To achieve consistency in the regulation of products that are different in form but which have similar commercial outcomes, and further competition between providers of these products. 

       To minimise the impact of any changes on industry, and reduce the regulatory burden resulting from any such changes. 

Options

Option 1: Maintain the status quo

9.77              Under this option, no changes would be made to the regulation of consumer leases, sale by instalments and exempt leases under the Code. 

9.78              This option would also take into account the potential impact that the introduction of new obligations (in respect of licensing and responsible lending) under the Credit Act would have on persons who offer consumer leases (but not those who offer exempt leases). 

Impact analysis

9.79              There will be no changes to existing practices. 

9.80              This option would meet the fourth objective.  It would only partially meet the first objective to the extent that the introduction of responsible lending obligations and licensing requirements under the Credit Act reduce the occurrence of the detriment suffered by consumers from consumer leases.  However, this in turn may simply result in a greater use of exempt leases (particularly leases for an indefinite period) to avoid these legal responsibilities completely rather than changing their business models to comply with them.  This risk is greatest with fringe operators.

9.81              The risk of continuing consumer detriment appears significant given that the differences and gaps in the current regulatory framework have been in existence since the commencement of the UCCC in 1996 and have been utilised by some operators to facilitate outcomes that benefit them but result in financial harm to consumers.  Some providers have demonstrated a specific election to provide finance through leases because of the competitive advantages, which suggests this position is unlikely to change in the absence of regulatory intervention.

9.82              To the extent that consumers who hire goods via consumer leases are generally low income consumers with fewer choices, the impact of poor financial decisions is more pronounced.  It is important for persons on limited incomes to be able to make more suitable choices when entering into arrangements to hire goods.  This is especially so given that low‑income consumers generally have fewer finance choices available for the purchase of basic household items.  They are therefore less able to bear or adjust to relatively low levels of loss, which therefore have the capacity to cause significant financial hardship.

9.83              In summary, there are no advantages to consumers under this proposal, while lessors will continue to benefit, particularly through being able to charge higher prices because of the lack of competition. 

Option 2: Regulate consumer leases and exempt leases in a way that acknowledges the functional similarity of these products to credit contracts

9.84              This option would result in:

       New obligations being imposed on consumer leases; and

       Leases for an indefinite period being regulated by the Code. 

Consumer leases

9.85              Under this option the following two categories of new obligations would apply to consumer leases:

       extending to leases existing and well understood requirements in the Code that currently only apply to credit contracts, either in their current from where these are applicable to consumer leases and where their introduction would address the problems identified above, or in a modified way where the different structure of leases requires this (particularly in relation to the ownership of goods); and

       introducing new obligations to allow for disclosure of the cost of finance in a way that allows for comparison with credit contracts.

9.86              The obligations in the Code that, under the first proposal above, would be applied to leases include:

       the provisions in the Code applying to mortgages and guarantees where the lessee’s obligations under the lease are supported by a mortgage (over goods or property other than the leased goods) or guarantees;

       requirements in relation to variations to consumer lease contracts (other than those providing for hardship variations, as these obligations  already apply);

       requirements in respect of providing statements of account (including enabling a consumer to dispute the contents of these statements) and in relation to enforcement practices (including regulating enforcement expenses); and

       extending the liability of a lessor for conduct by an intermediary at the point of sale.

9.87              Disclosure obligations would be introduced that are likely to assist consumers in making a better judgement about consumer lease products before deciding whether to use them.  These obligations would include:

       providing for a high impact short form disclosure of key information about the contract prior to the contract being entered into (with the details of this requirement to be developed in a further RIS discussing disclosure in respect of all products regulated by the Credit Act);

       disclosure of the cost of a lease using consistent assumptions that enable a comparison to be made with credit contracts;

       disclosure of the amount in dollar terms required to be paid for each dollar of the market value of the hired goods (which would enable consumers to assess the amount they are paying relative to purchasing the goods for cash or using an interest free option, where this is available); and

       disclosure of the cost of services provided with the lease, to enable consumers to make informed decisions of each element of a bundled transaction.

9.88              This RIS also identified an issue in relation to the lack of comparative disclosure where an intermediary has arrangements with financiers so that they can offer consumers either a credit contract or consumer lease.  This issue may be further addressed in a RIS that considers the role of these point of sale intermediaries in detail.

Leases for an indefinite term

9.89              Section 171(1) currently exempts leases that are for an indefinite period or that have a fixed term of less than 4 months.  This option would result in the removal of these exemptions, so that these categories of leases become regulated as consumer leases under the Credit Act.  Persons who currently only offer these types of leases would therefore need to meet all the obligations under the Credit Act, including meeting the requirements to hold an ACL, and also meeting the responsible lending obligations.

Impact analysis

Consumers

9.90              Consumers would particularly benefit from being able to more readily compare the costs of entering into a consumer lease and a sale by instalments and other credit contracts, and make more effective purchasing decisions.  They would also benefit from a reduction in cost, where lessors lower their prices because of the need to meet enhanced competition from persons offering credit contracts.

9.91              They would also benefit from:

       greater regulation of indefinite leases, which may result in these products only being offered where they meet the consumer’s needs, rather than as a way of committing the consumer to making indefinite payments;

       exclusion of players who engage in regular misconduct from the industry; and

       having greater access to remedies in the event they suffer loss or damage, and this in turn could be expected to promote better standards of conduct by the lessor (to reduce the costs associated with responding to complaints, particularly complaints to an EDR scheme).

9.92              Consumers who currently obtain goods through unregulated providers are likely to have continued access to some goods through lessors who are currently regulated by the Credit Act.  The application of the responsible lending requirements, and the need to ensure consumers have the capacity to meet repayments, may mean that they are unable to access the same volume or quality of goods.  That is, as a result of those reforms, those consumers who are on low incomes or unable to access other forms of credit, are still likely to be able to obtain goods through leases, but that either:

       the goods they can lease would be lower in value; or

       the total cost would be reduced, because the individual repayments would be lower.

       The risk of the consumer defaulting, and incurring consequent costs, will be reduced, as a result. 

Lessors offering regulated products

9.93              Lessors would incur increased costs, as discussed in detail below.  However, consumers will have a better capacity to understand the relative costs of different products and therefore lessors may not be able to pass on any increase in costs where, as a result of the reforms, the lessor will need to compete with cheaper credit contracts.

9.94              The impact on those lessors who are already required to comply with the Credit Act would be relatively low, as they are already required to comply with the Act (including the licensing and responsible lending obligations).  The main changes would be:

       introduction of new pre‑contractual disclosure requirements — these may result in one off costs of between $10,000 and $20,000 for the lessor to change their existing documents so that they comply with the new requirements; and

       changes to their internal procedures in order to comply with obligations in the Credit Act — these costs would not be significant in that the substantive nature of these  obligations is well understood as they have been in force in relation to credit contracts, through the UCCC, since 1996. 

Lessors offering unregulated products

9.95              Those lessors providing unregulated products would need to decide whether to exit the market or apply for an Australian credit licence (ACL).  It could be expected that the majority of these would decide to leave the industry, as the use of exempt leases is particularly prevalent among those who are targeting vulnerable consumers and have no interest in establishing a broader or mainstream presence, or therefore in meeting the range of legal obligations associated with holding an ACL.  If they cease offering leases they could still be rsubject to limited egulation while they are receiving payments under existing leases (adapting the existing regulatory approach in the Credit Regulations 2009 for lenders who choose not to apply for an ACL following the commencement of the Credit Act).

9.96              The lessors who decide to seek a licence will incur costs in relation to entry requirements, ongoing conduct standards and responsible lending conduct obligations.  If the lessor sought legal advice for this purpose they could expect to incur costs of $60,000 to $180,000 in order to be ‘regulator‑ready’.  The cost would vary according to factors such as the range and type of products being provided and the extent to which existing procedures need to be changed. 

9.97              A lessor would also incur costs to third parties as follows:

       Costs payable to ASIC in connection with the licence, that is, an application fee, and an annual fee.[9]   For lessors, the amount of the fee is based on the amount of rental payments under contracts arranged and can range from $450 to $21,000 (although most lessors are likely to be at the lower end of the scale).[10]

       EDR membership: application fee $165 — $220; membership fee (calculated according to membership type and the size and nature of business) and complaint fees.[11]

9.98              Lessors would also incur costs in changing their practices in order to ensure they are complying with the new obligations.  While there would be one off costs in documenting these new practices and training staff, there would be little difference in ongoing costs once the new procedures have been introduced, as they would be replacing existing practices. 

Providers of credit contracts and government

9.99              Credit providers who offer regulated products more competitive to leases may increase their market share due to greater transparency in pricing.  These providers will not incur additional compliance costs.

9.100          The amount of revenue generated for government by fees associated with, in all likelihood, a small number of lessors applying for an ACL is unquantifiable but insignificant.

9.101          In summary, this option would have the following costs and benefits:

       Lessors who currently offer consumer leases (a product already regulated by the Credit Act) would incur some compliance costs in relation to changes in documentation; however, these would be significantly lower than the costs they have incurred in obtaining an ACL or complying with the responsible lending obligations.  They would find themselves able to compete more effectively with providers of exempt leases, but, in turn, would no longer have the benefit of their current competitive advantages relative to credit contracts (and may have to reduce the cost of their products in order to maintain their market share). 

       Lessors who currently offer products unregulated by the Credit Act would incur significant costs as they would need to meet the standards and obligations applying to all licensees.  It could be expected some would cease offering these products (particularly those fringe operators who operate without any business infrastructure). 

       Credit providers who operate business models in which their products compete with credit contracts would no longer be at a competitive disadvantage and, where their products were cheaper than consumer leases, could be expected to benefit through increased market share.

       Consumers would benefit in a range of different ways, principally through being able to select the cheapest finance option, and also through better protections from fringe operators.  These changes would particularly benefit low‑income consumers.

Option 3: Use financial literacy programs and materials to educate consumers as to the differences between credit contracts, regulated leases and unregulated leases

9.102          This option would see existing education or financial literacy programs used to provide lease‑specific information to consumers, to encourage better decision‑making by consumers in relation to the use of credit contracts, regulated leases and unregulated leases.  It is noted that ASIC already has information comparing leases and other forms of credit on its website, but that this option contemplates more extensive and targeted information, delivered through additional mechanisms. 

9.103          It could include the dissemination of information through existing financial literacy avenues, including school programs and government websites.  The differences between these products are, as set out above, largely based on technical features of the contracts between the financier and the consumer, and the educational materials would therefore need to reflect this. 

9.104          This approach would not prevent persons from offering consumer leases or exempt leases on the same terms as is currently the case, until any education campaign changed consumer behaviour sufficiently to require them to reassess their products. 

Impact analysis

Consumers

9.105          It is unlikely that an education campaign would have an immediate impact on consumer behaviour as the use of leases is linked to a desire by the consumer to obtain goods.  In these circumstances the consumer’s initial concern is on selecting these goods from a retailer, and then responding to the finance options presented by the retailer.  The difference between leases and credit contracts, as presented in the abstract, will not necessarily assist a consumer to identify whether the form of finance they are being offered is a lease or a credit contract. 

9.106          An education campaign would therefore also need to assist consumers to be assertive in their dealings with the providers of goods, and to specifically inquire what form of finance would be used.  This restricts the extent to which an education campaign will be effective, particularly where consumers may have limited choices available to them and are offered a lease as the only source of finance (on a ‘take it or leave it’ basis). 

9.107          This option would have no immediate impact on providers of leases or on their competitors.  It may have a limited impact over time, as consumers adjust behaviour in response to a greater awareness of the consequences of different choices.  This long‑time benefit would, however, depend on continued education programmes to inform each new generation of consumers. 

9.108          This approach would be unlikely to meet the government's objectives, other than the fourth objective.

9.109          In summary, this option would have the following costs and benefits:

       Lessors would not incur any costs, except as over time consumer decision‑making changed to indicate a preference for credit contracts over consumer leases.

       Some consumers, who assimilate the messages of the education campaign, would either avoid leases or enter into lease contracts with a better understanding of how they work.  Consumers who do not respond to these messages or who do not have alternative finance choices available to them would continue to be at risk of suffering the financial disadvantages identified in this RIS.   

       Credit products who operate business models in which their products compete with credit contracts would continue to be at a competitive disadvantage.

Consultation

9.110          The Government has conducted extensive consultations in the consideration of enhancements to the regulation of consumer leases via the Green Paper and the Industry and Consumer Representatives Consultation Group. 

9.111          In addition, the Government has formed a specialist group on this topic, given the technical issues associated with leases.  This group comprises lessors (represented directly rather than through an industry body), consumer representatives with significant experience in the area, the Financial Ombudsman Service (FOS) (because of its experience with complaints in respect of leases) and providers of credit contracts.  The level of expertise within this group has resulted in a frank and detailed analysis and exchange of information that has informed this RIS and is expected to assist in the implementation of the proposals.

9.112          The views of stakeholders are set out below.

Consumer and legal representatives

9.113          The option of applying the protections provided to consumers using credit contracts under the Credit Act to users of consumer leases is supported by a range of consumer and legal group stakeholders, including the Brotherhood of St Laurence, Consumer Action Law Centre, National Legal Aid, and the Wesley Community Legal Service.  In particular, these stakeholders agree that providing consumers with disclosure regarding the cost of the consumer lease and being provided with enhanced disclosure that improves the consumers’ ability to compare the cost of a consumer lease with a credit contract are key necessary reforms. 

9.114          These groups also agree that the different levels of regulation applying to credit contracts and consumer leases creates regulatory arbitrage and is allowing lease providers to reduce disclosure and other requirements under the Code by structuring their products as a lease, rather than a credit contract. 

Industry representatives and professional bodies

9.115          Several industry and professional body representatives including GE Capital, the Mortgage & Finance Association of Australia and Min‑it Software have expressed various concerns regarding practices under current regulation including competitive bias and regulatory arbitrage.  These stakeholders agree that greater regulation of consumer leases is required.

9.116          Several industry and professional body representatives including Flexigroup, the Australian Finance Conference and the Finance Brokers Association of Australia consider that there is insufficient evidence to determine that additional regulation of consumer leases is warranted.

9.117          To the extent they acknowledge there may be regulation their primary concern is that leases are not regulated in a way in which ownership of the goods passes to the consumer.  This approach has not been contemplated in this RIS.   

Dispute resolution provider

9.118          The Financial Ombudsman Service considers that consumer leases should be subject to the same disclosure requirements as sales by instalments and credit contracts.

Recommended option

9.119          Options 2 and 3 are the preferred options.  It is considered the combination of these two options will operate in a complementary way to deliver both benefits to consumers both in the short‑term and the medium‑term. 


Enhancements to the National Consumer Credit Protection Regime

Background

9.120          During Phase One of the National Consumer Credit Protection reforms, stakeholders raised concerns about certain aspects of the UCCC which have been replicated in the Code.[12] 

9.121          It was agreed that improvements to the Code would be considered during Phase Two of the credit reforms and were the topic of Chapter 7 of the Green Paper.  The following issues have been identified:

       The provisions allowing borrowers to request a variation of their credit contract on the grounds of financial hardship (whether before or after enforcement action) are highly prescriptive, and subject to a restriction in that they only apply to persons who have borrowed up to $500,000.  This restricts the capacity of borrowers to obtain a variation, even where they only need a variation to address a short‑term change in their circumstances.  Three different aspects of this topic are considered below.

       There is no general remedy provided for unjust conduct by brokers or other intermediaries (as the Code only provides a remedy where there has been unjust conduct by lenders).  This creates a gap as consumers otherwise need to rely on general prohibitions that may not always provide a remedy where they have suffered loss because of the conduct of a broker. 

       The Code does not prohibit or restrict the use of particular words or phrases.  In the credit context, some words or phrases have an emotional resonance with consumers (for example, ‘impartial’ or ‘interest free’).  Consumers may be more susceptible to entering into contracts where brokers or lenders have used these terms in advertising, even where they may not be strictly correct or are subsequently qualified, and where therefore the contract is inconsistent with the use of these words. 

       The Code only contains a partial prohibition against door‑to‑door canvassing of credit.  The prohibition does not apply where goods are being sold on credit or provided through a lease.  Given the range of alternative distribution channels available today, door‑to‑door selling in this way is largely associated with targeting of vulnerable consumers, and often with high‑pressure or manipulative sales tactics.

Issue One — Types of hardship variations that can be requested

Background

Rights of Borrowers under the National Credit Code

9.122          Under the Code borrowers have a statutory right to request certain variations to their contract where they are unable reasonably, due to illness, unemployment or other reasonable cause to meet their obligations where the value of their contract is under the monetary threshold.[13]  This right is subject to a number of limitations, primarily that the borrower must specifically ask their credit provider to change the contract in one of the three following ways:

       extending the period of the contract, and reducing repayments accordingly;

       a repayment holiday (without extending the period of the contract); or

       a repayment holiday and extending the period of the contract.

9.123          If the borrower formulates the request in some other way (for example, they simply ask for a variation without putting forward any proposal of their own) this will not be a ‘request’ within the meaning of the Code, and therefore the credit provider is under no statutory obligation to respond in accordance with the Code. 

9.124          The wording of the current provision therefore focuses attention on a relatively narrow set of options for varying the contract, rather than directing the parties involved to consider the substantive issue, namely whether a variation (of any type) would resolve the borrower’s situation and void them defaulting, while still being able to repay the amount borrowed.    

9.125          In relation to a request that falls within one of the three categories above, a lender must a respond in writing within 21 days, and set out the reasons for denying the request (if this is the outcome).  A request can be legitimately denied where the credit provider does not reasonably expect the consumer to be able to meet their obligations despite a variation. 

9.126          A debtor can apply to the court to change the contract if the credit provider refuses a hardship request.  If successful, a court has power to order a variation as described above.[14]  Consumers may also apply to the credit provider's external dispute resolution (EDR) scheme to reconsider a request for a hardship variation.

9.127          Changes to a contract can also be negotiated by agreement between the parties.[15]  There are no limitations on what variations can be made under this provision.  However, if a request to amend a contract which is made outside of the hardship provision in the Code is refused by the credit provider, the consumer has no statutory recourse to a court (or EDR) for review.  These variations are therefore within the discretion of the credit provider.

9.128          Some credit providers have elected to become signatories to a voluntary industry code.[16] These types of codes include requirements that signatories will assist consumers in financial hardship beyond meeting the statutory obligations required by the Code.  While there is no statutory recourse to a court for review, the jurisdiction of EDR schemes can include monitoring compliance with industry codes.

9.129          In April 2009 the Treasurer announced an agreement between the Government and the four major banks, to assist borrowers who are experiencing financial difficulty as a result of the global financial crisis by temporarily adopting expanded principles on hardship.  By June 2009, all 144 retail banks, building societies and credit unions had agreed to adopt the expanded principles.  Under the expanded principles, these institutions work with borrowers, irrespective of the value of their loan, to determine the most appropriate assistance option.  In practice, nearly all of these institutions were already signatories to a voluntary code containing similar obligations, and this agreement therefore did not significantly change the way in which they operated.  However, there are differences in approach between lenders in relation to compliance with these voluntary obligations (as discussed in detail below).   

9.130          In the discussion of this issue below the term ‘credit’ is used to refer to both credit contracts and consumer leases.

Levels of debt and financial hardship in Australia

9.131          Between March 2000 and March 2010, total outstanding consumer credit (owner‑occupied housing credit and other personal credit) increased from $277.2 billion to $913.5 billion.  This equates to an average annual growth rate of 12.7 per cent.  Total outstanding credit in the economy, which includes consumer credit, grew at an average rate of 11.1 per cent over the same period.[17]

9.132          The growth in the volume of consumer credit has also resulted in an increase in the level of debt stress amongst Australian households (exacerbated in the last two years by the global financial crisis).  This has resulted in a greater number of borrowers at risk of defaulting under their credit contracts, and an increase in the number who need or are seeking variations to their credit contracts on the grounds of financial hardship.[18] The Treasurer’s announcement from April 2009 was a reflection of this situation.

9.133          During 2008‑09 there were 6,731 new disputes relating to credit lodged with the Financial Ombudsman Service (FOS), an ASIC‑approved EDR scheme.  This was ‘up 36 per cent on the previous financial year and reflects the deteriorating economic condition of 2008–2009 and the hardship experienced by many consumers’.[19] 

9.134          The Credit Ombudsman Service Ltd (COSL), another ASIC approved EDR scheme, reported that ‘enquiries increased by 21 per cent in 2008/2009’ while ‘complaints increased by 19 per cent in 2008/2009’.  ‘Issues relating [to] financial hardship alone accounted for a significant 22 per cent of all enquires and complaints we received.  Applications for a variation to a credit contract on grounds of financial hardship are likely to increase further in the next financial year’.[20] 

9.135          The following graph shows the percentage of home loan provided by banks in arrears by greater than 90 days between 1994 and 2010.[21]  Although the arrears rate is low in percentage terms, it remains elevated in historical terms (with this trend consistent with that for home loans provided by lenders other than banks).  The need for a hardship variation is most pronounced in relation to mortgages as, first, this debt is likely to be a borrower’s largest commitment (and therefore the one they will have most difficulty in meeting), and, second, the consequences of default are greater relative to other debts (including potentially loss of the family home). 

The graph shows the percentage of home loans provided by banks in arrears by greater than 90 days between 1994 and 2010. The percentage of these loans rose from just over 0.4% in 1994 to approximately 0.7% in 2010.

Problem Identification

9.136          The discussion above indicates that borrowers only have a right to seek a variation to address short‑term hardship on relatively narrow grounds, and where their request conforms to precise legal requirements.  This creates a risk of two distinct problems for borrowers:

       the lender may refuse to consider a variation of their contract because the borrower’s  request did not conform to the requirements under the Code; or

       lenders may only provide a variation that is one of the three options set out in the Code, when a different response would more effectively address the borrower’s situation.

9.137          In both cases the consequence for the borrower is the same, namely that they may default under their credit contract and face enforcement action when, in some situations, this could have been avoided.

9.138          There is evidence from a number of different sources that some lenders are not properly meeting the obligations in their voluntary code in relation to hardship, and that they are only complying with the requirements in the Credit Act.  They therefore have practices which mean they do not actively seeking to resolve, in a broader way, the position of borrowers who are in financial hardship. 

9.139          The first source is a Bulletin issued by FOS in March 2007 which set out its concerns that some member banks were not complying with the requirement in the Code of Banking Practice to actively inform customers in financial difficulty about the hardship provisions of the UCCC (rather than only responding to requests made in accordance with the UCCC).[22] FOS stated that: ‘It has become apparent that across a number of banks the material provided to customers and the internal processes applied focus almost entirely on the matters arising under section 66 of the UCCC and do not pay adequate regard to the fact that financial difficulty could arise from circumstances other than illness, unemployment or another cause; and the ways in which a subscribing bank may respond to those circumstances are potentially broader than by the express changes described in section 66’.

9.140          Secondly, in 2009, ASIC conducted a review of hardship practices by 15 major lenders.  The key relevant findings in the report were that:

       One lender would only consider an application made in accordance with the statutory requirements, and that otherwise it would not offer any assistance.  All the other lenders did not differentiate in their responses.

       Lenders preferred to provide a similar response irrespective of the borrower’s situation; typically this was short term assistance such as a three month payment moratorium.  This response did not require an assessment of the consumer's circumstances and needs and then varying the contract to match those needs. 

       Lenders generally have a far wider range of options for responding to hardship than those set out in the Code, but in practice tend to provide a much narrower range of options. 

9.141          The results of the ASIC survey also raise an inference that the FOS Bulletin did not result in all lenders reviewing their level of compliance with a voluntary code to ensure they were meeting its standards of conduct.

9.142          Further, both EDR schemes, FOS and COSL, have reported high rates of negotiating variations between lenders and borrowers where the lender initially refused a request for a variation.  In its Green Paper submission FOS noted that over 80 per cent of disputes in the period 1 January to 20 July 2010 were resolved successfully, with agreements made on grounds not necessarily available under the Code.  COSL reported a similar experience, and also noted in their Green Paper submission that their experience was that negotiated agreements often involved variations outside the Code. 

9.143          The outcome of complaints to EDR schemes clearly indicates that a significant percentage of lenders are rejecting applications for hardship when in fact the consumer is in a position to continue making payments under a variation to their contract.  It suggests that lenders are taking a narrow or technical view of whether to provide a variation, rather than considering the overall position of the borrower.

9.144          Finally, it is also noted that fringe or predatory lenders who provide ‘equity stripping’ loans have no interest in providing hardship variations, and could be expected to rely on any legal technicalities to avoid doing so.  This is because the intention of these lenders is to maximise the debt incurred by the borrower in as short a period as possible, and particularly through default or penalty interest and enforcement expenses.  While only representing a very small segment of the market these lenders cause significant losses to individual consumers. 

9.145          It would generally be expected that it would be in the interests of lenders to provide a hardship variation where appropriate, as it would be preferable for the contract to remain on foot and for the lender to receive ongoing payments without the costs of enforcement action.  Both the ASIC report and the experience of both FOS and COSL indicate that this is not always the case.  Possible reasons for this include:

       Compliance procedures are developed to meet the requirements imposed by the law, rather than being applied more flexibly (notwithstanding that this may be in the interests of the lender). 

       It is administratively simpler for lenders to adopt a standard response to requests for hardship (such as providing a three month moratorium) rather than assessing each application on its merits.

       Another reason may be that some lenders, particularly smaller lenders, are reluctant to defer payments, and prefer to receive payments as early as possible.   

9.146          It is also noted that not all borrowers who have an application for a variation rejected will pursue a complaint to an EDR scheme, and that there will be a percentage of borrowers therefore who end up facing enforcement action or selling their home, when they would be very likely (given the FOS resolution rate of 80 per cent) to avoid this outcome if they did complain.

Objective of Government action

9.147          The objective of government action is to support sufficient flexibility in the hardship variation provisions to enable the most mutually beneficial outcomes for lenders and consumers.

Options

Option 1.1 Maintain the status quo

9.148          Under this option, the existing limited range of variations that can be requested under the hardship provisions will be maintained.  This presupposes that the existing mechanisms for requesting variations to contracts when consumers find themselves in financial hardship are already sufficiently flexible.

Impact analysis

9.149          Under this option, there would be no additional impacts on consumers or credit providers.  Some consumers would therefore continue to be disadvantaged, particularly by losing the opportunity to retain possession of their homes where the lender, adopting a strict but legally correct approach to hardship variations, refused to change the terms of the contract even where doing so would result in the borrower being able to make repayments.

Option 1.2 Broaden the types of variations that can be requested

9.150          Under this option the types of variations that can be requested will be broadened.  Rather than establish additional prescriptive types of variations, it is proposed that the provision be written as a principles based right to request a variation when experiencing hardship, which should only be granted where the debtor reasonably expects to be able to comply with their obligations, as altered.  Credit providers would not be obliged to agree to a variation that sees them receiving a lower amount than would otherwise be due under the contract.

9.151          This approach would be driven by an underlying policy objective that, as far as possible, borrowers who can meet their financial obligations through a variation, should be assisted to seek such changes to their contract through a flexible response adapted to their individual circumstances. 

Impact analysis

Consumers

9.152          Consumers will benefit from the additional flexibility in the types of variations they can request, and their requests will not be declined for technical reasons, thereby increasing their ability to keep their contract on foot or recover from default.  The most substantial benefit will accrue to those borrowers who are able to remain in their own homes, and who will avoid significant costs (particularly enforcement costs and legal expenses) and consequent social dislocation. 

9.153          Avoiding default means that consumers will not be liable for default fees and charges and enforcement expenses which would otherwise be incurred by their credit provider.  In addition, it would avoid a default listing being placed on their credit file, which could see them unable to obtain additional credit or having to pay a higher price for it.

9.154          It is expected that a number of requests will also be resolver quicker (based on the experience of the extent to which requests for hardship variations that are initially rejected by the credit provider are then resolved through the intervention of an EDR scheme).  Consumers will benefit from the likelihood that requests are resolved quicker and have improved confidence that reasonable variations are likely to be made. 

9.155          If the options in the statutory right were broader, there would be improved reviewability of lender’s decision through internal mechanisms and external oversight, as compared to the current reliance on changes by agreement.

9.156          Consumers whose financial position is irretrievable would still face enforcement action, as is currently the case. 

Credit providers who are not signatories to a code of conduct

9.157          This class of lenders are likely to incur additional compliance costs in changing the way in which they respond to requests for hardship variations, as they are not already covered by industry codes (noting that some may nevertheless already currently adopt a flexible response to hardship). 

9.158          The cost of a lender reviewing one aspect of their systems in relation to hardship variations is likely to be quite low, given that it is estimated that it could cost a lender currently unregulated by the Act as little as $60,000 to comply with the Code in its entirety.

9.159          These costs could also be partially offset by a better performance of their overall lending portfolio, with reduced enforcement expenses and fewer bad debts.  Notwithstanding that these advantages could be expected to encourage all lenders to already act in this way, it is noted that this is not the case (as discussed above).   

9.160          In addition, it is likely that over time more hardship disputes would be resolved internally, as lenders adapted to the new requirements and became more effective in identifying and providing the appropriate response to an individual’s circumstances.  This would result in minor savings for credit providers, as EDR schemes charge a fee for each dispute received.

Credit providers who are signatories to a code of conduct

9.161          This option has a more limited impact on those lenders who are signatories to a code of conduct in which they have voluntarily agreed to be more responsive in their dealings with consumers who are in financial hardship, irrespective of the value of the credit contract.  This would include all ADIs, and would cover the majority of credit contracts.

9.162          The nature of the impact would be:

       For those lenders already fully complying with the code — the change to their business would be minimal; and

       For those lenders not complying with the code, or complying inconsistently (as suggested by the ASIC report and the FOS bulletin) — the introduction of these obligations in law would introduce greater accountability and responsibility for non‑compliance, and could be expected to result in greater internal changes to their practices to ensure they were now meeting these requirements.

9.163          In relation to those lenders who are ADIs, APRA has advised that there may be more loans which, because of delays in repayment or variation in terms, may need to be classified as impaired (and therefore provisioned).  However, to the extent the terms of a loan are renegotiated under hardship provisions (which should not be done in circumstances where an inevitable default by the customer is probable) there would be no impact on the estimated future cash flows of the financial asset and therefore no impairment charge.  The impact of broadening the statutory grounds on which a variation could be sought would therefore be expected to have a minimal impact on APRA‑regulated entities.

9.164          This option could be expected to have the following costs and benefits:

       A significant percentage of consumers who currently have requests for hardship variations refused would be provided with changes to their contract that avoid them going into default, or enable them to remedy a default in a relatively straightforward way.

       Lenders would incur minimal compliance costs, and could be expected to have lower default rates overall (noting that these costs may vary according to whether or not the lender was a signatory to a code of conduct with similar obligations, and, where it was a signatory, whether or not the lender was already meeting the standards of conduct in that code). 

Stakeholder views

9.165          This option was supported by EDR schemes, consumer groups and some lenders in their Green Paper submissions.  Expanding the types of variations available provides greater flexibility and access to review thereby increasing the potential to stay out of default.  It also addresses the concern that consumers’ requests could be declined for technical rather than substantive reasons. 

9.166          Although MFAA, ABA and ABACUS did not support any further regulatory intervention in their Green Paper submissions, they noted that adopting this recommendation codifies their codes of practice and should have only a minimal impact on their members.

9.167          APRA has considered the prudential implications for the proposed expansion of the circumstances under which borrowers can ask lenders to vary loans under the hardship provisions.  They acknowledge that the effect of the broadened ambit of the provisions means that there may be more loans which, because of delays in repayment or variation in terms, may need to be classified as impaired (and therefore provisioned).  However, APRA does not believe the proposals raise significant prudential concerns as:

       the proposals only give consumers a right to request a variation, as opposed to a right to a variation;

       a credit provider will not be obliged to provide a variation that sees them receiving a lower amount than would otherwise be due under the contract; and

       a variation should continue to be granted only where it is expected the consumer will be able to meet their obligations after the variation. 

Recommended option

9.168          Option 1.2, broadening the types of variations that can be requested, is the recommended option.  Avoiding a narrow or prescriptive approach to hardship variations will assist consumers and lenders to negotiate the most beneficial outcome.  It would remove unnecessary inflexibility from the statutory right to request a variation and increase access to independent review of the lender’s decision.  A variation would be provided according to whether or not the borrower can meet their liability to the lender through the variation, rather than whether the request meets relatively technical procedural requirements. 

9.169          As this recommendation codifies leading industry codes of conduct and EDR rules, it should have minimal compliance cost implications for lender while delivering significant protections to consumers (in terms of greater flexibility in keeping contracts on foot).

Issue Two — Changing the monetary threshold above which a consumer does not have a statutory right to request a hardship variation or postponement of enforcement proceedings

Background

9.170          The right of borrowers to seek a variation of their credit contract under the Code is subject to a constraint, in that it is only applies to borrowers where the maximum amount of credit available under the contract did not exceed a prescribed figure. 

9.171          The way in which this figure was determined has changed as follows since the introduction of the UCCC:

       In 1996, when the UCCC first came into force, the statutory right for consumers to request a variation to their contract only applied to contracts under $125,000.[23]

       Changes to the State regulations between November 2004 and July 2005 resulted in the introduction of a floating threshold linked to equal to 110 per cent of the average loan size for the purchase of new owner occupied dwellings in New South Wales.  The threshold changes monthly, and has varied significantly, from $295,790 (Aug‑Sept 2005) to $387,420 (Sept‑Oct 2010).  Since July 2009, the threshold for these contracts has been around $350,000.  This threshold continues to be relevant for pre‑1 July 2010 contracts only.

       As part of Phase 1 of the national credit reforms, the threshold for contracts entered into after 1 July 2010 was increased to $500,000 (or higher as specified in regulations).[24]  This threshold is not indexed, and as a result it can be expected that over time an increasing number of credit contracts will be over the threshold

9.172          This threshold is also relevant to the right to request a postponement of enforcement proceedings (discussed below in Issue Three).[25]

9.173          This discussion only applies to contracts entered into after 1 July 2010.  For constitutional reasons, the basis for calculating the threshold for contracts entered prior to 1 July 2010 cannot be altered. 

Problem identification

9.174          The existence of a monetary threshold (of any amount) necessarily creates a class of borrowers who will be denied access to a statutory right to seek a variation.  This creates a risk for these borrowers that the lender may refuse to provide a variation of their contract, even where the variation would allow the borrower to avoid defaulting.  Where these persons are in short‑term financial difficulties, their options are then limited to refinancing (with transaction costs, and assuming that a new lender is prepared to lend to the borrower), or facing enforcement action (and consequent costs).

9.175          The evidence of lender conduct set out in detail in Issue One above indicates that some lenders:

       take a technical approach to responding to requests for hardship variations, and will only assess them in accordance with the law, resulting in requests in respect of loans over $500,000 being rejected;

       respond to requests in a formal rather than substantive way, for example, by providing a short term moratorium (which may only exacerbate the problem for the consumer after this period, when the amount outstanding has increased and their underlying financial situation has not changed); and

       reject requests for hardship variations when, following complaint to an EDR scheme, a repayment scheme is negotiated that enables the consumer is meet their obligations under the contract. 

9.176          Loans which exceed the threshold would generally be home loans secured by a mortgage, and, in the majority of cases, the lender would be an ADI or RFC.  The number of contracts which exceed the threshold are concentrated in high cost metropolitan areas and are expected to increase in line with increasing house prices.  There is no evidence to suggest that these consumers differ in some way from persons who borrow less than $500,000; while they may earn more money in order to be able to service a higher level of repayments there is no clear distinction between the two classes of borrowers.

9.177          Table 1 shows that, based on a mortgage of 95 per cent[26] of the median sale price of all dwellings (strata and non‑strata) in certain Sydney metropolitan areas as at December 2009, the value of a significant number of consumers’ home loans could exceed the current $500,000 monetary threshold.

Table 9.1Table 1: Housing New South Wales, A8.  Median Sales Prices — Greater Metropolitan Region by statistical sub‑divisions/postcodes — December 2009.[27]

Location

95% median sale price

% annual change

Inner Sydney

$551,000

16 %

Eastern Suburbs

$760,000

26.4%

St George – Sutherland

$519,650

20.2%

Inner Western Sydney

$584,250

25%

Lower Northern Sydney

$665,000

26.4%

Central Northern Sydney

$643,150

15.7%

Northern Beaches

$752,400

18.2%

9.178          Similarly, Table 2 shows that based on a mortgage of 95 per cent of the median sale price of houses in metropolitan Melbourne, the value of consumers’ home loans could exceed the current threshold.

Table 9.2Table 2: Real Estate Institute of Victoria, Metropolitan Melbourne Median Prices.[28]

Dwelling type

95% median sale price

Median sale price June Qtr 2010

% change Jun-09 to Jun-10

Houses

$531,050

$559,000

26.8%

 

9.179          Although the average loan size remains well below the current threshold, it is expected that the number of loans in excess of $500,000 will increase, as house prices increase.  Based on data from the Australian Bureau of Statistics, Treasury estimates that more than 35,000 home loans in excess of $500,000 are written each year, and that the total number of such loans on foot will increase with each year (as more loans of this type will be provided than are discharged).[29]  It is not known how many of these loans are varied or default because the consumer experiences financial hardship. 

Objective of Government action

9.180          The objective of government action is to support access to the hardship variation provisions to enable the most mutually beneficial outcomes for lenders and consumers.

Options

Option 2.1 Maintain the status quo

9.181          Under this option, the existing monetary threshold above which a consumer does not have a statutory right to request a hardship variation of $500,000 would be maintained.  Consumers with contracts in excess of the threshold would continue to lack access to the statutory right to request hardship variation and to have that decision reviewed.  Those consumers would need to rely on other mechanisms to obtain hardship variations, such as industry codes (where they apply).

Impact analysis

9.182          Under this option, there would be no additional impacts on consumers or business.  Some consumers would continue to lose the opportunity to retain possession of their homes where the lender refused to vary the terms of the contract even where doing so would result in the borrower being able to make repayments.  The number of consumers in this category would increase over time as the value of contracts increases relative to the threshold.

Option 2.2 Increase the threshold under which a consumer has a statutory right to request a hardship variation

9.183          Under this option, a threshold would be maintained but would be increased.  Possible models for this approach would be:

       to increase the threshold to a fixed figure such as $1 million;

       to adopt a new higher floating figure (for example, using a figure equal to 110 per cent of the average loan size for the purchase of new owner occupied dwellings in inner Sydney, rather than greater New South Wales); or

       to set increments after certain periods of time (for example, increased by $10,000 every year or $50,000 every three years).

9.184          Further consultation on the method of determining the appropriate level of the threshold would need to be undertaken.  Possible methods of increasing the threshold include annual indexation or linking to movements in the median house price.  In certain market conditions (eg deflation) use of these methods would result in the threshold decreasing unless expressly preserved. 

9.185          For example, if the hardship threshold was linked to equal to 110 per cent of the average loan size for the purchase of new owner occupied dwellings in Inner Sydney (rather than greater New South Wales as it was prior to 1 July 2010) the threshold would have been $638,000 in December 2009 (as opposed to $364,210).  If the hardship threshold was linked to equal to 110 per cent of the average loan size for the purchase of new owner occupied houses in metropolitan Melbourne the threshold would be approximately $614,900 in June 2010, rather than $361,790 (based on the old threshold).

9.186          Although some consumers would gain access to the statutory right to request variations, others would continue to be excluded and have to rely on other mechanisms to request hardship variations.

9.187          This option would need to be justified either by evidence that above the threshold:

       consumers are assumed to possess a level of financial literacy or sophistication that means they do not need statutory rights — however, there is no evidence this is the case, given the majority of the loans of this value are for a primary place of residence rather than part of an investment strategy.[30] 

       lenders are at greater risk in respect of high value loans — as noted in Issue One, APRA did not identify any such risks in respect of this type of lending generally.   

9.188          Regular adjustments to the threshold may lead to uncertainty about coverage and increase the monitoring and compliance cost for those businesses who maintain different procedures for contracts on the basis of whether or not they were below the threshold. 

Impact analysis

Consumers

9.189          Some consumers will gain statutory access to the right to request variation to their contract, increasing their ability to keep their contract on foot or recover from default.  Any additional compliance cost incurred by lenders may be passed on to consumers. 

9.190          A limited number of consumers are likely to be confused about whether or not they have a statutory right to request a hardship variation (particularly where their loan exceeds the threshold by a small amount), and may seek a remedy when they have no such right.

Credit providers who are not signatories to a code of conduct

9.191          This class of lenders are likely to incur additional compliance costs in changing the way in which they respond to requests for hardship variations above the threshold (noting that some may nevertheless already currently adopt a flexible response to hardship). 

9.192          These costs are likely to be quite low, and could also be partially offset by, first, a better performance of their overall lending portfolio, and, second, simpler and consistent internal procedures.

Credit providers who are signatories to a code of conduct

9.193          This option has a more limited impact on those lenders who are signatories to a code of conduct in which they have voluntarily agreed to be more responsive in their dealings with consumers who are in financial hardship, irrespective of the value of the credit contract.  This would include all ADIs, and would cover the majority of credit contracts.

9.194          In summary, this option could be expected to have the following costs and benefits:

       Fewer consumers who enter into contracts under the increased threshold would go into default and lose their home (because they would be able to use the statutory right to request a hardship variation to be provided with changes to their contract that avoid this outcome).

       Lenders would incur minimal compliance costs, and could be expected to have lower default rates overall. 

Option 2.3 Remove the threshold under which a consumer has a statutory right to request a hardship variation

9.195          Under this option, the threshold would be removed, and all consumers would have a statutory right to request a hardship variation. 

Impact analysis

Consumers

9.196          All consumers will have statutory access to the right to request variation to their contract, thereby increasing their ability to keep their contract on foot or recover from default.  Additional compliance cost incurred by lenders may be passed on to consumers.

Credit providers

9.197          This option would have the same impact on credit providers as Option 2.2, except that lenders would incur slightly lower compliance costs in that:

       They would not need to monitor the monetary threshold; and

       They can apply internally consistent procedures across all contracts, eliminating the need for different processes.    

9.198          This option could be expected to have the following costs and benefits:

       Even fewer consumers than under Option 2.2 would go into default and lose their home (because they would be able to use the statutory right to request a hardship variation to be provided with changes to their contract that avoid this outcome).

       Lenders would incur minimal compliance costs, and could be expected to have lower default rates overall. 

Stakeholder views

9.199          Removing the threshold was supported by EDR schemes, consumer groups and some lenders in their Green Paper submissions.  Consumer groups supported increasing the threshold as an alternative (if removing the threshold altogether was not recommended).

9.200          Although MFAA, ABA and ABACUS did not support any further regulatory intervention in their Green Paper submissions, adopting this recommendation codifies their codes of practice and should have minimal impact on their members. 

9.201          APRA did not believe this proposal raised significant prudential concerns.  The reasons are the same as discussed above in relation to Issue One above, namely that:

       the proposals only give consumers a right to request a variation, as opposed to a right to a variation;

       a credit provider will not be obliged to provide a variation that sees them receiving a lower amount than would otherwise be due under the contract; and

       a variation should continue to be granted only where it is expected the consumer will be able to meet their obligations after the variation. 

Recommended option

9.202          Option 2.3, removing the threshold, is the recommended option.  This would not mean that a borrower has an automatic right to a variation, but rather a right to request one.  Lenders would not be required to agree to receive less than what they are rightfully owed, and a variation should only be granted where it is reasonably expected that the borrower could discharge their obligations.

9.203          As this recommendation codifies leading industry codes of conduct and EDR rules, it should have minimal compliance cost implications for lenders while delivering significant benefits (in the form of increased protection and access to review for consumers and the likelihood additional contracts would be kept out of default) to consumers with have large debts who are experiencing difficulty in making their repayments.

Issue Three — Enhancements to the postponement of enforcement provisions

Background

9.204          A credit provider can generally commence proceedings where a consumer is in default and the credit provider has served the borrower a notice specifying the nature of the default, and allowing them an opportunity to rectify the default.[31]  The notice contains information on the hardship variation and stay of enforcement provisions and EDR contact details. 

9.205          The Code does not require credit providers to specifically consider whether the consumer could continue to meet their obligations if their contract were varied before commencing enforcement proceedings.  However, some industry codes of conduct and the rules of both FOS and COSL[32] prohibit lenders from commencing or continuing enforcement proceedings once they have received, and are considering, a request for a hardship variation. 

9.206          In this context, enforcement proceedings include taking legal action; repossession (unless the security is at risk); listing of a default on a consumer’s credit file; and selling the debt or otherwise assigning any right to recover the debt. 

Problem Identification

9.207          Some borrowers do not seek solutions to their financial hardship by actively approaching their lender prior to going into default, and the lender commencing enforcement action (by sending them a notice under Section 80 of the Code).  Nevertheless, some of these borrowers would still satisfy the requirements for a hardship variation by being able to repay their liability to the credit provider (notwithstanding that the debt has increased in size relative to if they had sought the variation earlier). 

9.208          Consumer advocates suggest that a significant number of borrowers do not approach their lender to seek a hardship variation until the credit provider has commenced enforcement action.  The reasons for this include:

       Consumers are not always aware themselves of their right to seek a variation until they seek out advice from a third party, and a percentage of consumers only seek this advice when faced with enforcement action.

       Consumers who may be aware of this right nevertheless believe that telling their credit provider they are in financial difficulties will precipitate enforcement action (irrespective of whether this is true or not). 

9.209          Where the borrower makes a request the Code currently does not prevent lenders from commencing enforcement action.  Therefore, some lenders may commence enforcement proceedings before giving proper consideration to consumer’s ability to remedy the default, such as responding to their request for a hardship variation, or proactively making enquires with the consumer to determine the source of the problem and whether it can be resolved without resorting to formal enforcement proceedings. 

9.210          There is evidence that the scale of the problem is significant.  Firstly, COSL, in its submission to the Green Paper, stated that in more than 90 per cent of the complaints it receives from borrowers seeking hardship variations the borrower has either been served with a default notice or legal proceedings have commenced.  This number does not represent all borrowers who have had hardship applications rejected as not all these persons will pursue their complaint to an EDR scheme.

9.211          It is noted that the COSL membership includes the overwhelming majority of non‑ADI lenders, micro lenders, promoters of non‑bank residential lending programmes, aggregators and mortgage managers. 

9.212          Secondly, a recent survey of homeowners facing enforcement action found that ‘Nearly half the respondents initiated attempts with their lenders to [re‑schedule mortgage repayments in order to deal with mounting arrears and forestall possession or forced sale] but only 4 per cent were successful’.[33]Where credit providers initiate court action it is likely they will have incurred legal costs (and may continue to do so while any hardship variation or request for a stay is being considered).  Under court rules the borrower would usually be liable for these costs, which increase their debt.  In some cases, these costs could have been avoided by consideration of such measures earlier. 

Objective of Government Action

9.213          The objective of government action is to support sufficient flexibility in the hardship variation provisions to enable the most mutually beneficial outcomes for lenders and consumers.

Options

Option 3.1 Maintain the status quo

9.214          Under this option, the current arrangements regarding when enforcement proceedings can be commenced, would be maintained. 

9.215          Measures implemented in Phase 1 of the credit reforms should assist in raising awareness about the existence of the right to request hardship variations and stays of enforcement and encourage consumers to be more proactive in approaching their lender when they experience difficulty.  In addition, improved access to independent review by EDR should raise the quality of decisions made by lenders. 

Impact analysis

9.216          Under this option, there would be no additional impacts on consumers or business.

Option 3.2 Requiring lenders to consider whether a hardship variation is appropriate before commencing enforcement proceedings

9.217          Under this option, credit providers would be required to specifically consider whether a variation should be given to a defaulting borrower before commencing enforcement proceedings.  This would require a lender to contact any defaulting consumers to establish the cause of the default and then assess whether a variation should be provided (in order to keep otherwise viable contracts on foot and avoid incurring unnecessary enforcement expenses). 

9.218          Requiring lenders to initiate consideration addresses the risk that consumers did not apply because they did not know or were hesitant to raise the issue with their lender.  Enforcement proceedings should only be commenced when other options are exhausted; exceptions would apply where, for example, security is at risk or it is clear that the contract cannot be completed satisfactorily,

Impact analysis

Consumers

9.219          Requiring lenders to initiate consideration of a variation before commencing enforcement action may reduce the incidence of avoidable and costly enforcement action.  However, there is a risk that inappropriate variations may granted, leading to further financial hardship and worse outcomes.

9.220          There is also a risk that the implementation of this proposal could encourage credit providers to consider commencing proceedings earlier, to compensate for any perceived risk of delay which may arise as a result of the time required to consider a variation.

9.221          There is also a risk that delaying enforcement proceedings which eventually proceed could result in borrower being liable for a much greater debt as a result of a greater shortfall.  Where such provisions are used as a delay tactic to artificially extend the period before enforcement action, neither the consumer nor lender would ultimately benefit. 

Credit providers

9.222          As this proposal goes beyond what is currently contained in industry codes and the rules of EDR schemes, it is likely to have significant impacts on credit providers, in terms of the cost and time required to contact all defaulting consumers to determine the cause of default and the appropriateness of a variation. 

9.223          These costs may be partially offset by savings in avoidable enforcement expenses and reduced number of defaults that are written off as bad debts.  However, it is expected that the cost would exceed those savings, as it is likely that a variation would not be provided in most cases, including where the lender could not make contact the borrower or could not obtain sufficient information about the borrower’s financial situation to be able to assess the application.  The costs of contacting borrowers individually (possibly on multiple occasions) and seeking a level of detail, through documentary evidence of the borrowers’ circumstances, are likely to considerable.  Where a variation was not provided these contracts would proceed to enforcement. 

9.224          This option could be expected to have the following costs and benefits:

       Some consumers who are facing enforcement action would be provided with changes to their contract that avoid them going into default.

       Lenders would incur significant compliance costs in contacting all borrowers who have defaulted, and where enforcement action is being considered.  This may result in lenders passing on these costs to all consumers (through higher interest charges). 

Option 3.3 Require lenders to finalise consideration of any outstanding requests for a variation before commencing enforcement proceedings

9.225          Under this option, credit providers would not be able to progress enforcement proceedings until they had considered a consumer’s request.  Making this an upfront requirement in the law, rather than relying on industry codes or only having it apply to cases which are taken to EDR, would provide certainty and encourage confidence in the process. 

9.226          Where the request was refused, credit providers would be required  to allow the borrower time (for example, 10 working days) to consider the response and take further action (for example, request review from an EDR scheme, seek other sources of credit or sell assets). 

9.227          There would need to be restrictions about the number of applications a consumer could make, in order to avoid the risk that multiple applications of little or no merit were made, simply to delay enforcement action. 

Impact analysis

Consumers

9.228          Requiring lenders to determine a request for hardship before commencing enforcement action is likely to reduce the incidence of avoidable enforcement action.  It will particularly assist the following classes of consumers:

       Borrowers who are hesitant or reluctant to confront their financial problems.  These persons may only seek assistance when they are confronted with the prospect of enforcement action, through the lender sending them a default notice.

       Borrowers who pursue hardship variations because the introduction of a statutory right gives them greater awareness of, and confidence in pursuing, their rights.

9.229          There is a risk that delaying enforcement proceedings which eventually proceed could result in some borrowers becoming liable for a larger debt as a result of a greater period during which repayments may not be made.   

Credit providers

9.230          Additional compliance costs are expected to be minimal, as this proposal would only affect credit providers in relation to a smaller class of borrowers relative to Option 3.2 (those borrowers in default who have lodged a hardship variation rather than all borrowers in default where enforcement action is being considered).  These costs may be offset by savings in avoidable enforcement expenses and reduced number of defaults that are written off as bad debts.

9.231          The evidence from COSL suggests the impact is likely to be higher on lenders who are not ADIs.

9.232          This option could be expected to have the following costs and benefits:

       A percentage of those consumers who have defaulted and would otherwise face enforcement action would be provided with changes to their contract that avoid them going into default.

       Lenders would incur minimal compliance costs, and could be expected to have slightly lower default rates.

Stakeholder views

9.233          Consumer groups supported Option 3.2.  However, a majority of lenders responded that without access to information about the totality of a consumer’s financial situation at the time of the default or an indication on the consumer’s willingness to meet their obligations, a lender would not be able to properly consider the appropriateness or feasibility of a variation. 

9.234          FOS suggested it was appropriate for lenders to attempt to contact consumers to determine the reason for default, and if possible consider if a variation would be appropriate, before commencing recovery action.

9.235          There was support for Option 3.3 from NFSF, EDR schemes and consumer groups.  ABA, ABACUS, MFAA and FBAA did not support additional regulatory action.

Recommended option

9.236          Option 3.3 is the recommended option.  Where a consumer has exercised their right to request a variation, they should be given the opportunity to have it properly considered before the lender commences enforcement action.  A beneficial outcome is mostly likely to be achieved when both parties are willingly and actively participating in the process. 

9.237          However, consumers would be prevented from forestalling enforcement by regularly applying for hardship variations where their circumstances have not changed and it is unlikely to result in a beneficial outcome.

Issue Four — Provision of a general remedy for misconduct by providers of credit services

Background

9.238          The implementation of Phase One of the credit reforms has maintained in the Code the right for consumers to be able to have a credit contract, consumer lease, mortgage or guarantee reopened on the grounds that it is unjust.  This provides a general remedy beyond those existing in other legislation.  A remedy of this type in respect of credit contracts has been long‑standing, and previously been included in money‑lending legislation.  The remedy has recognised the desirability of industry‑specific protections that encourage higher standards of conduct by credit providers. 

9.239          However, the Credit Act does not provide any equivalent general remedy in relation to providers of credit services.  There are two classes of such persons, those who provide credit assistance by arranging or suggesting a particular or identified contract (and are therefore required to comply with the responsible lending requirements in Chapter 3 of the Credit Act), and other intermediaries who only play a lesser role in the provision of credit or leases. 

9.240          The Credit Act currently only provides a consumer with a remedy where a person has breached a specific provision of the Act, and the consumer has suffered loss or damage as a result.[34] This means that the ability of consumers to obtain a remedy under the Credit Act varies according to the function of the person they are dealing with, as follows:

       Where the person provides credit assistance — they are subject to a number of specific obligations in Chapter 3 of the Credit Act (including obligations to ensure the contracts they arrange or suggest are not unsuitable, and disclosure requirements, particularly in relation to fees and commissions) and will be liable to consumers for breaches of these requirements, but not otherwise.

       Where the person does not provide credit assistance — they are not subject to specific obligations under the Credit Act in respect of their dealings with consumers and as they are under no requirements, they therefore cannot breach them.

9.241          Following the introduction of the Commonwealth legislation consumers in New South Wales, Victoria and Western Australia who use the services of brokers no longer have rights that they previously enjoyed under State legislation in relation to the conduct of brokers.  For example, in New South Wales, Section 4J of the Consumer Credit Administration Act 1995 (NSW) (the Administration Act) provided consumers with a remedy for unjust conduct in relation to contracts regulated by the UCCC.  Section 3 defined unjust conduct as conduct that:

(a) is unfair, dishonest or fraudulent, or

(b) consists of anything done or omitted to be done in breach of contract, whether or not proceedings in respect of the breach have been brought, or

(c) consists of a contravention of any consumer credit legislation.

9.242          The legislation in force at a State level has been effective in regulating the conduct of brokers in a way that reduces the risk of adverse conduct that can cause harm to consumers.  For example, the New South Wales Office of Fair Trading considers that the Administration Act was effective in reducing the level of disputes between consumers and brokers in relation to fees, but that these types of problems continued to occur where the contract was unregulated by the UCCC, and the Administration Act therefore did not apply. 

Problem identification

9.243          There are two related problems for consumers:

       Existing remedies under the Credit Act and other Commonwealth legislation do not adequately address common situations where consumers are at risk of financial detriment from brokers and other intermediaries.

       In New South Wales, Victoria and Western Australia the situation is exacerbated in that consumers have suffered a loss of rights in their dealings with brokers, from the repeal of legislation regulating their conduct.

9.244          The absence of any remedy means that consumers will be unable to obtain a remedy against a provider of credit services where they have not breached other legislation (such as the ASIC Act).[35] There are a number of relatively common situations where consumers are at risk of loss or detriment from conduct of brokers that is either unjust or unfair without other remedies being available.  These practices are largely adopted by persons who operate on the fringes of the industry, and who are conscious of the limits of existing regulation.  This class of persons will deliberately seek to avoid infringing specific statutory obligations by techniques such as:

       using a number of different parties, to make it harder to attribute fault to any single party;

       exploiting technical gaps in legislation (in the credit context, by constructing their business in such a way that they do not provide credit assistance and are therefore subject to a lower level of regulation);

       formal compliance with the law (for example, providing necessary disclosure but that is designed not to alert consumers to particular risks); or

       making the consumer sign documents that contain false statements or information (for example, verifying that they understand a particular transaction or consequences), that make it harder for the consumer to then deny the version of events recorded in those documents.

9.245          The first situation where this type of conduct is likely to occur is in ‘equity stripping’ scenarios.  Currently, the responsible lending provisions in the Credit Act impose an obligation on a broker who provides credit assistance (typically, by suggesting the particular credit contract) to assess the capacity of the borrower to meet repayments.  However, this requirement does not extend to other persons involved in the transaction who do not provide credit assistance; for example, in some equity stripping practices three or four parties may be involved each of whom charges a separate and large fee to the consumer.  National Legal Aid specifically referred to this situation in its response to the Green Paper and stated:  ‘Equity stripping, without any consequences for third parties who have financially benefited from such practices, … is of significant concern.’

9.246          A second area of concern is fees charged by intermediaries who do not provide credit assistance.[36] The Credit Act does not include any specific requirements regulating the way in which these persons disclose or charge fees.  It is noted that COSL (the EDR scheme that the majority of brokers belong to) has identified disputes about fees as a significant source of complaints in its recent Annual Reports of Operations; in 2008‑09 227 complaints (or 22 per cent) were about fees, and in 2009‑10 244 complaints (or 19 per cent) were about fees.  There is therefore considerable potential for ongoing disputes about fees (for example, about the amount or the circumstances in which a person is liable to pay those fees). 

9.247          A third situation is where intermediaries charge fees or earn commission, where the cost to the consumer may be inflated to cover payments to the broker (directly or indirectly).  For example, the broker may also be involved in the sale of real property and fix the price of the property according to the maximum amount the consumer can borrow, in order to earn a higher commission from the sale of the property.   

9.248          This practice is illustrated by the facts in the decision of the NSW Supreme Court in Investmentsource Corporation Pty Ltd v Knox Street Apartments Pty Ltd & Others [2002] NSWSC 710.  The case concerned the marketing and promotion of inner city units by a Henry Kaye company, Investmentsource Corporation Pty Ltd (Investmentsource).  Henry Kaye held wealth creation seminars in which he encouraged consumers to purchase these units and that Investmentsource assisted consumers to arrange finance. 

9.249          Separately, Investmentsource had negotiated with the owner of the units to obtain exclusive rights to market them.  Investmentsource had negotiated to receive a commission from the owner for the sale of each unit; the amount of commission received by Investmentsource was not fixed but was the amount by which the purchase price exceeded a minimum sale price set by the owner.  There was no evidence that the consumers were told about these arrangements and it can be presumed that they were unlikely to have agreed to purchase the units if this was the case.

9.250          Investmentsource sold 31 units and earned commission of $1,330,589.  This equates to a profit of $42,922 on each sale through inflation of the property price.  Assuming that the consumers borrowed money to finance the purchase of a unit with a loan at an interest rate of 6.5 per cent and that the liability was discharged over a period of 15 years, the additional interest paid by a consumer on the sum of $42,922 would be $24,379.41.  The total loss to consumers, through paying a higher cost for the properties, can be estimated as $2,086,343.70 ([$42,922 + $24,379.41] x 31). 

9.251          The extent of these practices is not precisely known.  However, given that brokers and intermediaries can earn significant financial benefits from these practices they are likely to create a continuing incentive for persons to continue to engage in this type of conduct. 

Objective of Government Action

9.252          The objectives of government action are to improve public confidence in the conduct of brokers and intermediaries by providing consumers with appropriate access to remedies in relation to loss or damage from misconduct by credit service providers.

Options

Option 4.1 Maintain the status quo

9.253          Under this option there would be no change to the current remedies available to consumers for loss or damage suffered as a result of conduct by brokers and intermediaries in relation to credit contracts, consumer leases, mortgages and guarantees.

9.254          Consumers would need to seek remedies for loss or damage under the existing, and more limited, provisions of the Credit Act (where applicable) or other legislation.  Consumers in NSW, Victoria and Western Australia would have lost protections by comparison with the remedies which were available under legislation such as the Consumer Credit Administration Act 1995 (NSW).

Impact analysis

9.255          Under this option, there would be no additional or new impacts on business.  Consumers in NSW, Victoria and Western Australia would find their rights reduced when engaging the services of brokers.

Option 4.2 Provide a general remedy against providers of credit services by extending the existing remedy for unjust conduct

9.256          The existing remedy allows an unjust contract to be reopened, but usually only allows for orders to be made against the credit provider, rather than third parties.  This would entail a change to the procedural aspects of the existing provisions, to enable an application to be brought against a broader range of parties (so that the consumer can obtain redress against both brokers and lenders, either individually or jointly). 

9.257          Changing the existing nature of the remedy in this way would mean that misconduct by a third party may enable the consumer to obtain a remedy which would allow the court to rewrite the terms of a credit contract or lease (irrespective of whether the conduct was known to the lender). 

Impact analysis

Consumers

9.258          Consumers will be able to obtain a remedy that is currently not available where they have suffered loss or damage as a result of unjust conduct by a person providing credit services.  They may also benefit from improved standards of conduct by providers of credit services, where they change their practices to mitigate the risk of engaging in unjust conduct.

9.259          In some situations the unjust conduct by the provider of credit services causes loss or damage that results in the consumer defaulting on the payments due under their contract.  Where this is the case, enhancing the capacity of the consumer to seek compensation may mean they can use the money awarded to them from a broker to rectify this default, and thereby avoid enforcement action by the credit provider or lessor. 

Credit providers or lessors

9.260          Some risk averse financiers may no longer arrange transactions involving third parties where they assess there is a high risk of unjust conduct that could result in the contract being reopened (to avoid incurring additional compliance costs in monitoring this risk).  Alternatively they may increase the cost of credit charged to the borrower to cover this contingent risk.  However, this is unlikely to involve significant new costs as it is considered most financiers would already be undertaking these assessments for other reasons (for example, reputational risk). 

Credit service providers

9.261          Providers of credit services may need to review their practices to identify situations where they are at risk of engaging in unjust conduct, and make appropriate changes after identifying any areas where they consider their conduct both may be unjust or unfair and may cause loss to consumers.  For example, brokers who earn commissions from related transactions may need to take extra steps to disclose to consumers their commercial arrangements with third parties other than lenders.[37] Brokers who previously operated in NSW would not need to do so, as it is generally expected that they would have already undertaken this task in order to address similar risks under the Consumer Credit Administration Act 1995.

9.262          Some brokers may therefore incur additional compliance costs as a result of this review.  These costs are unlikely to be significant for those who have reviewed their practices prior to applying for an Australian credit licence (or in making any changes required under their professional indemnity insurance).  These costs may need to be absorbed internally where the person providing credit services does not charge borrowers a fee.

9.263          There is a small class of brokers who are likely to incur more substantial costs, namely those brokers operating on the fringes who deliberate engage in conduct that may be unjust (for example, brokers who charge fees in ways that may be unfair or who earn secret commissions).  It is not possible to assess the impact on these persons solely in terms of compliance costs as there is a threshold question as to whether or not they are prepared to risk non‑compliance with the requirements of the Credit Act in order to gain additional financial benefits.  In practice therefore they will need to decide whether to exit the industry rather than change their overall business model. 

9.264          In summary this option would result in the following costs and benefits:

       Some lenders may charge consumers higher costs or may reduce the extent to which they use broker distribution channels. 

       It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct.

       Consumers would have a higher level of protection, and greater access to remedies, particularly when using the services of those fringe brokers, but may be charged higher costs by some lenders.

Option 4.3 Provide a specific remedy against providers of credit services

9.265          This option would see a new and separate remedy created for unfair conduct by providers of credit services.  The consumer would only be able to seek a remedy against a provider of credit services, and this remedy would be separate to the existing remedy in the Credit Code available against credit providers or lessors in relation to the credit contract.  The consumer's rights would be limited to remedies from the provider of credit services, and would therefore not result in any adjustment of the rights of the consumer under any credit contract or consumer lease to which they are a party. 

Impact analysis

Consumers

9.266          The impact on consumers would be largely equivalent to that under Option 4.2.  Some consumers may incur costs of time and money because they initially pursue a complaint against the lender when the remedy should have been pursued against the broker.  This is not expected to have a significant impact on consumers as:

       where the complaint is made to an EDR scheme — these schemes already have in place procedures to efficiently identify and resolve this issue.  As there are only two such schemes, the EDR scheme would either treat the complaint against the lender as a complaint against the broker (where they are a member of the same scheme), or refer the complaint to the other EDR scheme under existing protocols. 

       where compensation is sought through court action — the consumer’s lawyers could be expected to accurately identify the person against whom a remedy should be sought, so that the problem would not arise.

9.267          The costs to the consumer can therefore be expected to be minimal, and are balanced in that these costs are only incurred because the consumer is seeking a remedy which would otherwise not be available. 

Credit providers or lessors

9.268          This option would not affect credit providers or lessors, as their rights under existing contracts would not be affected.  It would see a more efficient allocation of responsibility where the appropriate person is accountable for conduct that causes loss or damage, rather than third parties being made liable.

Credit service providers

9.269          The impact on providers of credit services would be equivalent to that under Option 4.2, in that some of these providers may consider it necessary to review their practices and identify any areas of their conduct where they may be at risk of claims.  The costs are not quantifiable as they will vary according to the size, market and existing practices of the provider.

9.270          Again, however, the main class of brokers who would be affected is those who are targeting vulnerable consumers in systematic ways through unfair or unjust conduct in a systemic way and therefore causing financial harm to a relatively large number of consumers.  These persons would need to decide whether to cease these practices or face a greater risk of liability. 

9.271          In summary this option would result in the following costs and benefits:

       It would have no impact on credit providers or lessors. 

       It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct.

       Consumers would have a higher level of protection, and greater access to remedies, particularly when using the services of those fringe brokers.

Stakeholder views

9.272          The status quo was supported by the ABA and the FBAA. 

9.273          The ABA, the MFAA and the AFC specifically opposed Option 4.2 on the basis that lenders and their contracts should not be affected by the misconduct of a third party.  The MFAA's key concern was that under Option 4.2 the credit contract could be set aside or varied because of the conduct of the broker.  This could encourage lenders not to distribute through brokers, and the result would be a reduction in competition and the assistance for borrowers.  The MFAA was however quite comfortable about brokers being liable for their own conduct under Option 4.3. 

9.274          Option 4.3 was supported by the NFSF, COSL, CALC, CCLC (NSW) and National Legal Aid.  CCLC (NSW) and National Legal Aid saw the introduction of a remedy of this type as particularly significant in relation to equity stripping practices (where a number of legal actions they have been involved in have failed because brokers avoid liability through invoking technical restrictions in the scope of other remedies. 

9.275          In its Green Paper submission, COSL stated that the creation of a new and separate remedy for unjust conduct by providers of credit services would allow the remedy to be specifically tailored to address the role of third parties who are not the credit provider or lessor, and would allow relief to be attributed to the appropriate person.

Recommended option

9.276          The recommended option is option 4.3, that is, providing a general broad remedy against providers of credit services.  The creation of a separate remedy would allow the remedy to be specifically designed to address the role of third parties who are not the credit provider or lessor.  It would also avoid any impact on credit providers or lessors. 

9.277          The model in the Consumer Credit Administration Act 1995 (NSW) could be largely utilised,  to ensure consistency with a known standard of conduct.  The result would be to introduce a general remedy for ‘unfair conduct’, rather than a remedy being available only within the precise terms of other legal concepts (for example, conduct that is unfair may not be unconscionable, as the latter concept requires demonstrating that the borrower’s decision and judgement is adversely affected). 

Implementation

9.278          It is proposed to implement this reform as follows:

       The remedy for unjust conduct would be modelled on the existing approach in the Administration Act.  This has been in force for a number of years, and would therefore provide greater certainty as to when conduct will or will not infringe such a provision.  Some of the contingent elements developed for the remedy in the draft Finance Brokers Bill also need to be included in the remedy (for example, where they provide clarity about the circumstances in which the remedy applies).

       The court would be given broad powers to provide relief similar to those available for unjust conduct under the Credit Act, including by awarding compensation for loss or damage or relieving the consumer of liability under any contract with the provider of credit services. 

       As a technical issue, the remedy would not extend to a situation where a credit provider or lessor was acting as a provider of credit services in respect of their own products., and would therefore have an appropriate limitation to this effect (similar in effect to those in sections 112 and 135 of the Credit Act where lenders and lessors have been exempted from other requirements, in relation to their own products).

9.279          Implementing the reform in this way would principally address the conduct of fringe operators who deliberately construct transactions in ways that cause financial harm or loss to consumers, principally through:

       charging excessive or disguised fees;

       earning inflated profits through transactions related to the credit contract or lease (particularly the sale of other products or services); and

       being involved, directly or indirectly, in equity stripping arrangements or other situations where the credit provider or lessor can be misled as to the financial position of the consumer.

9.280          These persons would be at greater risk of having to compensate consumers.

 

Issue Five — Restricting the use of certain words or expressions

Background

9.281          Under the financial services regime, sections 923A and 923B of the Corporations Act 2001 (Corporations Act) restrict the use of the words independent, impartial or unbiased, and  other words or expressions, for example insurance broker or stockbroker, unless the person holds appropriate authorisations under their Australian financial services licence.  The Credit Act does not include any equivalent provision restricting the use of certain words or expressions by persons engaging in credit activities. 

Problem identification

9.282          A small number of key words or phrases can have an emotive force, and a power to connect with or engage consumers.  Allowing the unrestricted use of these terms raises the prospect of consumers being misled, either deliberately or inadvertently.  This risk has been identified as arising in respect of the following particular terms.

9.283          ‘Pre‑approved’.  This term has been used in the context of lenders sending out applications for new credit cards or offers to increase the credit limit on an existing credit contract.  The Consumer Action Law Centre conducted a review of the terms of these invitations.  It found that the use of the phrase ‘pre‑approved’ conveyed to the consumer a message that the lender endorsed the increase in credit limit, and was an effective means of encouraging the consumer to apply.[38] The risk is that consumers will therefore increase their credit limit unnecessarily, and will do so partly in the belief that the lender considers this is a sensible or appropriate course of action (rather than the lender being motivated by their own commercial interests).[39]

9.284          ‘Independent, impartial or unbiased’.  These terms can be extremely influential in attracting consumers who are seeking assistance from a broker who will not choose products on the basis of commissions.  The risk for consumers is that they will be placed in a credit contract that may be more expensive than other products because the broker will earn commissions in respect of that product.  ASIC has previously had to use its powers under the ASIC Act powers to prevent brokers from using these terms in a way that was misleading (but only after promotional materials had been published given the limitations in the way that Act regulates this type of conduct).[40]

9.285          It is proposed that this term would be restricted in a way similar to the analogous requirement applying to holders of an Australian financial services licence (AFSL) under the Corporations Act.  ; this would mean that there can be no confusion as to whether ‘independent’ means the broker will never receive commissions, or whether this is a general approach subject to qualifications or exceptions. 

9.286          It would also avoid brokers being able to use these terms when they have entered into volume bonus agreements, where the broker is under a financial incentive to meet targets, and where the consumer is at risk of being placed in a product that may be slightly more expensive as a result.  For example, a difference of 0.5 per cent in the interest rate on a home loan of $175,000 can result in the consumer paying an additional $15,547 over the life of the contract.

9.287          Limiting the use of these terms will therefore also be important in encouraging the development of brokers who do operate using an independent (or non‑commission based) business model.  They can have greater certainty that the use of these terms cannot be appropriated or abused by brokers who will receive commissions (and therefore limit the effectiveness of their capacity to promote themselves).

9.288          AFSL holders are already subject to restrictions in relation to the use of the words ‘independent, impartial and unbiased’ in the financial services context, and this would ensure consistency in the way in which they describe themselves, where they hold both an AFSL and an ACL. 

9.289          ‘Reverse mortgage’.  The term ‘reverse mortgage’ currently has some popular currency, but can be used to refer to a broad range of products with different characteristics.  As discussed in detail in the RIS for equity release products it is proposed to introduce a technical definition of ‘reverse mortgages’ in the Credit Act, and to require lenders offering this class of products to meet a number of specific requirements (for example, having a statutory guarantee of no negative equity). 

9.290          It is intended to assist the class of potential borrowers to more readily identify products with these characteristics by limiting the use of this term.  In the absence of such a restriction there is a risk that consumers will be attracted to other providers and may enter into contracts that are less suitable for their needs (for example, where they must repay a lump sum at a fixed point in time, and therefore face the risk of having to sell the family home involuntarily rather than at a time of their choosing).[41]  

9.291          The risks are exacerbated because of the characteristics of the class of borrowers likely to use these products, in that they tend to be more vulnerable and have a limited understanding of how these contracts work (as a result of factors such as poor financial literacy skills, lack of income and reduced capacity due to health problems).[42]

9.292          This approach will enable these borrowers, over time, to more easily identify the products that provide offer appropriate protections, and protect them from advertising materials that would otherwise use the term ‘reverse mortgage’ to attract them, when the product has fewer or none of these protections. 

9.293          ‘Financial counselling/financial counsellor’.  These terms are typically used to describe persons who are funded by government or on a not‑for‑profit basis, and who have been accredited by their professional association as meeting appropriate standards of training and competency (by holding particular qualifications such as a diploma and, in some States, meeting work experience requirements).  However, there is no restriction on the use of these terms, and they can be used by other persons.  This includes commercial businesses that can use these terms to attract consumers who by definition are likely to be in financial difficulties with limited income. 

9.294          There are two significant differences between these commercial enterprises and government or not‑for‑profit services.  First, they are free, and, secondly the assistance provided by government funded financial counsellors involves a more thorough and patient relationship with the consumer as it includes:

       A detailed assessment of their overall financial position.

       Identifying all possible options to address their problems (both external options — negotiating with creditors, and internal options — changes to lifestyle and budget).

       Ongoing support to the client in implementation of these options (which is particularly important where changes to their use of money and behaviour are required).

9.295          The terms financial counselling or financial counsellors are currently used by a number of commercial fee‑charging businesses, particularly in webpages.  Typically these businesses  provide a more restrictive range of services (for example, they may only assist with arranging Part IX bankruptcy agreements) so that consumers who approach them may only be offered this solution; by comparison, a financial counsellor will spend time analysing all the different aspects of the consumer’s financial problems and then identify the most appropriate response. 

9.296          There is also a risk that these persons may not perform their services with adequate levels of skill, as they do not need to meet any accreditation requirements and there are therefore no controls over their competency levels.

9.297          For example, ASIC is aware of one operator who would make requests for hardship variations without obtaining the necessary documentary evidence from borrowers to support their claims, and where those applications were therefore routinely dismissed.  Borrowers who have used the services of this person are in a worse position financially as they have not only incurred costs charged by the business, but the size of the debt owed to their lender has increased during these failed negotiations,  reducing their scope to negotiate a variation once the appropriate evidence of future income had been obtained.

9.298          There is a significant number of consumers who may be affected, given that financial counsellors see a maximum of 100,000 clients a year.

9.299          It is noted that the use of certain words or phrases may be misleading or deceptive or contain false and misleading representations, depending on the context in which the statement is made, and therefore infringe the prohibitions in sections 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (ASIC Act).  Under this provision, consumers may recover loss or damage.  ASIC has standing to take these actions, and may intervene in proceedings brought by consumers. 

9.300          The existing remedies for misleading or deceptive conduct or making false and misleading representations are inadequate to address this situation for two reasons:

       They do not address situations where a phrase does not have an accepted or specific meaning (for example, reverse mortgage or financial counsellor).  In these situations the use of the phrase in other contexts will not be misleading or deceptive (as this can only arise because of confusion between an accepted meaning — where one exists — and the actual way in which it is used). 

       They do not act as an automatic prohibition in all circumstances.  A person may still use these terms in a way that is false or misleading (either inadvertently or because of their effectiveness), and continue to use them until challenged by ASIC.  They may also be able to raise technical defences, or use qualifications or contexts that may create ambiguity as to whether a matter is misleading or deceptive, so that ASIC would have to prove that the use of words is misleading or deceptive in court on a case by case basis. 

Objective of Government Action

9.301          The objective of government action is to mitigate the risk of consumer detriment caused by the use of certain potentially misleading words or expressions in relation to credit.

Options

Option 5.1 Maintain the status quo

9.302          Under this option, no specific restrictions on the use of certain words and expressions would be introduced, and consumers would rely on the existing prohibition on false and misleading conduct and remedies available under the ASIC Act.

Impact analysis

9.303          Under this option, there would be no additional impacts on consumers or business.

Option 5.2 Restrict the use of certain words or expressions

9.304          Under this option the use of the terms described above would be restricted so a person could only use them in situations which met particular criteria:

       ‘Pre‑approved’ would not be able to be used in invitations to apply for credit or a consumer lease, or to increase an existing credit limit where the lender has not received an application form or conducted an initial assessment of the borrower’s eligibility.

       ‘Independent, impartial or unbiased’ would only be able to be used by brokers and intermediaries where they exclusively operate a model in which they do not receive any remuneration from commissions (but including where all commissions are rebated to the borrower). 

       ‘Reverse mortgage’ would be limited in use to describe products that are consistent with the definition to be introduced in the Credit Act. 

       ‘Financial counselling/financial counsellor’ and other similar phrases would be used to describe persons who are funded by government or on a not‑for‑profit basis, and who are accredited by the relevant professional association.  The approach would be based on the existing definition used to exempt this class of persons from the need to hold an ACL in the National Consumer Credit Protection Regulations 2009.

Impact analysis

Consumers

9.305          Persons would be unable to use the restricted term inappropriately, and consumers would therefore benefit as follows: 

       ‘Pre‑approved’: They are unlikely to apply for credit unnecessarily, and more likely to make informed choices about credit according to their needs, rather than responding to invitations for credit.  This is particularly relevant to credit cards where the consumer can incur higher interest charges than on other credit products.

       ‘Independent, impartial or unbiased’: Consumers would be able to more clearly identify and select those brokers who are not remunerated by way of commission.  Where they use brokers who do receive commissions they would also be at less risk of being confused about whether or not they are acting independently, and therefore of entering into a contract where the cost of the credit was more expensive than other contracts (because the product selection was influenced by the payment of commissions). 

       ‘Reverse mortgage’: Consumers, especially elderly or retired borrowers, would be at less risk of entering into contracts that are less suitable for their needs than reverse mortgages (for example, because they do not include a no negative equity guarantee).

       ‘Financial counselling/financial counsellor’: Borrowers in financial difficulties would be less likely to be attracted to use the services of persons who will charge them for their services, and where there are no requirements in respect of their skill or competency levels.  These consumers may otherwise find themselves both liable to pay fees and in further financial distress. 

Credit providers and credit services providers

9.306          The only class of providers who would be affected would be those who currently use any of these terms, or who propose to do so in the near future.  Credit providers and lessors do not use the terms ‘Independent, impartial or unbiased’ or ‘Financial counselling/financial counsellor’, as these are used by either brokers or persons seeking to attract persons in financial hardship. 

9.307          Some businesses are therefore likely to consider whether, rather than ceasing to use a restricted term, they should change their business model so that they meet the conditions to be able to use it.  They would presumably only do so where there was a commercial or financial advantage to them taking this course of action.

9.308          It is not expected this cost would be significant as it is intended the reform would be quite specific and unambiguous about when the terms can be used. 

9.309          This measure would enhance competition by promoting an even playing field, where one party cannot unfairly attract more customers by misrepresenting themselves. 

9.310          In summary this option would result in the following costs and benefits:

       It would have a small impact on a relatively small number of persons or businesses.  These persons would incur low one‑off costs in changing their marketing or promotional materials, and may incur more substantial costs where they relied on these terms to a significant extent to attract customers. 

       Consumers would be at less risk of being confused or misled by advertising, and could be expected to make better decisions about which service or lender to use.  This has the potential to save them money, as discussed above (for example, by not paying for financial counselling services).   

Stakeholder views

9.311          The status quo was supported by the ABA and AFC, who claimed that the prohibition on false and misleading conduct under the ASIC Act was sufficient.  The MFAA claimed there was no evidence of misuse to justify further regulation. 

9.312          The FBAA noted that it had not received negative feedback as to the misuse of certain words or expressions.  It also stated that the restriction on the term ‘pre‑approved’ is consistent with existing practices, in that its members can only use the term ‘preapproved’ where a formal approval in principle by the lender has actually occurred and any conditions specified by the lender have been met.

9.313          FOS recommended the use of ‘ombudsman’ be restricted.

9.314          Consumer groups supported the proposals in the Green Paper.

9.315          The Australian Financial Counselling and Credit Reform Association (AFCCRA), the peak body for government and not‑for‑profit financial counsellors, supported the restricted use of the terms  ‘Financial counselling/financial counsellor’, and provided a range of examples where the terms were currently used by commercial businesses.

Recommended option

9.316          Option 5.2, restricting the use of a limited number of terms, is the recommended option.  It is considered this option will reduce, in a number of key areas, the potential for confusion and therefore improve consumer choice in relation to both credit and credit services.  The reforms could be expected to provide them with financial benefits by reducing the extent to which: 

       they take up invitations for credit that are not necessary (particularly in respect of credit cards where higher interest rates can be charged relative to other mainstream credit products).

       enter into more expensive credit contracts where the broker was remunerated by commission. 

       enter into contracts that do not contain the statutory protections that will apply to reverse mortgages.

       use fee‑charging alternatives where financial counselling services would be more appropriate, and where the lack of any training or competency levels for those alternative services may exacerbate existing level of financial hardship or distress. 

9.317          The financial impact on persons engaging in credit activities is minimal in that, first, it does not affect all persons but only a relatively small class, and, second, the compliance costs are not significant.  Given the outcomes for consumers above, the cost‑benefit analysis supports this reform. 

Issue Six — Canvassing of consumer credit at home

Problem identification

9.318          The detailed analysis below is based on two substantial studies of the psychology of door‑to‑door selling.  The first report is a 2010 Australian research project by Deakin University and Consumer Action Law Centre, ‘Shutting the gates[43] (‘CALC Report’), which examined the sale of educational software programs door to door.  The report is particularly relevant as it includes information from interviews with former salespersons, who articulated the way in which they would use the nature of the home environment to manipulate the consumer into agreeing to the purchase. 

9.319          The second report is a 2004 English study prepared by the University of Sussex for the Office of Fair Trading, ‘Psychology of buying and selling in the home[44] (‘OFT Report’).  It is considered to be relevant to the Australian market given the similar cultural and behavioural dynamics in Australia and the United Kingdom.

9.320          In this RIS the term ‘unsolicited selling’ is used to describe selling arising from both door‑to‑door canvassing by the salesperson and from situations where the consumer is initially approached by telephone and an appointment in the consumer’s home is arranged, including scenarios where the consumer has provided their contact details for another purpose (for example, from entering a competition