Commonwealth Numbered Regulations - Explanatory Statements
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NATIONAL CONSUMER CREDIT PROTECTION AMENDMENT REGULATION 2012 (NO. 4) (SLI NO 314 OF 2012)
EXPLANATORY STATEMENT
Select Legislative Instrument 2012 No. 314
Issued by authority of the Minister for Financial Services and Superannuation
National Consumer Credit Protection Act 2009
National Consumer Credit Protection Amendment Regulation 2012 (No. 4)
Section 329 of the National Consumer Credit Protection Act 2009 (Credit Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Credit Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Credit Act.
The Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Credit Enhancements Act) amended the Credit Act, including the National Credit Code (Code) to introduce a number of reforms to the regulation of small amount credit contracts. Small amount credit contracts of less than $2,000 in value that are for a term of at least 16 days but not longer than one year; that are not continuing credit contracts; where the credit provider is not an Authorised Deposit-taking Institution; and where the debtor's obligations under the contract are not secured).
The reforms introduced by the Credit Enhancements Act included disclosure requirements on licensees who offer small amount credit contracts or make representations that they can provide credit assistance in relation to such contracts (prescribed licensees); provision for disclosure requirements where a debtor or lessee authorises payments to be made directly from their salary; prohibitions on entering into a small amount credit contract where the repayments do not meet prescribed requirements; and prohibitions on the charging of certain fees.
The Regulation amends the National Consumer Credit Protection Regulations 2010 (Principal Credit Regulations) to support each of these reforms.
First, the Regulation specifies that prescribed licensees are required to:
• display warning notices on their premises;
• display a warning on their website; or
• for licensees that communicate by telephone - read a warning to a consumer before providing credit assistance.
The forms of the warnings are set out in Schedules 7 and 8 of the Regulation.
The Regulation requires that a statement, in the form set out in Schedule 10, be completed by the debtor or lessor where a credit provider or lessor proposes to give an employer an authorisation for payments under a credit contract or consumer leases with the debtor or lessor to be paid directly from their salary or wages.
The Regulation also introduces a requirement on credit providers not to enter into a small amount credit contract or offer to enter into a small amount credit contract if the repayments would exceed 20 per cent of the consumer's gross income, for consumers who would receive at least 50 per cent of their gross income as payments under the Social Security Act 1991.
The introduction of this requirement is important in mitigating the risk of borrowers who are dependent on Government benefits for their income entering into a debt cycle, where the amount of the repayments relative to their income results in an ongoing need for credit. The requirement complements - rather than replaces - the responsible lending obligations in Chapter 3 of the Credit Act in that a credit provider may still in breach of the responsible lending obligations if the consumer cannot afford the repayments, or can only do so with substantial hardship, even if the repayments are 20 per cent or less of their income. While the amount of the repayments is limited in this way a credit provider cannot assume that arranging a small amount credit contract that complies with this requirement will therefore also satisfy the responsible lending obligations. The credit provider is still required to assess the financial position of the consumer, and determine whether the impact of the repayments will result in financial hardship.
The Regulation also addresses avoidance techniques used by some providers to circumvent the cap on the maximum amount of costs which can be charged under a credit contract, introduced by the Credit Enhancements Act. There is a risk the cap could be avoided by credit providers splitting the provision of credit over multiple loans to maximise their returns. The Regulation addresses this by prohibiting loan-splitting. Avoidance of existing caps in force as a result of State legislation has occurred where credit providers impose credit fees and charges that are excluded from the amounts specified as relevant to the calculation of the cap on costs. The Regulation addresses this by prohibiting a credit provider from recovering charging third-party fees (for example, fees charged by a third party for providing access to the credit through cashing a cheque), where the third party has been introduced to a consumer to provide a service in relation to a small amount credit contract. The Regulation also prohibits a credit provider from obtaining a return greater than that permitted by the cap by, in relation to medium amount credit contracts, introducing new fees after the contract has been entered into, and, in relation to other credit contracts, charging a fee such as a deferred establishment fees by arranging for the consumer to repay the amount owing earlier than specified in the contract.
The Regulation also imposes requirements on a credit provider to refrain from seeking a repayment due under a small amount credit contract where there have been two successive defaults in seeking a payment through a direct debit. The regulation requires the credit provider to make reasonable attempts to contact the debtor to clarify why the direct debit is being rejected. The intention is to prevent the debtor's liability to other persons increasing through dishonour fees incurred from repeated attempts to secure payment through the direct debit authority, at a time when the debtor may not be aware there are insufficient funds in their account to meet the payment.
Details of the Regulation are set out in the Attachment.
The Credit Act does not specify any conditions that need to be satisfied before the power to make the Regulation may be exercised.
The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulation was publicly released for comment in August 2012, and were also forwarded directly for targeted consultation to key stakeholder groups. Submissions were received from individual lenders, industry bodies, ASIC and consumer groups. Following changes in response to the submissions a second draft of the regulations was again circulated for targeted consultation to key stakeholder groups in November 2012.
The Regulation commenced on the day after it was registered for sections 1 to 3, on 1 March 2013 for Schedule 1 and on 1 July 2013 for Schedule 2. This staggered start is consistent with the staggered start date for the obligations to which each provision relates in the credit Enhancements Act.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
National Consumer Credit Protection Amendment Regulation 2012 (No. 4)
This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the Legislative Instrument
The purpose of the Legislative Instrument is to support the reforms to small amount credit contracts introduced by the Consumer Credit Legislation Amendment (Enhancements) Act 2012.
Human rights implications
This Legislative Instrument does not engage any of the applicable rights or freedoms.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.
ATTACHMENT
Details of the National Consumer Credit Protection Amendment Regulation 2012 (No. 4)
Section 1 - Name of Regulation
This section provides that the name of the Regulation is the National Consumer Credit Protection Amendment Regulation 2012 (No. 4).
Section 2 - Commencement
This section provides that sections 1 to 3 of the Regulation commences on the day after it is registered; Schedule 1 of the Regulation commences on 1 March 2013; and Schedule 2 commences 1 July 2013.
Section 3 - Amendment of the National Consumer Credit Protection Regulations 2010
This section provides that Schedules 1 and 2 amend the Principal Regulations.
Schedule 1 - Amendments commencing on 1 March 2013
Item 1 inserts a requirement for licensees to display a warning on the licensee's premises, or on the licensee's website, or read a warning to a consumer for licensees where they are communicating by telephone. The obligation applies to licensees who meet the criteria in sections 124B and 133CB of the National Consumer Credit Protection Act 2009 (Credit Act), and modified sections 124BA and 133CBA (as included in Item 1).
The intention behind the insertion of Item 1 is for a consumer to be made aware of the alternatives to a small amount credit contract that may be available before he or she applies for credit. The disclosure will alert consumers to alternatives that may avoid the need to enter into a small amount credit. Repeated or continued use of credit provided through these small amount credit contracts can result in consumers entering into multiple contracts where their overall indebtedness increases over time, with a consequent serious impact on their financial position.
The insertion of regulation 28XXA requires licensees to display a warning, in the form set out in Schedule 7, at the point of public entry or front window and in an area inside the premises where it is immediately visible upon entering the licensee's premises from which a licensee engages in credit activities. For licensees whose premises are not enclosed (such as an open booth at a shopping centre) the regulation imposes similar warning requirements, addressing the need to specify a different location for the notice.
The regulation specifies the size of the warning notice as 18 points in size, except as otherwise illustrated in Schedule 7; in practice this means the body of the information in Schedule 7 must be 18 points in size.
The insertion of regulation 28XXB requires a licensee to display a hyperlink, in the form set out in Schedule 8, to a warning on their homepage and any webpage which contains information about the benefits or characteristics of small amount credit contracts, which must be in a form set out in Schedule 9.
The insertion of regulation 28XXC requires a warning to be read to a consumer before a licensee can provide credit assistance. Similar requirements are inserted in regulation 28XXD in relation to a licensee before they enter into, or offer to enter into a small amount credit contract. Both 28XXC and 28XXD would amend the Credit Act to insert a requirement where a licensee is communicating by telephone, and where, in general terms, the consumer would not access the warning through a visit to a licensee's premises or website.
Regulation 28XXE, also included in Item 1, specifies, pursuant to subsection 160E(2) of the Credit Act, the written disclosure required to be provided by a credit provider or lessor may use as the instrument to be given to the employer where the debtor or lessee authorises the employer to make deductions from their salary or wages for the purpose of making payments to the credit provider or lessor.
The disclosure assists consumers to be better informed about the terms of an arrangement to pay directly from their salary or wages. It addresses practices such as credit providers arranging for the consumer to sign a blank payment authority, and then only completing the amount to be deducted following default by the consumer; the credit provider may then use the form to seek payment from the employer of an amount including default charges that is higher than the repayments under the contract. This can cause short-term hardship to the consumer.
To comply with the Act, the statement must be given in the prescribed form in Schedule 10, whether or not the credit provider or lessor chooses to use the document as the formal instrument required under subsection 160E(1) of the Credit Act.
Item 2 inserts a prohibition on credit providers not to enter into a small amount loan or offer to enter into a small amount loan if the repayments in a payment cycle would exceed 20 per cent of the consumer's gross income, for consumers who receive at least 50 per cent of their gross income as payments under the Social Security Act 1991.
The regulation sets out the principles to be applied by a credit provider when completing the calculation. A payment cycle is defined as the period during which the consumer receives the predominant amount of payments as income. The regulation requires the credit provider to work out the consumer's expected gross income and repayments for other small amount credit contracts and then compare the two amounts as a percentage.
The following examples illustrate the calculation principles:
Example 1
A consumer is applying for a $300 loan over 4 months. The total amount the consumer will pay back under the loan is $408. The consumer has an existing $1,000 loan for a term of 12 months. The consumer has 6 months of repayments left worth $340. The consumer receives their income of $290 fortnightly. The consumer expects to receive an extra $100 in income in 3 weeks' time.
The calculation is made as follows:
• For the 4 month term of the proposed loan, the consumer will have 8 fortnightly income cycles.
• The consumer's forecast income for the term of the proposed loan will be: $290 for the first fortnightly income cycle, $290 + $110 = $400 for the second income cycle, and $290 for the remaining 6 income cycles.
• For the proposed loan of $300, the consumer's average repayment over each income cycle will be $408 ÷ 8 = $51.For the existing loan of $1,000, the consumer's average repayment over each income cycle is $340 ÷ 12 (i.e. 6 months x 2 income cycles) = $28.33.
• For the term of the proposed loan, the consumer's total average payment over each income cycle will be $51 + $28.33 = $79.33.
• The consumer's average payments as a percentage of their income over each fortnightly income cycle will be:
- Cycle 1 - $79.33 ÷ $290 x 100 = 27.36%
- Cycle 2 - $79.33 ÷ $400 x 100 = 19.83%
- Cycles 3 to 8 - $79.33 ÷ $290 x 100 = 27.36%
• If the consumer wishes to proceed with the proposed loan, the licensee will be in breach of the prohibition unless they arrange with John to organise staggered payments to reduce the amount that John repays in cycles 1 and 3 to 8 for the proposed loan, so that the total repayments would be less than 20% of John's forecast income.
Example 2
If the consumer did not have an existing loan the calculation would operate as follows:
• For the 4 month term of the proposed loan, the consumer will have 8 fortnightly income cycles.
• The consumer's forecast income for the term of the proposed loan will be: $290 for the first fortnightly income cycle, $290 + $110 = $400 for second income cycle, and $290 for the remaining 6 income cycles.
• For the proposed loan of $300, the consumer's average repayment over each income cycle will be $408 ÷ 8 = $51.
• The consumer's average payments as a percentage of their income over each fortnightly income cycle will be:
- Cycle 1 - $51 ÷ $290 x 100 = 17.59%
- Cycle 2 - $51 ÷ $400 x 100 = 12.75%
- Cycles 3 to 8 - $51 ÷ $290 x 100 = 12.75%
• The licensee would be able to enter into the $300 credit contract without further changes as none of the proposed repayments exceed the 20 per cent threshold.
Item 3 inserts three schedules setting out prescribed warnings and forms:
• Schedule 7 would set out the warning that would be required under regulation 28XXA about small amount credit contracts that must be displayed at the licensee's premises.
• Schedule 8 would set out the warning that would be required under proposed regulation 28XXB.
• Schedule 9 would set out the statement that must be provided for an employer authorisation under proposed regulation 28XXE.
Schedule 2 - Amendments commencing on 1 July 2013
Item 1 addresses, in Regulation 28XXF, a practice that would result in avoidance of the cap on the maximum amount on costs that can be charged. It inserts a requirement on the credit provider to assess a credit contract as unsuitable for a consumer where the consumer's requirements and objectives are to receive an identified amount of credit and the credit provider arranges for the identified amount of credit to be provided by two or more small or medium amount credit contracts or a combination thereof. This regulation applies to licensees meeting their responsible lending obligations under subsections 118(2)(c), 123(2)(c), 131(2)(c) and 133(2)(c) of the Credit Act.
The objective of this regulation is to prevent a credit provider from circumventing the cap on the maximum amount that can be charged under a credit contract by 'loan-splitting'. As the cap allows larger amounts to be charged under small amount credit contracts than under credit contracts for higher amounts a credit provider could charge more while still complying with the cap by arranging for the consumer to enter into two small amount credit contracts. It is arguable that conduct of this type would be in breach of section 191 of the Code (which prohibits a person from seeking to avoid or modify the effect of the Code). However, it is considered preferable to address the risk of this conduct directly, through a specific provision, given the history of avoidance by persons in response to previous State and Territory legislation introducing caps on costs. This will avoid uncertainty about whether conduct of this type necessarily falls within the scope of section 191, and prevent consequent unnecessary disputes between credit providers and debtors.
Regulation 28XXF addresses this type of conduct by providing that a credit contract would be unsuitable where the consumer's requirements and objectives are to receive a certain amount of credit, which could be provided through one loan, but the credit provider offers two or more loans which would be more expensive for a consumer.
Item 2 introduces regulations that also address potential avoidance of the cap on costs in respect of credit contracts. Regulation 79AB provides that a person who has been introduced to a debtor by a credit provider to provide a service in relation to a small amount credit contract is a prescribed person under section 31B of the National Credit Code. In practice, this regulation prohibits arrangements where the consumer incurs costs charged by a third party. This regulation addresses practices previously used to impose charges that were not included in the amounts used to calculate the caps that operated as a result of State or Territory legislation.
Regulation 79AC addresses potential avoidance of the cap on costs in respect of credit contracts other than small amount credit contracts, through charging fees which are not ascertainable when the contract is entered into, but where the fee should be included in calculating the annual cost rate (for example, by the credit provider introducing new fees after the contract has been entered into).
Subregulation 79AC(1) addresses avoidance of the cap on costs in relation to medium amount contracts, through charging fees which are not ascertainable when the contract is entered into, but where the fee should be included in calculating the annual cost rate (for example, by the credit provider introducing new fees after the contract has been entered into). In practice the credit provider would need to identify all charges and fees and interest that the consumer is liable to pay before the contract is entered into.
Subregulation 79AC(2) provides that, in relation to credit contracts other than medium amount credit contracts, any fee or charge that is a deferred establishment fee, payable as a result of the practice of a credit provider seeking repayments that result in the contract being paid out early. The provisions address a current practice in which the existing State and Territory legislation imposing caps on costs is avoided through the debtor incurring, after the contract has been entered into, a liability to pay a fee as a result of the contract terminating before the end date specified in the contract, through the debtor increasing the amount of their repayments.
Item 4 inserts requirements on a credit provider to refrain from seeking a repayment due under a small amount credit contract where payments are made by a direct debit authority from the debtor, and the credit provider has twice sought unsuccessfully to obtain the repayment through the direct debit authority. The regulation requires the credit provider to make reasonable attempts to contact the debtor in order to clarify why the direct debit is being rejected (in circumstances where a debtor is in default and likely to be in financial hardship). The intention is to prevent the debtor's liability to other persons increasing through dishonour fees incurred from repeated attempts to secure payment through the direct debit authority, and when the debtor may not be aware there are insufficient funds in their account to meet the repayment.
The obligation to make reasonable attempts to contact the debtor ceases to apply when a credit provider receives the repayment, as this would indicate that the debtor is aware of the default and therefore should bear the responsibility to take appropriate action to prevent fees being charged.
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