Regulatory Update: Consumer credit, termination payments and unfair contracts
November 2009
The Commonwealth Parliament had a full agenda at the last parliamentary sittings in October 2009, debating complex policy issues and considering diverse legislation such as new laws for telecommunications, education and gambling. Corporate and consumer law reform were also on the list.
The National Consumer Credit Protection Bill was passed but the ‘golden handshake’ legislation on executive termination payments and the new Australian Consumer Law, which includes new laws about unfair contracts, have not yet been passed.
Both are scheduled for the November sittings but with climate change and telecommunications to be debated at these sittings, the passage of these two bills in 2009 is uncertain.
In this bulletin, we outline the new laws and key changes proposed to the legislation still in the ‘pipeline’.
National Consumer Credit Protection Bill
Under the new legislation there will now be a single national law for the regulation of consumer credit commencing on 1 July 2010.
All persons or entities engaged in ‘credit activities’ must obtain an Australian Credit Licence (ACL) from ASIC. Credit activities not only cover the activities of lenders and providers of consumer leases but those who provide credit services, such as finance brokers and other intermediaries, and any other person or entity that ‘assist’ consumers in relation to a particular credit contract with credit providers.
Margin lending and lending on investment properties will be covered and there is a new obligation that requires licensees to ensure they do not provide credit to a consumer or assist a consumer to enter into a credit contract or lease that is unsuitable. This obligation is intended to promote ‘responsible lending’ and requires credit providers and intermediaries to undertake enquires before providing, recommending or assisting with credit. Other responsibilities include certain disclosures, credit guides and quotations on costs and credit assessments.
Persons or entities wishing to engage in credit activities must register with ASIC between 1 April 2010 and 30 June 2010 and must be registered or hold an Australian credit licence by 31 December 2010.
The obligation not to provide credit that is unsuitable comes into effect by 1 July 2010 for credit providers other than Australian deposit taking institutions (ADIs) and 1 January 2011 for ADIs.
All other responsible lending obligations, such as the credit guides and assessments, will come into effect on 1 January 2011.
The current state Uniform Credit Code will become the National Credit Code and ASIC, which has been specially funded to implement the new scheme, will enforce all credit code matters from 1 July 2010.
The provision of consumer credit has been an area with perceived problems and ASIC is likely to be vigilant in its monitoring and enforcement role over the next 3 years.
Many credit providers will appreciate a single regulatory regime but the additional burdens of licensing, the new responsible lending obligations and regulation of credit activities that have not previously been regulated, will significantly add to the costs of compliance for some businesses.
In particular, businesses that deal with consumers or advise in relation to investment properties should examine the new rules to understand whether they are covered. The definition of ‘credit activities’ is broad enough to cover suggestions made to consumers to apply for a particular credit contract or lease, even where the intermediary is not involved in arranging the credit contract.
There will be exemptions for point of sale assistance given by retailers and car dealers where the retailer or dealer is not providing credit or making the decision to provide credit. However, this has been opposed by consumer groups and will be subject to review after 12 months.
Corporations Amendment (Improving Accountability on Termination Payments) Bill
The Bill has now been vigorously debated in the Senate in the last two parliamentary sittings. The Bill has been passed in the Senate but with an amendment by Senator Xenophon which, if it had been accepted by the House of Representatives, would have guaranteed a further review of the legislation before the end of 3 years.
Senator Xenophon successfully proposed an amendment that the exemptions to shareholder approval for payments to executives will cease to have effect 3 years after the commencement of the Bill. This would have meant that all payments would have to be approved by shareholders. This clearly was unworkable but the amendment was designed to ensure the policy behind executive termination packages would be reviewed in 3 years time by the government of the day.
The Government rejected the amendment so it will be back on the agenda for November. It will be interesting to see what happens as the government is very keen to see the legislation pass this year.
Trade Practice Amendment (Australian Consumer Law) Bill – Unfair Contracts
The proposed new Australian Consumer Law will make far reaching changes to consumer laws. Once the Bill is passed there will be new remedies for consumers and regulators, civil penalties will be introduced and, importantly, the state consumer laws will be harmonised. However, the new rules that have caused the most controversy and have delayed the passage of this ambitious consumer law reform are the provisions relating to unfair contracts.
Under these provisions, consumers will be given additional rights and remedies in relation to standard form contracts which contain unfair terms (please see our bulletin New complexity in proposed national unfair contract provisions, for details of the key provisions).
However, under proposed changes to the law there will now be an additional test for unfairness. The original draft was criticized by business because a contractual term could be unfair if there was a 'substantial likelihood' that it would cause detriment. This has been tightened up in amendments proposed by the Government and the requirement that the term would cause detriment (as opposed to a substantial likelihood) has been added as a third limb to the meaning of ‘unfair’.
It is still not necessary for the applicant to prove there has been actual detriment but the fact that detriment is now an element of unfairness shifts the weight of proof, albeit marginally, towards those seeking to rely on the term.
In addition to this amendment, the proposed new legislation:
- removes the power for the Minister to prohibit terms by regulation;
- provides that the Minister must take into account certain factors (such as detriment, impact on business and public interest) when prescribing by regulation, an example of an unfair term;
- clarifies that the unfair contract term provisions only apply to consumer contract terms varied on or after commencement of the legislation.
Importantly, the date of effect of the legislation is to be delayed until 1 July 2010 (not 1 January 2010 as originally proposed) or to a date to be proclaimed by the Governor General but not before 1 July 2010 if there is a substantial delay in passing the legislation.
It has also been clarified that individuals, not only the regulators, may apply to the court for declarations that the term of a consumer contract is unfair.
The proposed legislation is to again come before the senate in the November sittings but proposed amendments to be moved by Senator Xenophon will certainly complicate the progress of the Bill.
Senator Xenophon proposes amendments to:
- include business-to-business contracts involving transactions less than $2 million;
- delete references to ‘transparency’ and ‘detriment’;
- include a provision for ‘safe harbours’ where businesses and business associations could approach the ACCC or ASIC, as the case may be, for authorisation or approval of particular contract terms, and
- delete the exemption for insurance contracts.
These business-to-business provisions were excluded from the Bill introduced to the House of Representatives after broad consultation earlier this year. The Economics Senate Committee Report discussed a number of these issues and, even though it was recognised there were problems that warranted further review, none of these proposals were accepted by the Committee. At this stage it seems unlikely these proposed amendments will succeed.
Whatever the outcome of the next parliamentary sittings, the Government is committed to the new Australian Consumer Law as a major policy reform and will no doubt push these reforms through, if not by the end of 2009, in early 2010.
For more information, please contact a member of our Governance, Risk & Compliance team.
