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The National Consumer Credit Code
Australian Credit Licences



On 1 July 2010, the National Consumer Credit Code came into operation.

The Code applies to all credit contracts, which are defined to include loan agreements, mortgages, instalment contracts, and also to the giving of credit advice.

On 1 July 2010, a national credit licensing scheme came into effect.

An Australian Credit Licence must be held by anyone who is in the business of providing credit in the form of credit contracts, and / or gives credit advice.

The National Consumer Credit Code

The National Consumer Credit Code applies to credit contracts, whether or not the issuer of the credit contract is the holder of an Australian Credit Licence.

These are the main requirements to comply with the Code –

  • To meet responsible lending conduct obligations, pre contract, by -
    (a) Making reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;
    (b) Taking reasonable steps to verify the consumer’s financial situation; and
    (c) Making an assessment about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries and information obtained in the first two steps).
     
  • To meet the consumer’s requirements and address disputes, during the credit contract, by –
    (a) Issuing Statements of Account every six months, showing the loan balance, interest added and payments received;
    (b) Having a hardship application and dispute resolution procedure in place; and
    (c) Being a member of an external dispute resolution body, which is to say, being a member of either FOS (Financial Ombudsman Service) or COSL (Credit Ombudsman Service Limited) at a cost of about $500 per annum. The dispute resolution services they provide are cheap and efficient.

    The responsibility to meet the consumer’s requirements applies to pre-existing credit contracts, which are entered into prior to 1 July 2010 and are known as carried over instruments (COI), as well as to new credit contracts which are entered into on or after 1 July 2010.
     
  • To become the holder of an Australian Credit Licence when enough credit contracts are issued to be seen to carry on the business of entering into credit contracts or providing credit advice.


Advice for vendor finance providers

There are three classes of vendor finance providers, namely –

  1. vendor finance providers who issued credit contracts prior to 1 July 2010, and do not intend to issue new credit contracts – these providers need to register with ASIC by lodging a COI 1 form;
  2. vendor finance providers who issue a handful of credit contracts after 1 July 2010, and do not issue enough to be carrying on the business of entering into credit contracts – these providers should register with ASIC by lodging a COI 1 form;
  3. vendor finance providers who carry on the business of entering into credit contracts – these
    providers should hold an Australian Credit Licence issued by ASIC, and may act as contract managers for vendor finance providers in classes (1) & (2) by lodging with ASIC a COI 3 form.

The key distinction between the vendor finance providers in classes (1) & (2) is – are they carrying on business as a credit provider or credit advisor?

Some vendor finance providers are starting out and are looking to do a handful of instalment sales or deposit finance transactions. Doing a handful of transactions does not mean that they carrying on business as a credit provider or credit advisor.

These vendor finance providers could apply for an Australian Credit Licence even though they do not need to do so, but if they do apply they may find that they are not be able to satisfy the licence criteria because they do not have 2 years relevant experience.

But unlicensed vendor finance providers still need to comply with the National Consumer Credit Code in terms of responsible lending conduct, issuing statements, hardship applications, dispute resolution, etc.

Notifying ASIC

In terms notifying ASIC that they are engaging in credit activities, the unlicensed vendor finance providers should lodge with ASIC a COI 1 form when entering into their first instalment contract or deposit finance agreement.

COI stands for a Carried Over Instrument. Strictly speaking, the COI 1 form is designed to be used by unlicensed credit providers who have entered into credit instruments prior to 1 July 2010, and who will not enter into any new credit contracts after that date.

ASIC has not as yet published a form for unlicensed credit providers who enter into credit contracts after 1 July 2010. So, until ASIC does publish a form designed for vendor finance providers who provide credit without carrying on the business of providing credit, the COI 1 form should be used.

The COI 1 form requires general information to be supplied to ASIC to prove that they are ‘fit and proper persons’, and requires membership of either FOS or of COSL. It is not compulsory to become a member of FOS or COSL, and if not desired, the solution is to team up with an Australian Credit Licence Holder, who will lodge a COI 3 form with ASIC, to notify ASIC that they are the contract manager. Either way, the credit contract will have FOS or COSL as the dispute resolution provider.

Once the COI 1 form is completed, it is posted to ASIC – there is no fee. ASIC will list the person in the Register of Carried Over Instrument Lenders. The COI 1 form needs only to be lodge once – it does not matter how many credit contracts are issued.

The advantages of lodging a COI 1 form are -

  1. The credit provider is listed on ASIC’s register, which means that they have passed ASIC’s probity tests – the COI 1 has a series of probity questions which must be answered. This gives credibility and visibility.
  2. By lodging the COI 1 form, the credit provider is notifying ASIC that they are issuing credit contracts, and so can ‘start the clock’ on terms of gaining their 2 year experience that ASIC requires before the issue of a credit licence.
  3. In the COI 1 form, the credit provider is given the choice of either becoming a member of COS (Credit Ombudsman Service) or FOSL (Financial Ombudsman Service Limited), both of which provide the dispute resolution procedures required under the National Consumer Credit Code.
  4. Alternatively, in the COI 1 form, the credit provider may appoint a credit licence holder as a contract manager. If an Australian Credit Licence holder agrees to be appointed, then they will lodge a COI 3 form with ASIC.

Vendor finance providers should steer clear of offers to ‘rent’ an Australian Credit Licence. In January 2012, the Administrative Appeals Tribunal ruled that renting out credit licences is in breach of sections 31 and 69 of the National Consumer Credit Act. Breach will render both the licence holder and the person allowed to use the licence – the credit representative liable for prosecution.

Further Information

ASIC’s advice for Lenders with carried over instruments -

http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Lenders%20with%20carried%20over%20instruments

http://www.asic.gov.au/asic/asic.nsf/byheadline/Pre-existing-contracts?openDocument

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