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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
–
- 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;
- 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;
- 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 -
- 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.
- 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.
- 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.
- 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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