Proposed overhaul of responsible lending obligations: Draft legislation released for consultation

6 minute read  10.11.2020 Kate Hilder, Mark Standen

The government is consulting on draft legislation that proposes to implement major changes to consumer credit laws, including rolling back existing responsible lending requirements.  Our key takeaways are below.


Key takeouts


  • On the 25 September, the government announced plans for the proposed overhaul of consumer credit laws, including plans to roll back what it considers to be overly prescriptive responsible lending obligations. The object of the proposed changes is to improve the flow of credit and support the nation's economic recovery. You can find our summary here.
  • On 4 November, the government released a package of draft legislation for consultation, proposing to implement these changes.
  • Broadly (if enacted) the proposed changes will mean that from 1 March 2021:
    • Responsible lending obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) will only apply to: a) small amount credit contracts (SACCs); b) 'SACC-equivalent loans' (low limit credit contracts) provided by ADIs; and c) consumer leases.
    • This means that ADIs will no longer be required to comply with the responsible lending obligations NCCP Act (except 'SACC-equivalent loans). ADIs will continue be required to comply with the prudential standards set and enforced by the Australian Prudential Regulation Authority.
    • Non-ADI credit providers will need to comply with new non-ADI lending standards, modelled on 'key elements' of APRA's prudential standards applying to ADIs.
    • All credit assistance providers will need to comply with the 'best interests' obligations legislated for mortgage brokers.
  • The deadline for submissions to the consultation is 20 November 2020. The proposed commencement date for the changes is March 2021.

Overview

Treasury has released for consultation a package of draft legislation – [Exposure draft] NCCP (Supporting Economic Recovery) Bill 2020 (updated); [Exposure draft] NCCP (A new regulatory framework for the provision of consumer credit) Regulations 2020; [Exposure draft] Non-ADI Credit Standards and accompanying explanatory materials - proposing to legislate changes to consumer credit requirements previously announced by the government, and outlined in a fact sheet, on 25 September. You can access our summary here.

The deadline for submissions on the draft legislation is 20 November 2020.

The proposed commencement date for the changes is 1 March 2021.

Key changes

Rolling back responsible lending requirements

To remove unnecessary regulatory duplication and to move away from what the government considers to be an overly prescriptive, 'one size fits all' approach to lending, it's proposed that from 1 March 2021:

  • Responsible lending obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) will only apply to: a) small amount credit contracts (SACCs); b) 'SACC-equivalent loans' (low limit credit contracts) provided by ADIs; and c) consumer leases.
  • ADIs will continue be required to comply with the prudential standards set and enforced by the Australian Prudential Regulation Authority. The draft explanatory materials comment that,

'APRA’s prudential standards for ADIs ensure lenders have appropriate settings for managing risk to financial soundness throughout the life of loans. The credit risk management standards that ADIs are expected to meet include expectations of sound lending practices similar to the requirements under the RLOs [responsible lending obligations]. As part of these sound lending practices, APRA imposes serviceability requirements to ensure consumers can meet their obligations without substantial hardship'.

New non-ADI lending standards: applying 'key elements' of APRA's prudential lending standards to non-ADI credit providers

If enacted, Schedule 1 of the draft Bill will enable the Minister to determine standards, by legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes in relation to certain 'non-ADI credit conduct' such as entering into a credit contract, increasing the credit limit under a credit contract, 'or making an unconditional representation to a consumer that the licensee will do either of those things'.

According to the draft explanatory memorandum, the aim of the draft National Consumer Credit Protection (Non-ADI Credit Standards) Determination 2020 (the Standard) is to:

'ensure non-ADI credit providers establish, maintain and implement systems, policies and processes directed toward credit being provided where the licensee has assessed that a borrower will have the capacity to repay any credit provided without substantial hardship'.

This will be achieved through 'appropriately adopting key elements of APRA’s prudential lending standards for ADIs', and in particular certain provisions in APRA's forthcoming prudential standard APS 220 Credit Risk Management (APS 220), and applying them to non ADI credit providers.

The draft explanatory materials state that the proposed Standard is similar to provisions in APRA's forthcoming APS 220 relating to an institution’s lending standards and ensuring borrowers’ capacity to repay in APS 220 Credit Risk Management. The draft explanatory materials flag that APRA will consult 'over the coming month' on a further amendment to APS 220 which will require an ADI to assess an individual’s capacity to repay credit without substantial hardship.

The draft standard

Broadly it's proposed that the draft Standard will:

  • Impose obligations on credit licensees to: a) implement and maintain 'systems, policies and processes' to assess that a borrower will have the capacity to repay any credit provided without substantial hardship'; and b) formally document these processes/systems in a written plan, before engaging in 'non-ADI credit conduct'.
  • Require licencees to retain a record of this written plan for seven years after the time it 'ceases to set out the current systems, policies and processes the licensee utilises'.
  • Require licensees, at the request of a consumer, to provide the consumer with a copy of an assessment for up to seven years after the credit contract was entered into or the credit limit was increased.
  • Breach of these requirements could attract a maximum civil penalty of 5000 penalty units.

A risk based approach

The draft explanatory materials emphasise that this approach reflects the government's decision to move away from what it considers to be an overly prescriptive approach to lending.

'These standards will require licensees to implement adequate systems, policies and processes relating to non ADI credit conduct rather than impose individual conduct level obligations. This enables credit assessment to move away from a prescriptive framework for lenders and borrowers and will support risk-based lending that is attuned to the needs and circumstances of the borrower and credit product. These standards are appropriately adopted from the APRA standards to maximise alignment between the ADI and non-ADI regimes'.

The draft explanatory materials also emphaise that the standard will not apply in relation to credit provided 'genuinely for a small business purpose, where that purpose is not minor or incidental to the overall purpose of the credit'.

'Clarifying that the Standard does not apply to lending for a small business purpose will ensure that the obligations being imposed do not impede the timely flow of credit to small business. Licensees will still be required to determine the purpose of credit for compliance with other provisions of the Act and the National Credit Code'.

The proposed commencement date for the draft standard is immediately after the commencement of the draft Bill (1 March 2021).

Extension of best interests obligations to all credit assistance providers

If enacted, from 1 March 2021 the 'best interests' obligations legislated for mortgage brokers will be extended to all credit assistance providers.

This means that licensees and their credit representatives will be required to:

  • act in the best interests of consumers when providing credit assistance in relation to credit contracts;
  • resolve any conflicts of interest (should they arise) in the consumers' favour

Licensees that authorise credit representatives will also be required to take 'reasonable steps' to ensure that those representatives comply with best interests obligations.

A maximum civil penalty of 5,000 penalty units will apply for a breach of these obligations.

The object of the proposed change is to 'improve outcomes for consumers by legally requiring that credit assistance providers act in the consumer’s best interests and place their consumer’s interests before their own'.

Principles based standard

The draft explanatory materials state that

'The duty to act in the best interests of the consumer in relation to credit assistance is a principles-based standard of conduct that applies across a range of activities that licensees and representatives engage in. As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract. The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. It is the responsibility of credit assistance providers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circumstances'.

The draft explanatory memorandum expressly states that the 'obligations do not apply to credit assistance provided in relation to credit for predominantly business purposes'.

[Sources: Treasury media release 04/11/2020; [Exposure draft] NCCP (Supporting Economic Recovery) Bill 2020; [Exposure draft] NCCP (A new regulatory framework for the provision of consumer credit) Regulations 2020; [Exposure draft] Non-ADI Credit Standards; [Exposure draft] Explanatory Materials for Bill; Explanatory Materials for Regulations; Exposure draft] Explanatory Materials for Non-ADI Credit Standards]

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