2010‑2011‑2012

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

EXPOSURE DRAFT

National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012

No.      , 2012

(Treasury)

A Bill for an Act to amend the law relating to consumer credit, and for related purposes

Contents
1	Short title	1
2	Commencement	1
3	Schedule(s)	2
Schedule 2—Small business lending	3
Part 1—Main amendments	3
National Consumer Credit Protection Act 2009	3
Part 2—Other amendments	7
National Consumer Credit Protection Act 2009	7
Schedule 3—Investment lending	35
Part 1—Main amendments	35
National Consumer Credit Protection Act 2009	35
Part 2—Other amendments	37
National Consumer Credit Protection Act 2009	37
Schedule 4—Private lending	66
Part 1—Main amendments	66
National Consumer Credit Protection Act 2009	66
Part 2—Other amendments	68
National Consumer Credit Protection Act 2009	68
Schedule 5—Consumer leases	69
Part 1—Main amendments	69
National Consumer Credit Protection Act 2009	69
Part 2—Other amendments	73
National Consumer Credit Protection Act 2009	73
Schedule 6—Anti‑avoidance	75
Part 1—Main amendments	75
National Consumer Credit Protection Act 2009	75
Part 2—Other amendments	79
National Consumer Credit Protection Act 2009	79
Schedule 7—Miscellaneous amendments	80
National Consumer Credit Protection Act 2009	80
Schedule 8—Application provisions	81
National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009	81

A Bill for an Act to amend the law relating to consumer credit, and for related purposes
The Parliament of Australia enacts:
1  Short title
		This Act may be cited as the National Consumer Credit Protection Amendment (Credit Reform Phase 2) Act 2012.
2  Commencement
	(1)	Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

Commencement information	
Column 1	Column 2	Column 3	
Provision(s)	Commencement	Date/Details	
1.  Sections 1 to 3 and anything in this Act not elsewhere covered by this table	The day this Act receives the Royal Assent.		
2.  Schedules 1 to 7	A single day to be fixed by Proclamation.
However, if the provision(s) do not commence within the period of 6 months beginning on the day this Act receives the Royal Assent, they commence on the day after the end of that period.		
Note: 	This table relates only to the provisions of this Act as originally enacted. It will not be amended to deal with any later amendments of this Act.
	(2)	Any information in column 3 of the table is not part of this Act. Information may be inserted in this column, or information in it may be edited, in any published version of this Act.

Question

Stakeholders’ views are sought on the length of the transitional period to be provided in respect of each Schedule (including whether it may be appropriate to provide different periods according to the nature and extent of the obligations, or as a result of the interaction with reforms in other areas). 	
3  Schedule(s)
		Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

Schedule 2—Small business lending

Comment 

Schedule 1 will provide for matters relevant to a referral of legislative power to the Commonwealth by the States. It therefore has not been circulated for public comment with the other Schedules.
	
Part 1—Main amendments
National Consumer Credit Protection Act 2009
1  Subsection 5(1)
Insert:
small business means a business that:
	(a)	has less than the following number of employees:
	(i)	if the business is or includes the manufacture of goods—100 people;
	(ii)	otherwise—20 people; or
	(b)	has no employees.

Questions

Stakeholders’ views are sought on the practicality of this definition, noting that the definition of a credit contract with a small business is proposed to be further limited by reference to the amount of credit being provided (as discussed below).

Stakeholders’ views are sought on whether there is a need to provide a defence or presumption similar to the approach in section 13 of the National Credit Code, so that a contract is not regulated if, on the basis of reasonable inquiries, a licensee believes the business had more than the specified number of employees.	
2  After subsection 5(1) of the National Credit Code
Insert:
Small business credit contracts
	(1A)	This Code applies to the provision of credit (and to the credit contract and related matters) if, when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into:
	(a)	the debtor is a person (whether or not a natural person or strata corporation); and
	(b)	the credit is provided or intended to be provided predominantly for the purposes of a small business; and
	(c)	a charge is or may be made for providing the credit; and
	(d)	either or both of the following apply:
	(i)	the credit provider provides, or will provide, the credit in the course of, as part of, or incidentally to, a business carried on in this jurisdiction by the credit provider;
	(ii)	a person acts as an intermediary between the credit provider and the debtor in relation to the contract.

Question

It is intended that Chapter 2 (which imposes licensing obligations) of the National Consumer Credit Protection Act 2009 will be excluded from applying to persons engaging in credit activities in relation to small business credit contracts, and that the regulations will provide for a more limited ‘credit permit’ regime for those persons. A draft of these regulations has been circulated for comment with the Bill.

It is also proposed that contracts where the maximum amount of credit exceeds the sum of $5 million will be excluded by regulations made under section 203B of the National Credit Code. The exemption is set out in regulation 58A in Item 15 of the regulations.

Stakeholders’ views are sought on this approach.	
3  At the end of section 5 of the National Credit Code
Add:
	(5)	For the purposes of this Part, credit is provided predominantly for the purposes of a small business if:
	(a)	more than half of the credit is intended to be used for those purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for those purposes.
4  Section 169 of the National Credit Code
Omit “a natural person or strata corporation under which that person or corporation”, substitute “a person under which that person”.
5  Before paragraph 170(1)(a) of the National Credit Code
Insert:
	(aa)	the lessee is a natural person or strata corporation; and
6  After subsection 170(1) of the National Credit Code
Insert:
Small business consumer leases
	(1A)	This Part applies to a consumer lease if, when the lease is entered into:
	(a)	the lessee is a person (whether or not a natural person or strata corporation); and
	(b)	the goods are hired predominantly for the purposes of the small business; and
	(c)	a charge is or may be made for hiring the goods; and
	(d)	any of the following apply:
	(i)	the charge for hiring the goods, together with any other amount payable under the consumer lease, exceeds the cash price of the goods;
	(ii)	the lease is a regulated fixed term lease;
	(iii)	the lease is a regulated indefinite lease;
	(e)	either or both of the following apply:
	(i)	the lessor hires the goods in the course of, as part of, or incidentally to, a business carried on by the lessor in this jurisdiction;
	(ii)	a person acts as an intermediary between the lessor and the lessee in relation to the lease.

Question 

The regulations do not contain any exemption for small business leases where the cash value of the goods exceeds a maximum amount. Stakeholders’ views are sought on whether there are any classes of small business consumer leases that should be exempted, whether by cash value of the goods or other characteristics. 	
7  At the end of section 170 of the National Credit Code
Add:
	(5)	For the purposes of this Part, goods are hired predominantly for the purposes of a small business if:
	(a)	more than half of the goods are intended to be used for those purposes; or
	(b)	in the case where the same goods are intended to be used for different purposes—the goods are intended to be most used for those purposes.

Part 2—Other amendments
National Consumer Credit Protection Act 2009
8  Subsection 5(1) (definition of consumer)
Repeal the definition, substitute:
consumer means:
	(a)	in relation to a credit contract (other than a small business credit contract) or consumer lease (other than a small business consumer lease)—a natural person or strata corporation; and
	(b)	in relation to a small business credit contract or small business consumer lease—a person (whether or not a natural person or strata corporation).
9  Subsection 5(1)
Insert:
protected small business credit contract: see subsection 133FB(3).
10  Subsection 5(1)
Insert:
small business consumer lease has the same meaning as in section 204 of the National Credit Code.
11  Subsection 5(1)
Insert:
small business credit contract has the same meaning as in section 204 of the National Credit Code.
12  At the end of section 112
Add:
Small business credit contracts
	(3)	This Part does not apply in relation to credit assistance provided by a licensee to a consumer in relation to a small business credit contract.
Note:	Part 3‑2F has special responsible lending rules that apply to those that provide credit assistance to consumers in relation to small business credit contracts.
13  At the end of section 125A
Add:
Small business credit contracts
	(2)	This Part does not apply in relation to a licensee that is a credit provider under a small business credit contract.
Note:	Part 3‑2F has special responsible lending rules that apply to credit providers under small business credit contracts.

Comment 

The effect of the proposed amendments in sections 112A and 125A is that the current responsible lending obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 would not apply to small business credit contracts. 

Instead modified responsible lending obligations would apply as set out in proposed Part 3-2F. The operation of this part is discussed below.	
14  At the end of section 133AAA
Add:
Small business credit contracts
	(2)	This Part does not apply in relation to a licensee that is a credit provider under a small business credit contract.
Note:	Part 3‑2F has special responsible lending rules that apply to credit providers under small business credit contracts.
15  At the end of section 133BAA
Add:
Small business credit contracts
	(2)	This Part does not apply in relation to a licensee that is a credit provider under a small business credit contract.
Note:	Part 3‑2F has special responsible lending rules that apply to credit providers under small business credit contracts.
16  At the end of section 133CAA
Add:
Small business credit contracts
	(2)	This Part does not apply in relation to a licensee that is a credit provider under a small business credit contract.
Note:	Part 3‑2F has special responsible lending rules that apply to credit providers under small business credit contracts.
17  At the end of section 133DAA
Insert:
Small business credit contracts
	(2)	This Part does not apply in relation to a licensee that is a credit provider under a small business credit contract.
Note:	Part 3‑2F has special responsible lending rules that apply to credit providers under small business credit contracts.
18  Before Part 3‑3
Insert:
Part 3‑2F—Small business credit contracts
Division 1—Introduction
133FA  Guide to this Part
This Part has rules that apply to those who provide credit assistance for, or are credit providers under, small business credit contracts. These rules are more limited than the responsible lending rules in Parts 3‑1, 3‑2, 3‑2A, 3‑2B, 3‑2C or 3‑2D that apply to other types of credit contracts.
Under these rules, it does not matter whether the credit assistance provider or credit provider is a licensee.
Some of these rules only apply to certain types of small business credit contracts, called “protected small business credit contracts”.
All of these rules are aimed at better informing consumers and preventing them from being in unsuitable small business credit contracts.
Division 2 deals with those who provide credit assistance for small business credit contracts. It requires them to give the consumer a quote before providing credit assistance. If the contract is a protected small business credit contract, it also requires them to make inquiries and prohibits them from providing credit assistance if the contract will be unsuitable for the consumer.
Division 3 deals with credit providers under small business credit contracts. It requires them to give the consumer a disclosure document before entering into, or increasing the credit limit of, a small business credit contract with the consumer. If the contract is a protected small business credit contract, it also requires them to make inquiries and prohibits them from entering into, or increasing the credit limit of, the contract if the contract is unsuitable for the consumer.
133FB  Application of this Part
Application of this Part
	(1)	This Part applies in relation to small business credit contracts.
	(2)	Subdivision B of Division 2 and Subdivision B of Division 3 only apply in relation to small business credit contracts that are protected small business credit contracts.
Meaning of protected small business credit contract
	(3)	A small business credit contract is a protected small business credit contract if:
	(a)	the consumer’s obligations under the contract are or will be secured by a mortgage over residential property of the consumer or another person; and
	(b)	when the contract is entered into, the credit is provided predominantly for the purposes of enabling the consumer to comply with the consumer’s financial obligations under another contract (the defaulting contract) between the consumer and the credit provider or another person; and
	(c)	before the contract is entered into, the consumer had failed to comply with the consumer’s financial obligations under the defaulting contract.
	(4)	For the purposes of paragraph (3)(b), credit is provided predominantly for the purposes referred to in that paragraph if:
	(a)	more than half of the credit provided is intended to be used for those purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for those purposes.

Question 

Section 133FB introduces a definition of a protected small business credit contract. It is proposed to introduce specific responsible lending obligations in relation to this class of contracts to address equity stripping practices through the provision of credit to small businesses in financial distress. 

A protected small business credit contract is defined as a credit contract that meets each of the following three criteria:

•	the predominant use of the credit is to refinance the liability under an existing small business credit contract;

•	the borrower has defaulted in respect of the repayments due under that contract; and

•	the contract is secured by a mortgage over residential property.

Stakeholders’ views are sought on this definition, including the extent to which a lender can readily determine whether the borrower is in default prior to refinancing (in situations where it is proposed to secure the loan over a residential property).	
Division 2—Providers of credit assistance for small business credit contracts
Subdivision A—Obligations that apply for all small business credit contracts
133FC  Obligation to give quote for providing credit assistance
Obligation to give quote
	(1)	A person must not provide credit assistance to a consumer by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular small business credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular small business credit contract with a particular credit provider; or
	(c)	suggesting that the consumer remain in a particular small business credit contract with a particular credit provider;
unless:
	(d)	the person has given the consumer a quote in accordance with subsection (2); and
	(e)	the consumer has signed and dated that quote or otherwise indicated the consumer’s acceptance of it (and the day that happens) in the manner (if any) prescribed by the regulations; and
	(f)	the person has given the consumer a copy of the accepted quote.
Civil penalty:	2,000 penalty units.
	(2)	The quote must:
	(a)	be in writing; and
	(b)	give information about the credit assistance and other services that the quote covers; and
	(c)	specify the maximum amount that will be payable by the consumer to the person in relation to the person’s credit assistance and other services; and
	(d)	give information about what that amount relates to, including:
	(i)	the maximum amount of the person’s fee for providing the credit assistance and other services; and
	(ii)	the maximum amount of charges that will be incurred by the person for matters associated with providing the credit assistance and other services; and
	(iii)	the maximum amount of fees or charges that will be payable by the person to another person on the consumer’s behalf; and
	(e)	state whether the maximum amount or any other amount will be payable by the consumer to the person if a protected small business credit contract is not entered into, or a credit limit is not increased; and
	(f)	if the person intends to lodge a caveat in relation to land in relation to an amount payable by the consumer for the person’s credit assistance or other services—inform the consumer of the person’s intention and specify any other information that is prescribed by the regulations.
Manner of giving quote
	(3)	The person must give the quote to the consumer in the manner (if any) prescribed by the regulations.
No demanding payment of amount exceeding quoted amount
	(4)	The person must not request or demand payment of an amount that exceeds the maximum amount set out in the quote.
Civil penalty:	2,000 penalty units.
No requirement to give quote
	(5)	Subsections (1) and (4) do not apply if the person does not require the consumer to pay a fee or charge to the person for providing the credit assistance.
No demanding payment before credit assistance provided
	(6)	The person must not request or demand payment of an amount for the person’s credit assistance before the person provides the assistance.
Civil penalty:	2,000 penalty units.

Questions

Section 133FC is based on section 114 of the National Consumer Credit Protection Act 2009. It differs in that a provider of credit assistance is allowed to lodge a caveat in relation to their fees, but will have to disclose this in the quote (as set out in paragraph (2)(f) above). 

Stakeholders’ views are sought on the nature and extent of the disclosure requirements.

The obligation only applies to providers of credit assistance (as defined in section 8 of the Credit Act). Stakeholders’ views are sought on whether it should apply to intermediaries as well.	
	
Subdivision B—Obligations or prohibitions that apply only for protected small business credit contracts

Questions

Subdivision B applies modified responsible lending obligations to persons providing credit assistance, but only in respect of protected small business credit contracts, to address equity stripping practices.

As the borrower is in default of an existing credit contract, the provider of credit assistance is to be under an onus, in respect of a proposed refinance, to make inquiries to ensure the credit contract is suitable. These inquiries are intended to ensure the borrower has an exit strategy in respect to discharging their liability under the protected small business credit contract. 

As set out in section 133FE the provider of credit assistance is required to make inquiries in relation to:

•	the consumer’s requirements and objectives (which would include their exit strategy);

•	whether the consumer is prepared to risk losing the residence that is security for the debt (to address situations where the consumer’s concern is to prevent enforcement action in respect of their existing loan, but where they do so without appreciating the implications in respect of the refinance); and

•	whether the consumer seeks credit because they consider this will enable them to seek a higher price on the eventual sale of the property (to address situations where, for example, the consumer’s concern is to arrange a sale on their own terms).  

The suitability of the contract is then tested against the results of these inquiries; the contract will therefore be suitable if it meets the exit strategy identified by the inquiries into the consumer’s requirements and objectives (even where events subsequent to the entry into the contract mean the exit strategy does not crystallise).

This approach addresses equity stripping practices by imposing procedural requirements on persons to make inquiries, rather than by using other criteria, such as the outcome of the transaction. For example, a remedy could have been provided according to whether or not a defaulting borrower’s equity was diminished because the borrower could not meet the repayments on the refinanced loan. This approach was considered to be too inflexible. 

The provisions follow the model in the National Consumer Credit Protection Act 2009:

•	Obligation to make inquiries in section 133FD; cp section 115.

•	Scope of inquiries defined in section 133FE; cp section 117.

•	Prohibition on suggesting, or assisting with, unsuitable contracts in section 133FF; cp section 123.

•	Prohibition on suggesting to consumers to remain in unsuitable contracts in section 133FG; cp section 124.

Stakeholders’ views are sought both on this approach and on the nature of the proposed inquiries. In particular views are sought on whether they are consistent with existing practices to address the position of small businesses in financial distress. 	
133FD  Obligation to make inquiries
	(1)	A person must not provide credit assistance to a consumer on a day by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular protected small business credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular protected small business credit contract with a particular credit provider;
unless the person has, within 90 days (or other period prescribed by the regulations) before that day, made the inquiries in accordance with section 133FE.
Civil penalty:	2,000 penalty units.
	(2)	A person must not provide credit assistance to a consumer on a day by suggesting that the consumer remain in a particular protected small business credit contract with a particular credit provider unless the person has, within 90 days (or other period prescribed by the regulations) before that day, made the inquiries and verification in accordance with section 133FE.
Civil penalty:	2,000 penalty units.
133FE  The inquiries that must be made
	(1)	For the purposes of subsection 133FD(1) or (2), the person must:
	(a)	make reasonable inquiries about the consumer’s requirements and objectives in relation to the contract; and
	(b)	inquire whether the consumer or other person who owns the residential property that:
	(i)	has a mortgage that secures the consumer’s financial obligations under the contract; or
	(ii)	will have a mortgage that will secure the consumer’s financial obligations under the contract;
		is prepared to lose ownership of that property should the consumer be unable to comply with those obligations; and
	(c)	if the consumer’s financial obligations under the defaulting contract referred to in paragraph 133FB(3)(b) are secured by a mortgage over residential property of the consumer or another person—make reasonable inquiries about whether the consumer thinks that entering into, or increasing the credit limit of, the contract will enable the consumer or other person to obtain a higher price from the sale of that property.
Civil penalty:	2,000 penalty units.
	(2)	The regulations may prescribe particular inquiries that must be made or taken, or do not need to be made or taken, for the purposes of paragraph (1)(a), (b) or (c).
133FF  Prohibition on suggesting, or assisting with, unsuitable contracts
Prohibition on suggesting, or assisting with, unsuitable contracts
	(1)	A person must not provide credit assistance to a consumer by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular protected small business credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular protected small business credit contract with a particular credit provider;
if the contract will be unsuitable for the consumer under subsection (2).
Civil penalty:	2,000 penalty units.
When the contract will be unsuitable
	(2)	The contract will be unsuitable for the consumer if, at the time the person provides the credit assistance, it is likely that:
	(a)	the contract will not meet the consumer’s requirements or objectives; or
	(b)	the consumer or other person who owns the residential property that:
	(i)	has a mortgage that secures the consumer’s financial obligations under the contract; or
	(ii)	will have a mortgage that will secure the consumer’s financial obligations under the contract;
		is not prepared to lose ownership of that property should the consumer be unable to comply with those obligations; or
	(c)	if the consumer’s financial obligations under the defaulting contract referred to in paragraph 133FB(3)(b) are secured by a mortgage over residential property of the consumer or another person—the consumer does not think that entering into, or increasing the credit limit of, the contract will enable the consumer or other person to obtain a higher price from the sale of that property;
if the contract is entered into in the period proposed for it to be entered into, or the credit limit is increased in the period proposed for it to be increased.
Information to be used to determine if contract will be unsuitable
	(3)	For the purposes of determining under subsection (2) whether the contract will be unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
	(a)	the information is about a matter that the person is required to make inquiries about under section 133FE;
	(b)	at the time the person provides the credit assistance:
	(i)	the person had reason to believe that the information was true; or
	(ii)	the person would have had reason to believe that the information was true if the person had made the inquiries that the person was required to make under section 133FE.
Contract not unsuitable under regulations
	(4)	The regulations may prescribe particular situations in which a protected small business credit contract is taken not to be unsuitable for a consumer, despite subsection (2).
Offence
	(5)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	100 penalty units, or 2 years imprisonment, or both.
133FG  Prohibition on suggesting to consumers to remain in unsuitable contract
Prohibition on suggesting to remain in unsuitable contract
	(1)	A person must not provide credit assistance to a consumer by suggesting that the consumer remain in a particular protected small business credit contract with a particular credit provider if the contract is unsuitable for the consumer under subsection (2).
Civil penalty:	2,000 penalty units.
When the contract is unsuitable
	(2)	The contract is unsuitable for the consumer if, at that time the person provides the credit assistance:
	(a)	the contract does not meet the consumer’s requirements or objectives; or
	(b)	the consumer or other person who owns the residential property that has a mortgage that secures the consumer’s financial obligations under the contract is not prepared to lose ownership of that property should the consumer be unable to comply with those obligations; or
	(c)	if the consumer’s financial obligations under the defaulting contract referred to in paragraph 133FB(3)(b) are secured by a mortgage over residential property of the consumer or another person—the consumer does not think that remaining in the contract will enable the consumer or other person to obtain a higher price from the sale of that property.
Information to be used to determine if contract is unsuitable
	(3)	For the purposes of determining under subsection (2) whether the contract is unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
	(a)	the information is about a matter that the person is required to make inquiries about under section 133FE;
	(b)	at the time the person provides the credit assistance:
	(i)	the person had reason to believe that the information was true; or
	(ii)	the person would have had reason to believe that the information was true if the person had made the inquiries the person was required to make under section 133FE.
Contract not unsuitable under regulations
	(4)	The regulations may prescribe particular situations in which a protected small business contract is taken not to be unsuitable for a consumer, despite subsection (2).
Offence
	(5)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	100 penalty units, or 2 years imprisonment, or both.
Defence
	(6)	For the purposes of subsections (1) and (5), it is a defence if:
	(a)	the person suggested that the consumer remain in the protected small business credit contract because, after making reasonable inquiries, the person reasonably believed that there was no other small business credit contract that was appropriate for the consumer; and
	(b)	in the case where the defaulting contract referred to in paragraph 133FB(3)(b) is a credit contract—the person informed the consumer that there is a procedure under sections 72 and 94 of the National Credit Code for consumers in hardship.
Note:	For the purposes of subsection (5), a defendant bears an evidential burden in relation to the matters in subsection (6) (see subsection 13.3(3) of the Criminal Code).
	(7)	For the purposes of subsection (6), the regulations may prescribe:
	(a)	particular inquiries that must be made, or do not need to be made; and
	(b)	particular circumstances in which a small business credit contract is, or is not, appropriate for a consumer; and
	(c)	particular information that must be taken into account to determine whether a small business credit contract is appropriate for a consumer.
Division 3—Credit providers under small business credit contracts
Subdivision A—Obligations that apply for all small business credit contracts
133FH  Obligation to disclose
	(1)	A credit provider must not:
	(a)	enter into a small business credit contract with a consumer who will be the debtor under the contract; or
	(b)	increase the credit limit of a small business credit contract with a consumer who is the debtor under the contract;
if the credit provider has not given the consumer a disclosure document in accordance with subsection (2).
Civil penalty:	2,000 penalty units.
	(2)	The disclosure document must be in writing and set out the following matters:
	(a)	if the amount of credit is ascertainable—that amount;
	(b)	the annual percentage rate or rates under the contract and, if there is more than one rate, how each rate applies;
	(c)	if the contract has a fixed interest rate or is a contract prescribed by the regulations—the total amount of interest charges payable under the contract;
	(d)	if more than one repayment is to be made under the contract and the contract is not a continuing credit contract:
	(i)	the amount of the repayments or the method of calculating the amount; and
	(ii)	the number of the repayments, if ascertainable; and
	(iii)	if the contract has a fixed interest rate or is a contract prescribed by the regulations—the total amount of the repayments, if ascertainable; and
	(iv)	when the first repayment is to be paid, if ascertainable, and the frequency of payment of repayments;
	(e)	if the contract provides for a minimum repayment—the amount of that repayment, if ascertainable, but, if not, the method of calculation of the minimum repayment;
	(f)	a statement of the credit fees and charges that are, or may become, payable under the contract, and when each such fee or charge is payable, if ascertainable;
	(g)	the amount of any such fee or charge, if ascertainable, but, if not, the method of calculation of the fee or charge, if ascertainable;
	(h)	the total amount of credit fees and charges payable under the contract to the extent that it is ascertainable.
	(3)	The disclosure document may be the proposed contract document or be a separate document.

Question

This provision is based on the existing disclosure requirements in subsections 17(3), (4), (6) (7) and (8) of the National Credit Code. 

Stakeholders’ views are sought on the nature and extent of the proposed disclosure requirements.	
	
Subdivision B—Obligations and prohibitions that apply only for protected small business credit contracts

Questions

Subdivision B applies modified responsible lending obligations to credit providers, but only in respect of protected small business credit contracts, to address equity stripping practices.

As the borrower is in default, the credit provider is to be under an onus, in respect of the proposed refinance, to make inquiries to ensure the credit contract is suitable. These inquiries are intended to ensure the borrower has an exit strategy in respect to discharging their liability under the protected small business credit contract. 

As set out in section 133FJ the credit provider is required to make inquiries in relation to:

•	the consumer’s requirements and objectives (which would include their exit strategy);

•	whether the consumer is prepared to risk losing the residence that is security for the debt (to address situations where the consumer’s concern is to prevent enforcement action in respect of their existing loan, but where they do so without appreciating the implications in respect of the refinance); and

•	ether the consumer seeks credit because they consider this will enable them to seek a higher price on the eventual sale of the property (to address situations where, for example, the consumer’s concern is to arrange a sale on their own terms).  

The suitability of the contract is then tested against the results of these inquiries; the contract will therefore be suitable if it meets the exit strategy identified by the inquiries into the consumer’s requirements and objectives (even where events subsequent to the entry into the contract mean the exit strategy does not crystallise).
 
This approach addresses equity stripping practices by imposing procedural requirements on credit providers to make inquiries, rather than by, for example, using other criteria, such as the outcome of the transaction. For example, a remedy could have been provided according to whether or not a defaulting borrower’s equity was diminished because the borrower could not meet the repayments on the refinanced loan. This approach was considered to be too inflexible.  

The provisions follow the model in the National Consumer Credit Protection Act 2009:

•	Obligation to make inquiries in section 133FI; cp section 128.

•	Scope of inquiries defined in section 133FJ; cp section 130.

•	Prohibition on suggesting, or assisting with, unsuitable contracts in section 133FK; cp section 133.

Stakeholders’ views are sought both on this approach and on the nature of the proposed inquiries. In particular views are sought on whether they are consistent with existing lending practices to address the position of small businesses in financial distress.	
133FI  Obligation to make inquiries
		A credit provider must not:
	(a)	enter into a protected small business credit contract with a consumer who will be the debtor under the contract; or
	(b)	increase the credit limit of a protected small business credit contract with a consumer who is the debtor under the contract;
on a day unless the credit provider has, within 90 days (or other period prescribed by the regulations) before that day, made the inquiries in accordance with section 133FJ.
Civil penalty:	2,000 penalty units.
133FJ  The inquiries that must be made
	(1)	For the purposes of section 133FI, the credit provider must:
	(a)	make reasonable inquiries about the consumer’s requirements and objectives in relation to the contract; and
	(b)	inquire whether the consumer or other person who owns the residential property that:
	(i)	has a mortgage that secures the consumer’s financial obligations under the contract; or
	(ii)	will have a mortgage that will secure the consumer’s financial obligations under the contract;
		is prepared to lose ownership of that property should the consumer be unable to comply with those obligations; and
	(c)	if the consumer’s financial obligations under the defaulting contract referred to in paragraph 133FB(3)(b) are secured by a mortgage over residential property of the consumer or another person—make reasonable inquiries about whether the consumer thinks that entering into, or increasing the credit limit of, the contract will enable the consumer or other person to obtain a higher price from the sale of that property.
Civil penalty:	2,000 penalty units.
	(2)	The regulations may prescribe particular inquiries or steps that must be made or taken, or do not need to be made or taken, for the purposes of paragraph (1)(a), (b) or (c).
133FK  Prohibition on entering etc. unsuitable contracts
Prohibition on entering etc. unsuitable contracts
	(1)	A credit provider must not:
	(a)	enter into a protected small business credit contract with a consumer who will be the debtor under the contract; or
	(b)	increase the credit limit of a protected small business contract with a consumer who is the debtor under the contract;
if the contract is unsuitable for the consumer under subsection (2).
Civil penalty:	2,000 penalty units.
When the contract is unsuitable
	(2)	The contract is unsuitable for the consumer if, at the time it is entered into or the credit limit is increased:
	(a)	the contract does not meet the consumer’s requirements or objectives; or
	(b)	the consumer or other person who owns the residential property that:
	(i)	has a mortgage that secures the consumer’s financial obligations under the contract; or
	(ii)	will have a mortgage that will secure the consumer’s financial obligations under the contract;
		is not prepared to lose ownership of that property should the consumer be unable to comply with those obligations; or
	(c)	if the consumer’s financial obligations under the defaulting contract referred to in paragraph 133FB(3)(b) are secured by a mortgage over residential property of the consumer or another person—the consumer does not think that entering into, or increasing the credit limit of, the contract will enable the consumer or other person to obtain a higher price from the sale of that property.
Information to be used to determine if contract will be unsuitable
	(3)	For the purposes of determining under subsection (2) whether the contract will be unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
	(a)	the information is about a matter that the person is required to make inquiries about under section 133FJ;
	(b)	at the time of the contract is entered into or the credit limit is increased:
	(i)	the credit provider had reason to believe that the information was true; or
	(ii)	the credit provider would have had reason to believe that the information was true if the credit provider had made the inquiries that the person was required to make under section 133FJ.
Contract not unsuitable under regulations
	(4)	The regulations may prescribe particular situations in which a protected small business credit contract is taken not to be unsuitable for a consumer, despite subsection (2).
Offence
	(5)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	100 penalty units, or 2 years imprisonment, or both.
19  Section 135 (heading)
Repeal the heading, substitute:
135  This Part does not apply to lessors who provide credit assistance
20  At the end of Division 1 of Part 3‑3
Add:
135A  This Part does not apply to small business consumer leases
		This Part does not apply in relation to credit assistance provided by a licensee to a consumer in relation to a small business consumer lease.
Note:	Part 3‑4A has special responsible lending rules that apply to those that provide credit assistance to consumers in relation to small business consumer leases.
21  At the end of Division 1 of Part 3‑4
Add:
148A  This Part does not apply to small business consumer leases
		This Part does not apply in relation to a licensee that is a lessor under a small business consumer lease.
Note:	Part 3‑4A has special responsible lending rules that apply to lessors under small business consumer leases.
22  After Part 3‑4
Insert:
Part 3‑4A—Small business consumer leases
Division 1—Introduction
156AA  Guide to this Part
This Part has rules that apply to those who provide credit assistance for, or are lessors under, small business consumer leases. These rules are more limited than the responsible lending rules in Parts 3‑3 and 3‑4 that apply to other types of consumer leases.
Under these rules, it does not matter whether the credit assistance provider or the lessor is a licensee.
These rules are aimed at better informing consumers and preventing them from being in unsuitable small business consumer leases.
Division 2 deals with those who provide credit assistance for small business consumer leases. It requires them to give the consumer a quote before providing credit assistance.
Division 3 deals with lessors under small business consumer leases. It requires them to give the consumer a disclosure document before entering into a small business consumer lease with the consumer.

Question

Part 3-4A does not include a definition of protected small business consumer leases or any consequent responsible lending obligations (unlike the approach taken to protected small business credit contracts). 

It is assumed that the same issues would not apply in respect of leases as, first, it would not be common for a small business consumer lease to be secured over a residential property, and, second, where the consumer is in default they would be likely to either terminate the contract by returning the leased goods, or seek a variation of the terms where they would receive a benefit through the continued use of the leased goods.

Stakeholders’ views are sought on whether there are any circumstances, including the possible development of avoidance strategies, where modified responsible lending obligations (similar to those applying to protected small business credit contracts) should apply to a class of small business consumer leases. 	
Division 2—Providers of credit assistance for small business consumer leases
156AB  Obligation to give quote for providing credit assistance
Obligation to give quote
	(1)	A person must not provide credit assistance to a consumer by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular small business consumer lease with a particular lessor; or
	(b)	suggesting that the consumer remain in a particular small business consumer lease with a particular lessor;
unless:
	(c)	the person has given the consumer a quote in accordance with subsection (2); and
	(d)	the consumer has signed and dated that quote or otherwise indicated the consumer’s acceptance of it (and the day that happens) in the manner (if any) prescribed by the regulations; and
	(e)	the person has given the consumer a copy of the accepted quote.
Civil penalty:	2,000 penalty units.
	(2)	The quote must:
	(a)	be in writing; and
	(b)	give information about the credit assistance and other services that the quote covers; and
	(c)	specify the maximum amount that will be payable by the consumer to the person in relation to the person’s credit assistance and other services; and
	(d)	give information about what that amount relates to, including:
	(i)	the maximum amount of the person’s fee for providing the credit assistance and other services; and
	(ii)	the maximum amount of charges that will be incurred by the person for matters associated with providing the credit assistance and other services; and
	(iii)	the maximum amount of fees or charges that will be payable by the person to another person on the consumer’s behalf; and
	(e)	state whether the maximum amount or any other amount will be payable by the consumer to the person if a consumer lease is not entered into; and
	(f)	if the person intends to lodge a caveat in relation to land in relation to an amount payable by the consumer for the person’s credit assistance or other services—inform the consumer of the person’s intention and specify any other information that is prescribed by the regulations.
Manner of giving quote
	(3)	The person must give the quote to the consumer in the manner (if any) prescribed by the regulations.
No demanding payment of amount exceeding quoted amount
	(4)	The person must not request or demand payment of an amount that exceeds the maximum amount set out in the quote.
Civil penalty:	2,000 penalty units.
No demanding payment before credit assistance provided
	(5)	The person must not request or demand payment of an amount for the person’s credit assistance before the person provides the assistance.
Civil penalty:	2,000 penalty units.

Questions

Section 156AB is based on section 137 of the National Consumer Credit Protection Act 2009. It differs in that it allows a caveat to be lodged by the person providing credit assistance, but introduces disclosure requirements where this is the case.

If the person providing credit assistance needs to charge the consumer more than the figure specified in the quote they can provide a second quote with an updated figure.

Stakeholders’ views are sought on the nature and extent of the disclosure requirements.

It is noted that the draft Finance Brokers Bill prepared by the States in November 2007 included a modification to the disclosure requirements in that Bill in relation to small businesses, by allowing for initial oral disclosure of the proposed fees, and subsequent confirmation of this in writing. Stakeholders’ views are sought on whether a similar exemption should be considered, and, if so, in what circumstances.

The obligation only applies to providers of credit assistance. Stakeholders’ views are sought on whether it should apply to intermediaries as well.	
	
Division 3—Lessors under small business consumer leases
156AC  Obligation to disclose
	(1)	A lessor must not enter into a small business consumer lease with a consumer who will be the lessee under the lease if the lessor has not given the consumer a disclosure document in accordance with subsection (2).
Civil penalty:	2,000 penalty units.
	(2)	The disclosure document must be in writing and set out the following matters, if ascertainable:
	(a)	a description or identification of the goods hired under the lease;
	(b)	the amount or value of any consideration to be paid or provided by the lessee before the delivery of the goods;
	(c)	the amount of any stamp duty or other government charge (other than on receipts or withdrawals) payable by the lessee in relation to the lease;
	(d)	the amount of any other charges not included in the rental payable under the lease, and a description of those charges;
	(e)	the amount of each rental payment to be made under the lease;
	(f)	the date the first rental payment is due and either:
	(i)	the dates subsequent rental payments are due; or
	(ii)	the interval between rental payments;
	(g)	if the lessee’s obligations under the lease are or will be secured by an interest in, or power over, property:
	(i)	a statement to that effect; and
	(ii)	a description of that property;
	(h)	the number of rental payments to be made by the lessee, and the total amount of rental payable under the lease;
	(i)	a statement of the conditions on which the lessee may terminate the lease;
	(j)	a statement of the liabilities (if any) of the lessee on termination of the lease.
	(3)	The disclosure document may be the proposed lease document or be a separate document.

Question

This provision is based on the existing disclosure requirements in section 174 of the National Credit Code. 

Stakeholders’ views are sought on the nature and extent of the disclosure requirements (including whether there are any small business consumer leases where the number or amount of the rental payments is not ascertainable at the time the contract is entered into).	
	
23  Before subsection 5(1) of the National Credit Code
Insert:
Credit contracts (other than small business credit contracts)
24  Before subsection 170(1) of the National Credit Code
Insert:
Consumer leases (other than small business consumer leases)
25  After subsection 171(3) of the National Credit Code
Insert:
	(3A)	Without limiting subsection (3), the regulations may exclude a consumer lease from the application of this Part if:
	(a)	the amount payable under the lease, as referred to in section 170, exceeds or may exceed a specified amount; or
	(b)	the lessor under the lease is of a specified class.
26  At the end of Division 5 of Part 12 of the National Credit Code
Add:
203D  Exemptions for small business credit contracts and small business consumer leases
	(1)	Sections 14 to 168 do not apply in relation to small business credit contracts.
	(2)	Sections 173 to 187 do not apply in relation to small business consumer leases.

Comment 

The effect of section 203D is to exclude the substantive obligations in the National Credit Code from applying to both small business credit contracts and small business consumer leases. The following provisions will still apply:

•	the definition provisions in respect of consumer leases in sections 169 to 172 (noting that these are to be amended by Schedule 5 of this Bill); and

•	the definition and machinery provisions in sections 188 to 218.   	
	
27  Subsection 204(1) of the National Credit Code
Insert:
small business consumer lease means a consumer lease covered by subsection 170(1A).
28  Subsection 204(1) of the National Credit Code
Insert:
small business credit contract means a credit contract covered by subsection 5(1A).

Schedule 3—Investment lending
Part 1—Main amendments
National Consumer Credit Protection Act 2009
1  Paragraph 5(1)(b) of the National Credit Code
Repeal the paragraph, substitute:
	(b)	the credit is provided or is intended to be provided predominantly for one or more of the following purposes:
	(i)	personal purposes;
	(ii)	domestic purposes;
	(iii)	household purposes;
	(iv)	investment purposes; and
2  Subsections 5(3) and (4) of the National Credit Code
Repeal the subsections, substitute:
Purposes for which credit is provided
	(4)	For the purposes of this Part, credit is provided predominantly for personal, domestic, household or investment purposes if:
	(a)	more than half of the credit is intended to be used for one or more of those purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for one or more of those purposes.

Question

The effect of the proposed amendments to section 5 of the National Credit Code is that credit contracts will be regulated where the predominant use of the credit is for investment purposes.

It is proposed that the licensing and other provisions in Chapter 2 of the National Consumer Credit Protection Act 2009 would apply without modification to persons engaging in credit activities in relation to these contracts (noting that holders of an Australian financial service licence would be able to be streamlined under the regulation-making power in section 39 where they do not already hold an Australian credit licence). 

Stakeholders’ views are sought on this approach.  
	
3  Paragraphs 13(2)(a), (b) and (c) of the National Credit Code
Repeal the paragraphs, substitute:
	(a)	personal purposes;
	(b)	domestic purposes;
	(c)	household purposes;
	(d)	investment purposes;

Question

Schedule 3 does not amend the definition of consumer leases in paragraph 170(1)(a) to include consumer leases where the goods are hired for investment purposes, as the use of such contracts appears to be relatively uncommon.

Stakeholders’ views are sought on whether there any circumstances where consumer leases for investment purposes are or may be regularly provided, and should be subject to regulation. This could include their use in avoidance strategies or where the lessee has a right or obligation to purchase the goods (noting that currently the application of section 9 of the National Credit Code would not result in such leases being deemed to be credit contracts).

Part 2—Other amendments
National Consumer Credit Protection Act 2009
4  Subsection 5(1)
Insert:
financial product has the same meaning as in Division 3 of Part 7.1 of Chapter 7 of the Corporations Act 2001.
5  Subsection 5(1)
Insert:
investment credit contract: see subsection 133EB(2).
6  Subsection 5(1)
Insert:
product means real or personal property of every description, whether situated in Australia or anywhere else and whether tangible or intangible, and includes an interest in any such real or personal property.
7  Subsection 5(1)
Insert:
protected investment credit contract: see subsection 133EB(4).
8  Subsection 5(1)
Insert:
regulated product (home‑secured) investment credit contract: see subsection 133EB(6).
9  Subsection 5(1)
Insert:
unregulated product investment credit contract: see subsection 133EB(8).
10  Section 111 (first paragraph)
Omit “to a licensee that will be the credit provider under the credit contract”, substitute “in some circumstances (see section 112)”.
11  Section 112 (heading)
Repeal the section, substitute:
112  When this Part does not apply
Credit assistance provided by credit provider
	(1)	This Part does not apply in relation to credit assistance provided by a licensee in relation to a credit contract if the licensee is or will be the credit provider under the contract.
Investment credit contracts
	(2)	This Part does not apply in relation to credit assistance provided by a licensee to a consumer in relation to an investment credit contract.
Note:	Part 3‑2E has special responsible lending rules that apply to licensees that provide credit assistance to consumers in relation to protected investment credit contracts.
12  Section 125 (at the end of the first paragraph)
Add “However, these rules do not apply in some circumstances (see section 125A).”.
13  After section 125
Insert:
125A  When this Part does not apply
Investment credit contracts
	(1)	This Part does not apply in relation to a licensee that is a credit provider under an investment credit contract.
Note:	Part 3‑2E has special responsible lending rules that apply to licensees that are credit providers under protected investment credit contracts.

Comment 

The effect of the proposed amendments in sections 112A and 125A is that the current responsible lending obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 would not apply to investment credit contracts. 

Instead modified responsible lending obligations would apply as set out in proposed Part 3-2E. The operation of this part is discussed below.	
14  Paragraph 133(1)(b)
Omit “wholly or”.
15  Section 133A (at the end of the first paragraph)
Add “However, it does not apply in some circumstances (see section 133AAA).”.
16  After section 133A
Insert:
133AAA  When this Part does not apply
Protected investment credit contracts
	(1)	This Part does not apply in relation to a licensee that is a credit provider under a protected investment credit contract.
Note:	Part 3‑2E has special responsible lending rules that apply to credit providers under protected investment credit contracts.
17  Section 133B (at the end of the first paragraph)
Add “However, it does not apply in some circumstances (see section 133BAA).”.
18  After section 133B
Insert:
133BAA  When this Part does not apply
Protected investment credit contracts
	(1)	This Part does not apply in relation to a licensee that is a credit provider under a protected investment credit contract.
Note:	Part 3‑2E has special responsible lending rules that apply to credit providers under protected investment credit contracts.
19  Section 133C (at the end of the first paragraph)
Add “However, it does not apply in some circumstances (see section 133CAA).”.
20  After section 133C
Insert:
133CAA  When this Part does not apply
Protected investment credit contracts
	(1)	This Part does not apply in relation to a licensee that is a credit provider under a protected investment credit contract.
Note:	Part 3‑2E has special responsible lending rules that apply to credit providers under protected investment credit contracts.
21  Section 133DA (at the end of the first paragraph)
Add “However, these rules do not apply in some circumstances (see section 133DAA).”.
22  After section 133DA
Insert:
133DAA  When this Part does not apply
Protected investment credit contracts
	(1)	This Part does not apply in relation to a licensee that is a credit provider under a protected investment credit contract.
Note:	Part 3‑2E has special responsible lending rules that apply to credit providers under protected investment credit contracts.
23  After Part 3‑2D
Insert:
Part 3‑2E—Protected investment credit contracts
Division 1—Introduction
133EA  Guide to this Part
This Part has rules that apply to licensees that provide credit assistance for, or are credit providers under, certain types of investment credit contracts, called “protected investment credit contracts”. These rules are more limited than the responsible lending rules in Parts 3‑1, 3‑2, 3‑2A, 3‑2B, 3‑2C or 3‑2D that apply to other types of credit contracts.
There are 2 types of protected investment credit contracts—regulated product (home secured) investment credit contracts and unregulated product investment credit contracts (see section 133EB). Some of these rules only apply to unregulated product investment credit contracts.
All of these rules are aimed at better informing consumers and preventing them from being in unsuitable protected investment credit contracts.
Division 2 deals with licensees that provide credit assistance for protected investment credit contracts. It requires them to give the consumer a quote before providing credit assistance. It also requires them to make inquiries and it prohibits them from providing credit assistance if the contract will be unsuitable for the consumer.
Division 3 deals with licensees that are credit providers under protected investment credit contracts. It requires them to make inquiries and also prohibits them from entering into, or increasing the credit limit of, a protected investment credit contract if the contract is unsuitable for the consumer.
133EB  Application of this Part to protected investment credit contracts
Application of this Part
	(1)	This Part only applies in relation to investment credit contracts that are protected investment credit contracts.
Meaning of investment credit contract
	(2)	A credit contract is an investment credit contract if, when the contract is entered into, the credit is provided or is intended to be provided predominantly for investment purposes, other than:
	(a)	to purchase, renovate or improve residential property for investment purposes; or
	(b)	to refinance credit that has been provided predominantly to purchase, renovate or improve residential property for investment purposes.
	(3)	For the purposes of subsection (2), credit is provided predominantly for investment purposes (other than those referred to in paragraph (2)(a) or (b)) if:
	(a)	more than half of the credit is intended to be used for those investment purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for those investment purposes.
Meaning of protected investment credit contract
	(4)	An investment credit contract is a protected investment credit contract if:
	(a)	when the contract is entered into, the credit that is provided for investment purposes is provided predominantly for one or more of the following purposes:
	(i)	for the purposes of the consumer acquiring a financial product from a person who is not prohibited from providing that product under the Corporations Act 2001;
	(ii)	for the purposes of the consumer acquiring a financial product from a person who is prohibited from providing that product under the Corporations Act 2001;
	(iii)	for the purposes of the consumer acquiring a product that is not a financial product; and
	(b)	in the case where the credit that is provided for investment purposes is provided predominantly or partly for the purposes referred to in subparagraph (a)(i)—the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence.
	(5)	For the purposes of paragraph (4)(a), credit is provided predominantly for the purposes referred to in subparagraph (4)(a)(i), (ii) or (iii) if:
	(a)	more than half of the credit provided for investment purposes is intended to be used for one or more of those purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for one or more of those purposes.
Meaning of regulated product (home‑secured) investment credit contract
	(6)	A protected investment credit contract is a regulated product (home‑secured) investment credit contract if, when the contract is entered into:
	(a)	the credit that is provided for the investment purposes referred to in paragraph (4)(a) is provided predominantly for the purposes referred to in subparagraph (4)(a)(i); and
	(b)	the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence.
	(7)	For the purposes of paragraph (6)(a), credit is provided predominantly for the purposes referred to in subparagraph (4)(a)(i) if:
	(a)	more than half of the credit provided for investment purposes is intended to be used for those purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for those purposes.
Meaning of unregulated product investment credit contract
	(8)	A protected investment credit contract is an unregulated product investment credit contract if, when the contract is entered into:
	(a)	the credit that is provided for the investment purposes referred to in paragraph (4)(a) is provided predominantly for either or both of the purposes referred to in subparagraph (4)(a)(ii) or (iii); and
	(b)	any requirements prescribed by the regulations in relation to the contract are satisfied.
	(9)	For the purposes of paragraph (8)(a), credit is provided predominantly for the purposes referred to in subparagraph (4)(a)(ii) or (iii) if:
	(a)	more than half of the credit provided for investment purposes is intended to be used for either or both of those purposes; or
	(b)	in the case where the credit is intended to be used to obtain goods or services for use for different purposes—the goods or services are intended to be most used for either or both of those purposes.

Questions

Part 3-2E applies specific responsible lending obligations to protected investment credit contracts. These reforms are to address two particular classes of transactions that have particular risks for consumers: 

•	Loans secured over the family home where the borrower does not appreciate that if the investment does not generate the expected returns, they will need to meet the repayments from other resources and may be at risk of losing their home, depending on their overall financial position.

•	Loans to finance investments in products being offered illegally, by a person who does not hold an Australian Financial Services Licence (where there is a consequent risk the entire investment proceeds will be lost by the consumer).  
The Bill addresses each situation through different responsible lending obligations, with the consequent introduction of two classes of protected contracts. The two classes are:

•	Regulated product (home‑secured) investment credit contracts (see subsection 133EB(6)): defined as contracts:

–	where the predominant use of the credit is to  invest in a financial product offered by a person who is the holder of an Australian Financial Services Licence (or otherwise authorised by the Corporations Act 2001) – see subparagraph 133EB(4)(a)(i); and 

–	where the debt is secured by a mortgage over the consumer’s principal place of residence. 

•	Unregulated product investment credit contracts (see subsection 133EB(8)): defined as contracts where the predominant use of the credit is to acquire:

–	a financial product being offered illegally; or 

–	a product that is not a financial product (such as artwork or a commercial property). 

–	The definition in subparagraphs 133EB(4)(a)(ii) and (iii) covers all products offered by persons not authorised by the Corporations Act 2001on the basis that credit providers and providers of credit services will not always be able to readily determine whether a product is being offered illegally.

Stakeholders’ views are sought on these definitions

Paragraph 133EB(8)(b) provides that an unregulated product investment credit contract is a contract which satisfies any requirements prescribed by the regulations. 

It is proposed to further restrict the definition of unregulated product investment credit contracts so that it only covers contracts where there were commission or other financial arrangements creating a risk of conflicted advice in the distribution chain between the provider of the financial product and the credit provider.

By way of example, it is proposed to include contracts where a person who does not hold an Australian Financial Services licence may pay higher commissions than other providers of investment products to obtain access to distribution networks. However, it is intended to exclude contracts where the consumer approaches the credit provider directly or independently. 

The commission or financial arrangements could be between:

•	the credit provider and the provider of the investment product; or

•	a provider of credit services and the provider of the investment products. 

Stakeholders’ views are sought on the extent to which these practices can be readily identified by the parties to the transaction, and whether the criteria to identify linked credit transactions in Part 7 of the National Credit Code would provide a possible model for defining the relevant relationships.	
Division 2—Licensees that provide credit assistance for protected investment credit contracts

Comment

Division 2 applies responsible lending obligations to providers of credit assistance, but only in relation to protected investment credit contracts. 

The provisions follow the model in the National Consumer Credit Protection Act 2009:

•	Obligation to make inquiries (section 133ED); cp section 115.

•	Scope of inquiries defined (section 133EE); cp section 117.

•	Prohibition on suggesting, or assisting with, unsuitable contracts (section 133EF); cp section 123.

•	Prohibition on suggesting to consumers to remain in unsuitable contracts (section 133EI); cp section 124.

The inquiries that need to be made are discussed in more detail below.	
Subdivision A—Obligation to give quote for providing credit assistance
133EC  Obligation to give quote for providing credit assistance
Requirement to give quote
	(1)	A licensee must not provide credit assistance to a consumer by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular protected investment credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular protected investment credit contract with a particular credit provider; or
	(c)	suggesting that the consumer remain in a particular protected investment credit contract with a particular credit provider;
unless:
	(d)	the licensee has given the consumer a quote in accordance with subsection (2); and
	(e)	the consumer has signed and dated that quote or otherwise indicated the consumer’s acceptance of it (and the day that happens) in the manner (if any) prescribed by the regulations; and
	(f)	the licensee has given the consumer a copy of the accepted quote.
Civil penalty:	2,000 penalty units.
	(2)	The quote must:
	(a)	be in writing; and
	(b)	give information about the credit assistance and other services that the quote covers; and
	(c)	specify the maximum amount that will be payable by the consumer to the licensee in relation to the licensee’s credit assistance and other services; and
	(d)	give information about what that amount relates to, including:
	(i)	the maximum amount of the licensee’s fee for providing the credit assistance and other services; and
	(ii)	the maximum amount of charges that will be incurred by the licensee for matters associated with providing the credit assistance and other services; and
	(iii)	the maximum amount of fees or charges that will be payable by the licensee to another person on the consumer’s behalf; and
	(e)	state whether the maximum amount or any other amount will be payable by the consumer to the licensee if a protected investment credit contract is not entered into or a credit limit is not increased; and
	(f)	give information about:
	(i)	any commissions that the licensee, or an employee, director or credit representative of the licensee, is likely to receive, directly or indirectly, in relation to the protected investment credit contract; and
	(ii)	a reasonable estimate of the amounts of those commissions or the range of those amounts; and
	(iii)	the method for working out those amounts; and
	(g)	comply with any other requirements prescribed by the regulations.
Manner of giving quote
	(3)	The licensee must give the quote to the consumer in the manner (if any) prescribed by the regulations.
No demanding payment of amount exceeding quoted amount
	(4)	The licensee must not request or demand payment of an amount that exceeds the maximum amount set out in the quote.
Civil penalty:	2,000 penalty units.
No demanding payment before credit assistance provided
	(5)	The licensee must not request or demand payment of an amount for the licensee’s credit assistance before the licensee provides the assistance.
Civil penalty:	2,000 penalty units.
Caveats
	(6)	The licensee must not lodge, or threaten to lodge, a caveat in relation to land to induce the consumer to pay an amount to the licensee for the licensee’s credit assistance or other services.
Civil penalty:	2,000 penalty units.

Questions

This provision is based on section 114 of the National Consumer Credit Protection Act 2009. Stakeholders’ views are sought on the nature and extent of the disclosure requirements, including whether there are any particular practices in relation to intermediaries charging fees or receiving commissions in respect of investment products that warrant the introduction of additional disclosure obligations.

The obligation to provide a quote only applies to providers of credit assistance. Stakeholders’ views are sought on whether it should apply to intermediaries as well. 	
Subdivision B—Obligation to make inquiries and verify

Questions 

Section 133EE imposes a requirement to make inquiries as part of the responsible lending obligations that apply to protected investment credit contracts. 

Different obligations apply according to the nature of the underlying investment and whether the credit contract is therefore a regulated product (home‑secured) investment credit contract or an unregulated product investment credit contract.  This distinction is drawn as financial products offered by persons authorised by the Corporations Act 2001 are already subject to significant regulation. 

If the contract is an unregulated product investment credit contract then the obligation is to make inquiries into: 

•	the consumer’s requirements and objectives; 

•	whether the consumer is prepared to lose ownership of their residence where it is security for the debt should they be unable to meet the repayments under the contract;

•	reasonable inquiries about the consumer’s financial situation; and

•	reasonable verification of the consumer’s financial situation.

If the contract is a regulated product (home‑secured) investment then the obligation is to only make inquiries into: 

•	the consumer’s requirements and objectives; and 

•	whether the consumer is prepared to lose ownership of their (secured) residence should they be unable to meet the repayments under the contract.

The provider of credit assistance is required to make inquiries into whether the consumer is prepared to lose ownership of their (secured) residence should they be unable to meet the repayments under the contract. The obligations has been framed in this way in order to allow borrowers to use their home as security where they aware of, and have acknowledged, the risk of losing their residence.

Stakeholders’ views are sought on the nature of the proposed inquiries in respect of each class of investment contracts, including whether the obligation in relation to making inquiries in respect of the borrower’s residence is appropriately framed. 	
133ED  Obligation to make inquiries and verify
	(1)	A licensee must not provide credit assistance to a consumer on a day by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular protected investment credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular protected investment credit contract with a particular credit provider;
unless the licensee has, within 90 days (or other period prescribed by the regulations) before that day, made the inquiries and verification in accordance with section 133EE.
Civil penalty:	2,000 penalty units.
	(2)	A licensee must not provide credit assistance to a consumer on a day by suggesting that the consumer remain in a particular protected investment credit contract with a particular credit provider unless the licensee has, within 90 days (or other period prescribed by the regulations) before that day, made the inquiries and verification in accordance with section 133EE.
Civil penalty:	2,000 penalty units.
133EE  The inquiries and verification that must be made
	(1)	For the purposes of subsection 133ED(1) or (2), the licensee must:
	(a)	make reasonable inquiries about the consumer’s requirements and objectives in relation to the contract; and
	(b)	if the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence—inquire whether the consumer is prepared to lose ownership of that residence should the consumer be unable to comply with the consumer’s financial obligations under the contract; and
	(c)	make reasonable inquiries about the consumer’s financial situation; and
	(d)	take reasonable steps to verify the consumer’s financial situation; and
	(e)	make any inquiries prescribed by the regulations about any matter prescribed by the regulations; and
	(f)	take any steps prescribed by the regulations to verify any matter prescribed by the regulations.
Civil penalty:	2,000 penalty units.
	(2)	The regulations may prescribe particular inquiries or steps that must be made or taken, or do not need to be made or taken, for the purposes of paragraph (1)(a), (b), (c) or (d).
Modification for particular contracts
	(3)	If the contract is a regulated product (home‑secured) investment credit contract, then disregard paragraphs (1)(c), (d), (e) and (f).
Subdivision C—Obligation to disclose fees, commissions etc.
133EF  Fees, commissions etc.
Requirement for disclosure
	(1)	A licensee must, at the same time as providing credit assistance to a consumer by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular protected investment credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular protected investment credit contract with a particular credit provider; or
	(c)	suggesting that the consumer remain in a particular protected investment credit contract with a particular credit provider;
give the consumer a credit proposal disclosure document in accordance with subsection (2).
Civil penalty:	2,000 penalty units.
	(2)	The credit proposal disclosure document must contain the following:
	(a)	the total amount of any fees or charges that the consumer is liable to pay to the licensee in relation to the contract and the method used for working out that amount;
	(b)	a reasonable estimate of the total amount of any commissions that the licensee, or an employee, director or credit representative of the licensee, is likely to receive in relation to the contract and the method used for working out that amount;
	(c)	a reasonable estimate of the total amount of any fees or charges that the consumer is likely to be liable to pay to the credit provider in relation to applying for the contract;
	(d)	a reasonable estimate of the total amount of any fees or charges that the consumer is likely to be liable to pay to any other person in relation to applying for the contract;
	(e)	if the credit is to be used to pay any of the amounts in the above paragraphs—a reasonable estimate of the likely amount of credit that will be available to the consumer after payments under paragraphs (a), (c) and (d) are made.
	(3)	For the purposes of paragraph (2)(b), the regulations may prescribe:
	(a)	the method for working out amounts of commissions; and
	(b)	how amounts of commissions must be described.
Manner of giving credit proposal disclosure document
	(4)	The licensee must give the credit proposal disclosure document to the consumer in the manner (if any) prescribed by the regulations.
133EG  No profiting from fees etc. paid to third parties
Requirement not to profit
	(1)	If, in the course of providing credit assistance to a consumer in relation to a protected investment credit contract, a licensee pays an amount (the third party amount) to another person on behalf of the consumer, the licensee must not request or demand payment of an amount, as reimbursement for the third party amount, that exceeds the third party amount.
Civil penalty:	2,000 penalty units.
Offence
	(2)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	25 penalty units, or 6 months imprisonment, or both.
Subdivision D—Prohibition on suggesting, or assisting with, unsuitable protected investment credit contracts
133EH  Prohibition on suggesting, or assisting with, unsuitable contracts
Prohibition on suggesting, or assisting with, unsuitable contracts
	(1)	A licensee must not provide credit assistance to a consumer by:
	(a)	suggesting that the consumer apply, or assisting the consumer to apply, for a particular protected investment credit contract with a particular credit provider; or
	(b)	suggesting that the consumer apply, or assisting the consumer to apply, for an increase to the credit limit of a particular protected investment credit contract with a particular credit provider;
if the contract will be unsuitable for the consumer under subsection (2).
Civil penalty:	2,000 penalty units.
When the contract will be unsuitable
	(2)	The contract will be unsuitable for the consumer if, at the time the licensee provides the credit assistance, it is likely that:
	(a)	the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship; or
	(b)	the contract will not meet the consumer’s requirements or objectives; or
	(c)	if the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence—the consumer is not prepared to lose ownership of that residence should the consumer be unable to comply with the consumer’s financial obligations under the contract; or
	(d)	if the regulations prescribe circumstances in which a protected investment credit contract is unsuitable—those circumstances will apply to the contract;
if the contract is entered into in the period proposed for it to be entered into, or the credit limit is increased in the period proposed for it to be increased.
Information to be used to determine if contract will be unsuitable
	(3)	For the purposes of determining under subsection (2) whether the contract will be unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
	(a)	the information is about a matter that the licensee is required to make inquiries about or verify under section 133EE;
	(b)	at the time the licensee provides the credit assistance:
	(i)	the licensee had reason to believe that the information was true; or
	(ii)	the licensee would have had reason to believe that the information was true if the licensee had made the inquiries or verification that the licensee was required to make under section 133EE.
Modification for particular contracts
	(4)	If the credit contract is a regulated product (home‑secured) investment credit contract, then, for the purposes of determining under subsection (2) whether the contract will be unsuitable, disregard paragraphs (2)(a) and (d).
Contract not unsuitable under regulations
	(5)	The regulations may prescribe particular situations in which a protected investment credit contract is taken not to be unsuitable for a consumer, despite subsection (2).
Offence
	(6)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	100 penalty units, or 2 years imprisonment, or both.
133EI  Prohibition on suggesting to consumers to remain in unsuitable contracts
Prohibition on suggesting to remain in unsuitable contracts
	(1)	A licensee must not provide credit assistance to a consumer by suggesting that the consumer remain in a particular protected investment credit contract with a particular credit provider if the contract is unsuitable for the consumer under subsection (2).
Civil penalty:	2,000 penalty units.
When the contract is unsuitable
	(2)	The contract is unsuitable for the consumer if, at that time the licensee provides the credit assistance:
	(a)	the consumer is, or is likely to be, unable to comply with the consumer’s financial obligations under the contract, or only able to comply with substantial hardship; or
	(b)	the contract does not meet the consumer’s requirements or objectives; or
	(c)	if the consumer’s obligations under the contract are secured by a mortgage over the consumer’s principal place of residence—the consumer is not prepared to lose ownership of that residence should the consumer be unable to comply with the consumer’s financial obligations under the contract; or
	(d)	if the regulations prescribe circumstances in which a protected investment credit contract is unsuitable—those circumstances apply to the contract.
Information to be used to determine if contract is unsuitable
	(3)	For the purposes of determining under subsection (2) whether the contract is unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
	(a)	the information is about a matter that the licensee is required to make inquiries about or verify under section 133EE;
	(b)	at the time the licensee provides the credit assistance:
	(i)	the licensee had reason to believe that the information was true; or
	(ii)	the licensee would have had reason to believe that the information was true if the licensee had made the inquiries or verification that the licensee was required to make under section 133EE.
Modification for particular contracts
	(4)	If the credit contract is a regulated product (home‑secured) investment credit contract, then, for the purposes of determining under subsection (2) whether the contract is unsuitable, disregard paragraphs (2)(a) and (d).
Contract not unsuitable under regulations
	(5)	The regulations may prescribe particular situations in which a protected investment credit contract is taken not to be unsuitable for a consumer, despite subsection (2).
Offence
	(6)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	100 penalty units, or 2 years imprisonment, or both.
Defence
	(7)	For the purposes of subsections (1) and (6), it is a defence if the licensee suggested that the consumer remain in the protected investment credit contract because, after making reasonable inquiries, the licensee reasonably believed that there was no other protected investment credit contract that was not unsuitable for the consumer.
Note:	For the purposes of subsection (6), a defendant bears an evidential burden in relation to the matter in subsection (7) (see subsection 13.3(3) of the Criminal Code).
	(8)	For the purposes of subsection (7), the regulations may prescribe particular inquiries that must be made, or do not need to be made.
Division 3—Licensees that are credit providers under protected investment credit contracts

Comment

Division 3 applies responsible lending obligations to credit providers, but only in relation to protected investment credit contracts. 

The provisions follow the model in the National Consumer Credit Protection Act 2009:

•	Obligation to make inquiries (section 133EJ); cp section 128.

•	Scope of inquiries defined (section 133EK); cp section 130.

•	Prohibition on entering into or increasing the credit limit of unsuitable contracts (section 133EL); cp section 133.

The inquiries that need to be made are discussed in more detail below.	
133EJ  Obligation to make inquiries and verify
		A licensee that is a credit provider must not:
	(a)	enter into a protected investment credit contract with a consumer who will be the debtor under the contract; or
	(b)	increase the credit limit of a protected investment credit contract with a consumer who is the debtor under the contract;
on a day unless the licensee has, within 90 days (or other period prescribed by the regulations) before that day, made the inquiries and verification in accordance with section 133EK.
Civil penalty:	2,000 penalty units.
133EK  The inquiries and verification that must be made
Requirement to make inquiries
	(1)	For the purposes of section 133EJ, the licensee must:
	(a)	make reasonable inquiries about the consumer’s requirements and objectives in relation to the contract; and
	(b)	if the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence—inquire whether the consumer is prepared to lose ownership of that residence should the consumer be unable to comply with the consumer’s financial obligations under the contract; and
	(c)	make reasonable inquiries about the consumer’s financial situation; and
	(d)	take reasonable steps to verify the consumer’s financial situation; and
	(e)	make any inquiries prescribed by the regulations about any matter prescribed by the regulations; and
	(f)	take any steps prescribed by the regulations to verify any matter prescribed by the regulations.
Civil penalty:	2,000 penalty units.
	(2)	The regulations may prescribe particular inquiries or steps that must be made or taken, or do not need to be made or taken, for the purposes of paragraph (1)(a), (b), (c) or (d).
Modification for particular contracts
	(3)	If the contract is a regulated product (home‑secured) investment credit contract, then disregard paragraphs (1)(c), (d), (e) and (f).

Question 

Section 133EK imposes a requirement to make inquiries as part of the responsible lending obligations that apply to protected investment credit contracts. 

Different obligations apply according to the nature of the underlying investment and whether the credit contract is therefore a regulated product (home‑secured) investment credit contract or an unregulated product investment credit contract.  This distinction is drawn as financial products offered by persons authorised by the Corporations Act 2001 are already subject to significant regulation. 

If the contract is an unregulated product investment credit contract then the obligation is to make inquiries into: 

•	the consumer’s requirements and objectives; 

•	whether the consumer is prepared to lose ownership of their residence where it is security for the debt should they be unable to meet the repayments under the contract;

•	reasonable inquiries about the consumer’s financial situation; and

•	reasonable verification of the consumer’s financial situation.

If the contract is a regulated product (home‑secured) investment then the obligation is to only make inquiries into: 

•	the consumer’s requirements and objectives; and 

•	whether the consumer is prepared to lose ownership of their (secured) residence should they be unable to meet the repayments under the contract.

The provider of credit assistance is required to make inquiries into whether the consumer is prepared to lose ownership of their (secured) residence should they be unable to meet the repayments under the contract. The obligations has been framed in this way in order to allow borrowers to use their home as security where they aware of, and have acknowledged, the risk of losing their residence.

Stakeholders’ views are sought on the nature of the proposed inquiries in respect of each class of investment contracts, including whether the obligation in relation to making inquiries in respect of the borrower’s residence is appropriately framed.	
133EL  Prohibition on entering, or increasing the credit limit of, unsuitable contracts
Prohibition on entering etc. unsuitable contracts
	(1)	A licensee that is a credit provider must not:
	(a)	enter into a protected investment credit contract with a consumer who will be the debtor under the contract; or
	(b)	increase the credit limit of a protected investment credit contract with a consumer who is the debtor under the contract;
if the contract is unsuitable for the consumer under subsection (2).
Civil penalty:	2,000 penalty units.
When the contract is unsuitable
	(2)	The contract is unsuitable for the consumer if, at the time it is entered into or the credit limit is increased:
	(a)	it is likely that the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship; or
	(b)	the contract does not meet the consumer’s requirements or objectives; or
	(c)	if the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence—the consumer is not prepared to lose ownership of that residence should the consumer be unable to comply with the consumer’s financial obligations under the contract; or
	(d)	if the regulations prescribe circumstances in which a credit contract is unsuitable—those circumstances apply to the contract.
Information to be used to determine if contract will be unsuitable
	(3)	For the purposes of determining under subsection (2) whether the contract will be unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
	(a)	the information is about is about a matter that the licensee is required to make inquiries about or verify under section 133EK;
	(b)	at the time of the contract is entered into or the credit limit is increased:
	(i)	the licensee had reason to believe that the information was true; or
	(ii)	the licensee would have had reason to believe that the information was true if the licensee had made the inquiries or verification that the licensee was required to make under section 133EK.
Modification for particular contracts
	(4)	If the credit contract is a regulated product (home‑secured) investment credit contract, then, for the purposes of determining under subsection (2) whether the contract will be unsuitable, disregard paragraphs (2)(a) and (d).
Contract not unsuitable under regulations
	(5)	The regulations may prescribe particular situations in which a protected investment credit contract is taken not to be unsuitable for a consumer, despite subsection (2).
Offence
	(6)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	100 penalty units, or 2 years imprisonment, or both.
133EM  Involvement in contraventions of the Corporations Act
		If:
	(a)	a licensee that is a credit provider either:
	(i)	enters into a protected investment credit contract with a consumer who will be the debtor under the contract; or
	(ii)	increases the credit limit of a protected investment credit contract with a consumer who is the debtor under the contract; and
	(b)	the consumer’s obligations under the contract are or will be secured by a mortgage over the consumer’s principal place of residence; and
	(c)	the consumer uses the credit provided under the contract wholly or partly to acquire a financial product from a person; and
	(d)	the person contravenes section 911A or 911B of the Corporations Act 2001 (requirement to hold an Australian financial services licence) in relation to providing the financial product to the consumer;
then the licensee must not be involved in that contravention.
Civil penalty:	2,000 penalty units.
24  At the end of section 179
Add:
	(8)	If:
	(a)	the defendant is a credit provider who has contravened section 133EM; and
	(b)	the plaintiff, or ASIC on behalf of the plaintiff, applies for an order under this section to let the plaintiff reside in the plaintiff’s place of residence to prevent or reduce loss or damage suffered, or likely to be suffered, by the plaintiff vacating the place;
then, without limiting the powers of the court under this section, the court must consider the order appropriate to prevent or reduce the loss or damage and make the order unless the court is satisfied that the order would adversely affect a person other than the debtor and the defendant.

Comment 

The effect of section 133EM and the amendment to section 179 is to introduce a presumption that a court should make an order against a credit provider enabling a consumer to remain in their place of residence where:

•	credit is used to acquire a financial product from a person; and

•	the credit provider is knowingly involved in a contravention of section 911A or section 911B of the Corporations Act (that is, the requirement to hold an Australian financial services licence).

Section 133EM refers to a contravention of section 911A or section 911B of the Corporations Act. This approach provides, in practice, for a specific remedy in the National Consumer Credit Protection Act where a person contravenes section 911A or 911B of the Corporations Act, but does not alter the substantive elements of the offence between the different provisions in each Act. 
	
25  Subsection 13(2)
Omit “wholly or” (wherever occurring).
26  Subsection 13(3)
Omit “wholly or”.
27  Paragraph 170(1)(a) of the National Credit Code
Repeal the paragraph, substitute:
	(a)	the goods are hired predominantly for one or more of the following purposes:
	(i)	personal purposes;
	(ii)	domestic purposes;
	(iii)	household purposes; and
28  Subsection 170(4) of the National Credit Code
Repeal the subsection, substitute:
Purposes for which goods are hired
	(4)	For the purposes of this Part, goods are hired predominantly for personal, domestic or household purposes if:
	(a)	more than half of the goods are intended to be used for one or more of those purposes; or
	(b)	in the case where the same goods are intended to be used for different purposes—the goods are intended to be most used for one or more of those purposes.
29  After section 203B of the National Credit Code
Insert:
203C  Exemptions for investment credit contracts
		The following provisions do not apply in relation to investment credit contracts:
	(a)	sections 14 to 75;
	(b)	section 82 to 168.

Comment 

The effect of this provision is that the unjust contract provisions in sections 76 to 81 of the National Credit Code apply to all investment credit contracts. The remaining provisions in the Code will not apply to investment credit contracts (other than definitions and machinery provisions).
	
30  Subsection 204(1) of the National Credit Code
Insert:
investment credit contract has the same meaning as in subsection 133EB(2) of the National Credit Act.

Schedule 4—Private lending
Part 1—Main amendments
National Consumer Credit Protection Act 2009
1  Paragraph 5(1)(d) of the National Credit Code
Repeal the paragraph, substitute:
	(d)	either or both of the following apply:
	(i)	the credit provider provides, or will provide, the credit in the course of, as part of or incidentally to, a business carried on in this jurisdiction by the credit provider;
	(ii)	a person acts as an intermediary between the credit provider and the debtor in relation to the contract.
2  Subsection 5(2) of the National Credit Code
Repeal the subsection.
3  Paragraph 170(1)(c) of the National Credit Code
Repeal the paragraph, substitute:
	(c)	either or both of the following apply:
	(i)	the lessor hires the goods in the course of, as part of or incidentally to, a business carried on by the lessor in this jurisdiction;
	(ii)	a person acts as an intermediary between the lessor and the lessee in relation to the lease.

Comment 

The amendments to sections 5 and 170 of the Code extend the definition of regulated contracts to include respectively credit contracts and consumer leases where the credit provider or lessor:

•	is a private individual who is not in the business of providing credit or consumer leases; 

•	where the contract is arranged by an intermediary (rather than directly between the credit provider or lessor and the consumer).
It is proposed that regulations will modify the licensing obligations for private credit provider similar to the model already in place in respect of special purpose funding entities (see Credit Regulations 23B and 23C, and Schedule 3 – Modifications - special purpose funding entity). 

A draft of these regulations has been circulated for comment with this Bill. In general terms items 16 and 17 in the regulations implement this proposal by:

•	Amending the definition of special purpose funding entity to include a ‘credit activity investor’.

•	Introducing a definition of credit activity investor as an individual (or other small entity) who only engages in credit activities as a credit provider or lessor in accordance with a servicing agreement with an intermediary.

Under this model a credit activity investor would be exempt from the need to hold an Australian credit licence provided:

•	They are a member of an ASIC-approved External Dispute Resolution scheme (so that they will be contractually obliged to comply with decisions of the scheme).
 
•	The intermediary is the holder of an Australian credit licence. 

•	There is an agreement between the intermediary and the private credit providers and private lessors.

A credit contract will therefore still be unregulated where, for example, a private individual who is not in the business of providing credit arranges a credit contract directly with the borrower. 	
4  Subsection 170(2) of the National Credit Code
Repeal the subsection.

Part 2—Other amendments
National Consumer Credit Protection Act 2009
5  Paragraphs 9(a) and (b)
Repeal the paragraphs, substitute:
	(a)	acts as an intermediary (whether directly or indirectly) between a credit provider and a consumer wholly or partly for the purposes of:
	(i)	securing a contract between the credit provider and the consumer, being a contract that, if paragraph 5(1)(d) of the National Credit Code were disregarded, would be a credit contract; or
	(ii)	increasing the credit limit of credit contract between the credit provider and the consumer; or
	(b)	acts as an intermediary (whether directly or indirectly) between a lessor and a consumer wholly or partly for the purposes of:
	(i)	securing a lease between the lessor and the consumer, being a lease that, if paragraph 170(1)(c) of the National Credit Code were disregarded, would be a consumer lease; or
	(ii)	extending the term of a consumer lease between the lessor and the consumer.
6  Subsection 204(1) of the National Credit Code
Insert:
acts as an intermediary has the same meaning as in section 9 of the National Credit Act.

Schedule 5—Consumer leases
Part 1—Main amendments
National Consumer Credit Protection Act 2009
1  Paragraph 170(1)(b) of the National Credit Code
Repeal the paragraph, substitute:
	(b)	a charge is or may be made for hiring the goods; and
	(ba)	any of the following apply:
	(i)	the charge for hiring the goods, together with any other amount payable under the consumer lease, exceeds the cash price of the goods;
	(ii)	the lease is a regulated fixed term lease;
	(iii)	the lease is a regulated indefinite lease; and
2  After section 170 of the National Credit Code
Insert:
170A  Regulated fixed term leases and regulated indefinite leases
	(1)	A consumer lease is a regulated fixed term lease if it satisfies the following:
	(a)	the term of the lease is for a fixed period;
	(b)	at the time of entering into the lease, the lessor or a prescribed person has the requisite belief that the lessee wants to use the goods (whether while those goods are hired under the lease or otherwise) for a fixed, minimum or approximate period (the use period) that is longer than the term of the lease;
	(c)	if the term of the lease had instead been for the use period, the charge for hiring the goods, together with any other amount payable under the lease, would have exceeded the cash price of the goods.
	(2)	A consumer lease is a regulated indefinite lease if it satisfies the following:
	(a)	the term of the lease is for an indefinite period;
	(b)	at the time of entering into the lease, the lessor or a prescribed person has the requisite belief that the lessee wants to use the goods (whether while those goods are hired under the lease or otherwise) for a fixed, minimum or approximate period (the use period);
	(c)	if the term of the lease had instead been for the use period, the charge for hiring the goods, together with any other amount payable under the lease, would have exceeded the cash price of the goods.
	(3)	If, at the time of entering into a consumer lease, the lessor or a prescribed person has the requisite belief that the lessee wants to use the goods (whether while those goods are hired under the lease or otherwise) for an indefinite period, then:
	(a)	if the term of the lease is for a fixed period—the lease is a regulated fixed term lease; and
	(b)	if the term of the lease is for an indefinite period—the lease is a regulated indefinite lease.
	(4)	If:
	(a)	a lessee enters into a regulated fixed term lease (the relevant lease) with the lessor; and
	(b)	at the time of entering into the relevant lease, the lessor or a prescribed person has the requisite belief that the lessee wants to use the goods (whether while those goods are hired under the relevant lease or otherwise) for a fixed, minimum or approximate period (the use period) that is longer than the term of the relevant lease; and
	(c)	during the use period, the lessee enters into one or more consumer leases (the later lease) with the lessor; and
	(d)	the later lease is:
	(i)	for the same goods, or for goods of the same kind, as the relevant lease; and
	(ii)	on the same or similar terms as the relevant lease;
then:
	(e)	if the term of the later lease is for a fixed period—the later lease is a regulated fixed term lease; and
	(f)	if the term of the later lease is for an indefinite period—the later lease is a regulated indefinite lease.

Questions

Section 170A extends the definition of consumer leases to include short-term leases and indefinite term leases that are currently exempt under subsection 171(2). 

Both these classes of consumer leases will be regulated where the following criteria are met: 

•	at the time of entering into the lease, the lessor knew, or could have established through reasonable inquiries, that the consumer wanted the use of the goods for a longer or different period of time (the anticipated period of use); and 

•	the consumer would pay more than the cash price of the goods if they made rental payments for the anticipated period of use (rather than for the term of the lease).
 
This approach therefore retains the requirement that, in order to be regulated, the total of the rental payments must exceed the cash price of the goods, based on the anticipated period of use. 

The drafting of the definition in this way requires a lessor to make reasonable inquiries into the lessee’s intended period of use, and to test the amount payable against this term rather than that provided for in the contract. The policy objective is that that the lessor should not be in a better position (by being a party to an unregulated lease) through making fewer inquiries into where the lessor has failed to make such inquiries.

The approach is consistent with that in section 13 of the National Credit Code, which has operated since 1 July 2010 in relation to the presumption as to the purpose of a credit contract.

Stakeholders’ views are sought on the effectiveness of this approach. In particular views are requested in relation to:

•	whether the Bill should include a definition of the cash price of the goods (given that the existing definition in section 204 of the Code only applies in relation to credit contracts); and

•	whether there is a need to exempt genuine short-term consumer leases (for example, by exempting contracts where the bulk of the repayments are made on receipt of the goods). 	
3  Subsection 171(1) of the National Credit Code
Repeal the subsection.

Part 2—Other amendments
National Consumer Credit Protection Act 2009
4  Subparagraph 199(3)(b)(iv)
Omit “paragraph 170(1)(b)”, substitute “section 170”.
5  Subsection 13(3) of the National Credit Code
Repeal the subsection, substitute:
	(3)	However, the declaration is ineffective if, when the declaration was made, the credit provider or a prescribed person had the requisite belief that the credit was in fact to be applied wholly or predominantly for a Code purpose.
6  Before subsection 170(3)
Insert:
Amount payable under consumer lease
7  Subsection 170(3) of the National Credit Code
Omit “this section”, substitute “this Part”.
8  Subsection 172(3) of the National Credit Code
Repeal the subsection, substitute:
	(3)	However, the declaration is ineffective if, when the declaration was made, the lessor or a prescribed person had the requisite belief that the goods were in fact hired wholly or predominantly for personal, domestic or household purposes.
9  Subsection 204(1) of the National Credit Code
Insert:
regulated fixed term lease: see subsection 170A(1) and paragraphs 170A(3)(a) and (4)(e).
10  Subsection 204(1) of the National Credit Code
Insert:
regulated indefinite lease: see subsection 170A(2) and paragraphs 170A(3)(b) and (4)(f).
11  Subsection 204(1) of the National Credit Code
Insert:
requisite belief: a person has a requisite belief that a matter exists if the person:
	(a)	knows, or has reason to believe, that the matter exists; or
	(b)	would have known, or had reason to believe, that the matter exists if the person had made reasonable inquiries about the matter.

Comment 

This amendment provides a definition of ‘requisite belief’ relevant to the determination of the anticipated period of use (of the leased goods) in section 170A. As discussed in more detail above, the effect is that whether or not a short-term lease or an indefinite term lease is regulated by the National Credit Code will depend on whether at the time of entering into the lease, the lessor knew, or could have established through reasonable inquiries, that the consumer wanted the use of the goods for a longer or different term than that in the contract. 

The amendment would change the wording of sections 13 and 172 by introducing a cross-reference to the definition of requisite belief to be inserted into subsection 204(1); however, the amendment does not alter the effect or operation of these provisions. 

Schedule 6—Anti‑avoidance
Part 1—Main amendments
National Consumer Credit Protection Act 2009
1  After Division 1 of Part 7‑1
Insert:
Division 1A—Avoidance schemes
323A  Prohibition on avoiding this Act or the Transitional Act
Prohibition on avoidance
	(1)	A person must not, either alone or with others, engage in any of the following conduct:
	(a)	enter into a scheme;
	(b)	begin to carry out a scheme;
	(c)	carry out a scheme;
if, having regard to the matters referred to in subsection (3), it would be reasonable to conclude that the purpose, or one of the purposes, of the person engaging in that conduct was to avoid the application of a provision of this Act or the Transitional Act in relation to:
	(d)	the person; or
	(e)	any other person (a connected person) who has, or has had, any connection (whether of a business, family or other nature) with the person.
Civil penalty:	2,000 penalty units.
Meaning of scheme
	(2)	A scheme is:
	(a)	any agreement, arrangement, understanding, promise or undertaking, whether express or implied; or
	(b)	any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
Matters to have regard to
	(3)	For the purposes of subsection (1), the matters are as follows:
	(a)	the manner in which the scheme was entered into or carried out;
	(b)	the form and substance of the scheme;
	(c)	the time the scheme was entered into and the length of the period during which the scheme was carried out;
	(d)	the result in relation to the operation of this Act or the Transitional Act that, but for this Part, would be achieved by the scheme;
	(e)	any change in the financial position of the person, or a connected person, that has resulted, will result, or may reasonably be expected to result, from the scheme;
	(f)	any other consequence for the person, or a connected person, of the scheme having been entered into or carried out;
	(g)	the nature of any connection (whether of a business, family or other nature) between the person and a connected person;
	(h)	any similarities between a credit contract, mortgage, guarantee or consumer lease and a contract that:
	(i)	is between a consumer and the person or a connected person; and
	(ii)	is connected with the scheme;
	(i)	any representation connected with the scheme made by the person, or a connected person, to a consumer;
	(j)	whether the person, or a connected person, before beginning to carry out the scheme, carried on a business of providing credit to which the Code applies or consumer leases;
	(k)	whether the person, or a connected person, before entering a contract with a consumer connected with the scheme, considered the consumer’s ability to comply with the consumer’s financial obligations under the contract;
	(l)	any change in the conduct of a person, or a connected person, following amendments to this Act or the Transitional Act;
	(m)	any other matter prescribed by the regulations;
	(n)	any other relevant matter.
Offence
	(4)	A person commits an offence if:
	(a)	the person is subject to a requirement under subsection (1); and
	(b)	the person engages in conduct; and
	(c)	the conduct contravenes the requirement.
Criminal penalty:	200 penalty units, or 2 years imprisonment, or both.
Presumption of avoidance for certain schemes
	(5)	For the purposes of subsection (1) (but not for the purposes of subsection (4)), if:
	(a)	the person engages in conduct of the kind referred to in paragraph (1)(a), (b) or (c) in relation to a scheme; and
	(b)	the scheme is of a kind prescribed by the regulations or determined by ASIC under subsection (7);
then it is presumed that it would be reasonable to conclude that the purpose, or one of the purposes, of the person engaging in that conduct was to avoid the application of a provision of this Act or the Transitional Act.
	(6)	Subsection (5) does not apply if the person proves that, having regard to the matters referred to in subsection (3), it would not be reasonable to conclude that the purpose, or one of the purposes, of the person engaging in that conduct was to avoid the application of a provision of this Act or the Transitional Act.
	(7)	ASIC may, by legislative instrument, determine a scheme for the purposes of subsection (5).

Question

This Schedule introduces amendments intended to provide a systematic response to avoidance practices, rather than individual responses being developed that address a specific practice after it has come into use in the credit market., 

In summary, the amendments operate as follows:

•	a person is prohibited from beginning or carrying out a scheme for the purpose of avoiding the application of a provision of the Credit Act;

•	purpose is to be determined on the basis of objective factors, rather than the subjective intentions of the person engaged in the scheme;

•	a number of factors are listed as being relevant to the assessment of purpose, including:

–	any representations made to consumers (paragraph (i)), which would include whether products are advertised as credit or loans; and

–	any change in the conduct of a person following amendments to this Act (paragraph (l)), which would include changes in practices or structures to mitigate or avoid the effect of amendments; 

•	a scheme is presumed, other than for criminal proceedings, to be for the purposes of avoidance where it is a scheme of a type prescribed by regulations or ASIC by a legislative instrument (with this approach taken to provide greater regulatory consistency in respect of particular avoidance techniques, by allowing for the onus to be placed on the providers of the scheme, rather than ASIC positively having to establish the purpose in respect of each provider for similarly structured schemes). 

Stakeholders’ views are sought on this approach. 	

Part 2—Other amendments
National Consumer Credit Protection Act 2009
2  Subsection 5(1)
Insert:
scheme: see subsection 323A(2).
3  Section 180 (heading)
Omit “unlawful credit activities”, substitute “particular contraventions”
4  Paragraph 180(1)(a)
Omit “a credit activity”, substitute “conduct”.
5  Paragraph 180(1)(b)
Omit “activity”, substitute “conduct”.
6  At the end of paragraph 180(1)(b)
Add:
	(iv)	section 323A (which is about avoiding the application of this Act or the Transitional Act);
7  Section 323 (after the first paragraph)
Insert:
Division 1A has rules that prohibit schemes that are designed to avoid the application of this Act or the Transitional Act.
8  Subsection 334(1)
Repeal the subsection.
9  Paragraph 334(3)(c)
Omit “(1) or”.
10  Subsection 191(1) of the National Credit Code
Repeal the subsection.

Schedule 7—Miscellaneous amendments
  
National Consumer Credit Protection Act 2009
1  At the end of Division 4 of Part 1‑2
Add:
16A  Things being done predominantly for particular purposes
		A reference in this Act to a thing being done predominantly for particular purposes includes a reference to the thing being done wholly for those purposes.

Schedule 8—Application provisions
  
National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009

[To be drafted.]