As of 1st of April 2010 lenders, brokers and intermediaries
dealing in consumer credit can now register for an Australian
Credit Licence with ASIC. An Australian Credit Licence is a new
requirement under the National Consumer Credit Protection Act
(National Credit Act) and is required in order to comply with
the Act.
Applications for an Australian Financial Services
Licence (or variation thereto) for existing Issuers and advisers
of margin lending facilities wishing to continue business opened
on the 1st of February 2010 and will remain open until the
30th of June 2010. Businesses failing to apply before the 30th
of June 2010 must cease providing such services, until they
obtain a relevant AFSL (or variation).
The main requirements include:
• The need for issuers and advisers of margin lending facilities
to be licensed by ASIC under an Australian financial services
(AFS) licence;
• That advisers only provide advice that is appropriate
to the client's individual circumstances
• That margin lenders meet new responsible lending requirements
• That consumers have access to external dispute resolution
services
• Clarity around responsibility for notifying clients in
the case of a margin call
Furthermore, the same licensing, conduct and disclosure requirements
that currently apply to financial services will apply to providers
and financial advisers in relation to margin lending facilities.
The changes are part of the Government's plan to regulate credit
nationally and have taken effect from 1 January 2010; however
there is a 12 month transitional period so that the new requirements
will take effect from 1 January 2011. ASIC have also updated
Regulatory Guide 146 Licensing: Training for financial product
advisers and Regulatory Guide 166 Licensing: Financial requirements
in relation to these changes.
Responsible Lending Guidance
ASIC released Regulatory Guide 209 Credit licensing: Responsible
lending conduct obligations in order to assist in the understanding
of ASIC’s expectations in relation to the responsible
lending obligations as credit licensees under the National
Consumer Credit Protection Act 2009 (National Credit Act).
Credit licensees must comply with the responsible lending
conduct obligations in the National Credit Act, and must not
enter into a credit contract with a consumer, suggest a credit
contract to a consumer or assist a consumer to apply for a
credit contract if the credit contract is unsuitable for the
consumer.
Meeting these lending obligations will require the following:
(i) Making reasonable inquiries about the consumer’s
financial situation, and their requirements and objectives - Reasonable inquiries must be made with consideration of
the potential impact on the consumer, the complexity of the
contract, the capacity of the consumer and whether the consumer
is or isn’t an existing customer. What amounts to a
reasonable level of inquiries depends on the nature of the
service offered however reasonable enquiries about a consumer’s
financial situation and their requirements and objectives
must be made.
(ii) Taking reasonable steps to verify
the consumer’s
financial situation.
(iii) Making a preliminary or final
assessment about whether the credit contract is “not unsuitable’ for
the consumer - Making a final or preliminary assessment will require
active steps to be taken to form a reasonable view as to whether
the contract is ‘not unsuitable’ for the consumer
that is expected to be based on the reasonable inquiries made
to the consumer.
(iv) If requested by the consumer, a written copy of the preliminary
assessment or final assessment must be provided.
Duty to prevent insolvent Trading
Late in 2009 ASIC released Consultation Paper 124 as a guide
for directors regarding their duty to prevent insolvent trading.
The paper outlines the key principles which should be applied
by directors to ensure compliance with this key duty. These
include remaining informed about the financial affairs of the
company, regular assessment of the company’s solvency,
immediate identification of concerns, obtaining advice from
suitably qualified persons and acting in a timely manner, and.
Directors are required to investigate financial difficulties
from the moment there are reasonable grounds to suspect that
these difficulties may be present. ASIC will take the following
potential indicators of insolvency into consideration when
assessing solvency of a company:
• A company history of trading losses
• Any difficulties concerning the cash flow
• Difficulties in the selling of stock and collection
of owed debt
• Any occurrence of creditors not being paid on the agreed
trading terms
ASIC recommends that a director seek professional advice
if any of the above indicators become apparent.
Australian Consumer Law Reforms
Parliament passed the Trade Practices Amendment (Australian
Consumer Law) Bill 2009 (Cth) (ACL Bill) on 17 March 2010.
This Bill is the first of two reforms aiming to create a unified
national consumer law (ACL) applying to consumer transactions
in all Australian Jurisdictions. The ACL Bill:
(i) introduces new civil pecuniary penalties for contravention
of certain consumer protection provisions
This penalty scheme is very likely to increase the actions
being commenced by the ACCC, especially concerning unconscionable
conduct including false or misleading representations, single
figure pricing and misleading and deceptive conduct. This
is because the penalty scheme allows the ACCC to commence
court actions and as the onus of proof shifts from “beyond
reasonable doubt” in criminal proceedings to the “balance
of probabilities” under the new civil penalty regime.
(ii) prohibits unfair contract terms in standard form consumer
contracts
A term in a consumer contract will be void if the term is "unfair" and
the contract is a standard form contract. There will be a
rebuttable presumption that the term is not reasonably necessary
to protect the business’ legitimate interests. This
means that a business will need to demonstrate on the balance
of probabilities that its legitimate interest is sufficiently
compelling to overcome any detriment that may be caused to
the consumer.
Equivalent changes have been passed for financial services
and are mirrored in amendments to the Australian Securities
and Investments Commission Act 2001 (ASIC Act). Under the
ASIC Act amendments, such a term will be void where the standard
form consumer contract is for a financial product or financial
service.
All contracts will be presumed to be standard form contracts
unless demonstrated otherwise. Courts will consider the bargaining
power of the parties, pre-preparation of contracts, negotiating
potential etc in deciding whether a contract is standard form
or not. A term will be unfair if it causes significant imbalance
in the parties’ rights or obligations, is not reasonably
necessary to protect the legitimate interests of the advantaged
party and causes detriment (financial or otherwise). Examples
of unfair terms include those which enable avoidance/limitation
of performance, variations, renewals or terminations by only
one party etc.
(iii) introduces new enforcement powers for the Australian
Competition and Consumer Commission (ACCC) and the Australian
Securities and Investments Commission (ASIC)
Under the new penalty scheme ACCC and ASIC will be empowered
to
- Apply for a court order disqualifying a person from managing
corporations following a contravention of certain consumer
protection provisions of the TPA.
- Seek a court order to redress loss or damage to consumers
arising out of contravention of certain consumer protection
provisions.
- Issue "substantiation notices" requiring the recipient
to provide information and/or documents which would be capable
of substantiating representations made by the recipient.
- Issue "infringement notices" containing a financial
penalty for suspected contraventions of certain civil penalty
provisions of the TPA's consumer protection law. Although
payment is voluntary, if paid, it will avoid the regulator
bringing court proceedings in relation to that conduct.
- Issue "public warning notices" relating to consumer
protection in certain circumstances.
These wide-ranging reforms will have a significant impact
on all businesses and will require companies to conduct
reviews of their business-consumer agreements, standard
form terms and conditions, document retention policies
and procedures that are currently in place dealing with
potential investigation by a regulator.
The second proposed reform the Trade Practices Amendment
(Australian Consumer Law) Bill (No 2) 2010 was introduced
into the House of Representatives on 17 March 2010. This
Bill aims to provide for a national law that deals with
statutory consumer guarantees, unsolicited sales practices,
lay-by agreements, product safety and manufacturer liability.
It is anticipated that the consumer law reforms will take
full effect on 1 January 2011.
Simplified product disclosure
Draft regulations have recently been released by Treasury
regarding simplified disclosure in relation to managed funds
and superannuation fund investments. The objective is to make
Product Disclosure Statements (PDSs) standardised and easy
to understand, at a maximum length of 6 A4 pages (minimum
9 point font). Issuers will therefore need to consider what
additional information investors should receive and in what
format this can be provided to them, once these regulations
are passed. The Government has published sample PDSs for superannuation
and managed fund investments to demonstrate the proposed content
requirements and format. The new PDS regime will only apply
to MISs which invest mainly in financial assets, initially.
The new PDSs will be required to contain prescribed sections/headings
(set out in the prescribed order) and containing certain prescribed
information. Briefly, the format for MISs will require the
following:
1. About the RE – summary of RE, investment manager,
key benefits of investing in MIS and what it is.
2. How to Invest – overview of minimum investment amount,
fund assets/valuations, how to invest more or redeem investment
etc.
3. Benefits of Investing with RE – summary of significant
features and benefits of the MIS (and any socially responsible/ethical
considerations).
4. Risks – inclusion of a number of prescriptive statements,
and a summary of the key risks including past performance/no
guarantee disclaimer etc.
5. How we invest your money – summary of investment
options, asset classes and strategic asset allocation, investment
return objective, minimum suggested timeframe for holding
the investment, risk level of the investment, and warnings.
6. Fees & Costs – various prescribed warnings, and
inclusion of a prescribed fee table showing key fees, maximums
under trust deed, performance fees (but not how they are calculated),
worked example (including buy-sell spread) based on a $100,000
investment for 9 years with an additional $5,000 invested
per quarter. Any other legally required fee info is to be
incorporated by reference.
7. Tax – warning about tax consequences, and status
of the investment and recommendation to seek professional
tax advice.
8. How to apply – summary re how to invest and note
the cooling-off period, and how to complain.