Australian Consumer Law and the National Credit

Law

Greg KirkASIC, ACCC and Consumer Protection

Information Session

18 November 2010

Agenda

1. ACL in Financial Services

2. UCT – legal and policy issues

3. ASIC’s regulatory approach

4. New National Credit Laws key elements

5. Responsible Lending

6. Applying the two new laws, a case study on mortgage exit fees

What does ACL mean for ASIC?

• Introduced in 3 tranches– Trade Practices Amendment (Australian Consumer Law) Act

(No. 1) 2010– Trade Practices Amendment (Australian Consumer Law) Act

(No. 2) 2010– Competition and Consumer Legislation Amendment Bill 2010

• A single Australian Consumer Law with multiple regulators

• ASIC retains primary responsibility for financial products and services

Table of old and new sections

ACL Sections Issue or powerNew 12BF to BL Unfair Contract Terms

Existing 12CB Unconscionable conduct - supply financial source

Existing 12CC Unconscionable conduct - in business

Existing 12DB False & Misleading Representation

Existing 12DC False & Misleading Representation - offensive conduct

Existing 12DF Misleading conduct in relation to financial services

New 12GBA-GBB Civil Penalties

New 12GLD Director Disqualification

New 12GY-GYC Substantiation Notice

New 12GLC Public Warning Notice

New 12GNB Non-party Consumer Redress

New 12GX-GXG Infringement Notice

Unfair contract terms

• New provisions in ASIC Act ss12BF-12BM

• Main provision - s12BF. A term of a consumer contract is void if:

– the term is unfair;

– the contract is in standard form; and

– it relates to a financial product or supply of financial services.

Which financial products and financial services?

• Any financial products and financial services (ASIC Act definition):

– Credit

– Banking transaction accounts

– Investment products?

• Except…

– General and life insurance

– Constitutions of companies, MIS, other bodies.

Meaning of unfair?

• A term is unfair if it:– causes significant imbalance in the

parties’ rights and obligations;– is not reasonably necessary to

protect the legitimate interests of the advantaged party; and

– would cause financial or other detriment.

• A court must consider transparency and the contract as a whole.

Exclusions

• A term is not subject to the UCT provisions if it:

– defines the main subject matter of the contract; or

– sets the upfront price; or

– is required or expressly permitted by law.

Examples of unfair terms

• Some potential examples in the legislation:– penalising one party but not the

other for breach or termination;– allowing one party unilaterally to

determine if there has been a breach or to interpret its meaning;

– allowing one party, but not the other, to renew or not renew the contract.

Terms of concern

• A term stating:

“No officer, servant or agent of the company has any authority to vary, add to or omit any of the terms and conditions of the contract or lease”.

• Possible conflict with National Credit Code entitlement to seek hardship variations.

Powers of attorney

• Terms relating to powers of attorney– “In the event of default, the Grantor [Buyer]

irrevocably appoints the Lender and each officer of the Lender severally its attorney with the power to exercise its powers even if the attorney has a conflict of duty in exercising its powers or has a direct interest in the means or result of the exercise of its powers”.

• Extent of lenders ability to negatively influence the financial position of the consumer, above and beyond the level of debt under the loan/lease agreement.

ASIC’s regulatory approach to UCTs

• A new tool for use where appropriate in all of our work

• A measure for addressing particular identified problems

• Possibly different approaches where the questionable term is one off or industry wide

• Current work with industry – projects to cut out boilerplate

National Consumer Credit Protection Act

• Commenced 1 July 2010

• Key elements

– UCCC becomes the NCC

– Licensing for all players

– Regulation of mortgage brokers

– Introduction of Responsible Lending

– Mandatory EDR

Responsible Lending

• Conduct reasonable inquiries about requirements and objectives

• Verify the customer’s financial situation

• Assess the customer’s capacity to repay without substantial hardship

• Do not offer or suggest credit products that are unsuitable

Responsible Lending: Credit Cards

ASIC review of existing practice in relation to credit card issuance and limit increases

Survey of 15 card issuers

Industry practice – high volume, streamlined, little manual intervention

Responsible lending requirements focus on individual assessments

Guidance in RG 209

Resources to Assist

• www.asic.gov.au/credit

• Regulatory Guides and Information Sheets on all key elements

• Downloadable Podcasts

• Subscribe to credit newsletter

• ASIC Infoline – 1300 300 630

Some priorities going forward

• Verification audits in relation to license applications

• Policing the boundary

• Complaints

• Emphases in our BAU activities

– Debt collection, hardship

– Gatekeepers

– Entities new to regulation

Issue based work

• Mortgage Early Exit Fees

• Responsible Lending

– credit cards,

– short term lending,

– home loans especially fringe

• Consumer Credit Insurance

• Book Up

• Debt consolidation

Applying the NCC and the ACL Mortgage Early Exit Fees

• Twin Jurisdiction

– Section 78 of the NCC: unconscionable establishment fees (s78(3)) and unconscionable “fees payable on early termination” (s78(4))

– Unfair Contract Terms: section 12BF of the ASIC Act 2001

Mortgage Early Exit Fees

• 2008 review of mortgage entry and exit fees– ASIC published a report which found that:

• early termination fees on mortgages in Australia were high in comparison with the UK and US;

• some early termination fees could probably not be justified by the underlying cost to the lender;

• but, home loan entry fees in Australia were lower in comparison to those overseas.

Mortgage Early Exit Fees

• Regulatory guidance on early exit fees– 27 June 2010: ASIC released Consultation

Paper CP 135 seeking stakeholder feedback on how ASIC proposes to administer the NCC and UCT provisions as they apply to mortgage early exit fees.

– Consultation period closed on 9 August 2010

– 10 November 2010: Regulatory Guide 220 published setting out ASIC guidance on NCC and UCT provisions.

Mortgage Exit Fees – legal issues

• Deferred Establishment Fees

- for the NCC are they establishment fees or fees payable on early termination

- for the ACL, are they a part of the upfront price

• Two routes to the same outcome – fees that reflect losses caused by the early termination

Mortgage Exit Fees

Provides guidance about:• what is a fee “payable on early termination”?• Types of costs and losses that may be

included in an exit fee• Types of costs and losses which may not be

included in an exit fee• The circumstances in which a lender may

vary an exit fee• How lenders can explain their early exit fees

transparently• Break fees on fixed rate mortgages.

Questions and more information

• Complain to ASIC’s infoline

1300 300 630

emailinfoline@asic.gov.au

• Joint regulatory guidance on UCT and other guidance forthcoming

• Coordinated relationships with fellow regulators

consumerlaw.gov.au