Keeping up with the National Credit Code – What’s New?
By-line: Increased ASIC powers, design and distribution obligations and a new EDR scheme are all changes to the regulation of credit in Australia over the past 12 months. There is great change in the consumer credit space post the Banking Royal Commission.
There have been a number of significant updates in consumer credit over the past 12 months, many of which were enacted as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This article will provide you with a high-level overview of the main changes to the National Consumer Credit Protection Act 2009 (NCCP Act) to allow you and your business to be up to date on changes.
ASICs Product Intervention Power
The concept of a product intervention power for ASIC was introduced by the Financial System Inquiry’s Final Report in December 2014, as a tool of last resort or pre-emptive measure where there is a risk of significant detriment to a class of consumers. The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill came into force on 5 April 2019.
From 6 April 2019, ASIC has the power to make orders requiring a person to not engage in specified conduct in relation to a financial product if ASIC is satisfied that the financial product has resulted in, will, or is likely to result in significant detriment to retail clients or consumers. For the purposes of the product intervention power, a ‘financial product’ is defined to be an ASIC Act financial product, which includes credit products.
For the NCCP Act, the power applies to all products that may be provided by a person in the course of engaging in a credit activity or proposed credit activity, such as credit contracts, mortgages and consumer leases. Amendments to the Corporations Act enable the Corporations Regulations or ASIC to declare products to be ‘financial products’ for the purposes of the product intervention power. However, the amendments to the NCCP Act do not contain an equivalent provision.
ASIC is required to consult with affected persons prior to making the product intervention order, which ASIC has been doing by way of releasing consultation papers with draft legislative instruments.
On 9 July 2019, ASIC released Consultation Paper 316 (CP 316) which outlines their proposal to use their product intervention power for the first time to address the significant consumer detriment arising from some short term lending models. On 12 September 2019, ASIC registered a legislative instrument prohibiting credit providers and associates from providing short term credit and charging for additional or collateral services.
This legislative instrument is currently being challenged in the Federal Court by Cigno Pty Ltd, one of the two businesses targeted by ASIC in the development of the order. Cigno argues that the model ASIC is regulating is not in itself a financial product under the ASIC Act, the case is scheduled for a hearing on 30 March 2020.
On 22 August 2019, ASIC released Consultation Paper 322 (CP 322) which outlines their second proposed use of the product intervention power in relation to over-the-counter (OTC) binary options and Contracts for Difference (CFDs). The proposed draft legislative instruments will ban the issue of OTC binary options to retail clients, prohibit the issue of CFDs to retail clients that do not meet prescribed conditions and prohibit issuers of CFDs providing certain inducements to retail clients to open a CFD trading account or trade in CFDs with the issuer.
On 1 October 2019, ASIC released Consultation Paper 324 (CP 324) which outlines their third proposed use of the product intervention power in relation to add-on financial products sold by caryard intermediaries. The proposed draft legislative instrument intends to introduce a deferred sales model, as well as a number of other additional obligations including an online consumer roadmap.
Design and Distribution Obligations
The new design and distribution obligations require offerors (issuers and certain sellers) of financial products intended for retail clients to consider the intended clients of their products, design products to be appropriate for their intended clients and to take steps to ensure that products are not offered to persons outside their target market.
The obligations apply to financial products that are offered under a disclosure document or Product Disclosure Statement, or which are issued to retail clients. As with the product intervention power, the design and distribution obligations apply to ASIC Act financial products, meaning they also apply to credit facilities.
The objective of the new obligations is to assist consumers to obtain appropriate financial products by requiring issuers to consider their target market in the design, market and distribution of financial products.
The key obligations for regulated persons are:
- - for financial product offerors, to prepare a ‘target market determination’ in relation to a product, which identifies the class of persons the product is directed towards, limitations on the product’s distribution and conditions requiring a review of the target market determination;
- - to not engage in any retail product distribution activity unless and until a target market determination has been made;
- to take reasonable steps to ensure that a financial product is distributed consistently with its target market determination; and
- - to notify ASIC upon becoming aware of significant dealings in a financial product that are inconsistent with the target market determination.
The target market determination must be made so that if the product is issued or sold to a retail client in accordance with the target market determination, the product is consistent with the likely objectives, financial situation and needs of the client. Although this obligation is phrased as if an offeror identifies a target market given particular product specifications, in practice offerors will need to identify their target retail clients at the outset and then design the financial product to be appropriate to those clients.
If ASIC is satisfied that a design and distribution obligation has been contravened, it may order a regulated person to not engage in specified conduct in relation to retail clients. However, prior to making such an order, ASIC must hold a hearing and allow any interested person to make submissions (unless any delay in making the order would be prejudicial to the public interest, in which case ASIC may make a 21 day interim order).
The Australian Financial Complaints Authority (AFCA) began operations as the sole financial services external dispute resolution (EDR) scheme on 1 November 2018, replacing the Credit and Investments Ombudsman (CIO), Financial Ombudsman Service (FOS) and the Superannuation Complaints Tribunal (SCT).
In its first 12 months, AFCA received 73,272 complaints, a significant increase on the 55,000 complaints estimated and the number of complaints received from the former EDR schemes in the previous year.
AFCA’s powers are similar to those under the previous schemes. However, there are a number of differences. AFCA has an increased monetary limit of $1 million and a compensation cap of $500,000 for most non-superannuation disputes. There are no monetary limits and compensation caps for disputes about whether a guarantee should be set aside where it has been supported by a mortgage or other security over the guarantor’s primary place of residence. These increased monetary limits have contributed to the $185 million in compensation awarded to consumers in the first 12 months of operations.
AFCA has also relaxed the definition of small business, so that businesses with fewer than 100 employees at the time of the act or omission by the financial firm that gave rise to the complaint can access AFCA. Although small business claims will not involve NCC-regulated credit, credit providers and credit assistance providers should be aware of their obligations towards small businesses. In its first twelve months, AFCA received 3,869 complaints from small businesses, primarily relating to misleading product or service information.
Similar to the previous EDR schemes, there is no clear right to appeal non-superannuation related AFCA determinations. Although appeal rights have not changed since the previous scheme, a number of issues are raised. Unlike the previous scheme, if financial firms are not satisfied with how an EDR scheme is approaching complaints, the financial firm does not have the ability to change membership to another EDR scheme.
Additionally, AFCA now has the power to publish its determinations, as well as the names of the financial firms involved, unless there is a compelling reason not to do so. This can create serious reputational and financial effects on firms, as the publications effectively create precedent for other customers to bring similar successful claims.
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 introduced substantial changes to the civil penalty regime in the NCCP Act. It only applies to contraventions of civil penalty provisions that occur on or after the commencement date relevant to the applicable section.
From the commencement of the amendments, the maximum pecuniary penalty for natural persons is the greater of:
(a) the number of penalty units provided; or
(b) three times the benefit derived or detriment avoided from the contravention (if ascertainable).
The maximum pecuniary penalty for bodies corporate is the greater of:
(a) ten times the number of penalty units provided;
(b) three times the benefit derived or detriment avoided because of the contravention (if ascertainable); or
(c) either 10% of annual turnover of all related bodies corporate for the 12 month period ending at the end of the month in which the contravention occurred or began to occur, or 1 million penalty units (whichever the lesser).
Since the amendments, the NCCP Act expressly states that, in determining the pecuniary penalty to impose, the court must take into account all relevant matters, including:
(a) the nature and extent of the contravention;
(b) the nature and extent of any loss or damage suffered because of the contravention;
(c) the circumstances in which the contravention took place; and
(d) whether the person has previously been found by a court (Australian or foreign) to have engaged in similar conduct.
The amended legislation also made changes to contraventions of criminal penalty provisions that occur on or after the commencement date relevant to the applicable section. From the commencement of the amendments, the maximum pecuniary penalty for individuals is the greater of:
a) the monetary penalty specified;
b) if only a term of imprisonment for less than 10 years is specified – either imprisonment for the time period specified in the provision or a fine for the number of penalty units equal to 10 times the number of months of imprisonment specified; or
c) if only a term of imprisonment for 10 years or more is specified – either imprisonment for the time period specified in the provision or a fine for the greater of 4,500 penalty units or three times the benefit derived from (or detriment avoided by) the contravention.
The maximum pecuniary penalty for bodies corporate is the greater of:
a) ten times the monetary penalty specified;
b) if only a term of imprisonment less than 10 years is specified - a fine for the number of penalty units equal to 100 times the term of imprisonment specified (in months); and
c) if only a term of imprisonment of 10 years or more is specified, a fine the greater of 45,000 penalty units ($945,000), three times the benefit derived or detriment avoided because of the offence or 10% of the annual turnover of the body corporate for the 12 month period ending at the end of the month in which the body corporate committed or began to commit the offence.
Andrea Beatty and Andrew Smith’s 6th edition of the Annotated National Credit Code, which provides a comprehensive update of the NCC, responsible lending and other consumer credit topics was published in mid-November 2019 and is available for order here.
- Andrea Beatty
- Chelsea Payne
- Piper Alderman
- T: 61 2 9253 9999
- W: www.piperalderman.com.au