NATIONAL CONSUMER CREDIT PROTECTION AMENDMENT REGULATIONS 2010 (NO. 3) (SLI NO 137 OF 2010) EXPLANATORY STATEMENT

NATIONAL CONSUMER CREDIT PROTECTION AMENDMENT REGULATIONS 2010 (NO. 3) (SLI NO 137 OF 2010)

ATTACHMENT

Details of the National Consumer Credit Protection Amendment Regulations 2010 (No. 3)

Chapter 1 Preliminary

Regulation 1 – Name of Regulations

This regulation provides that the name of the Regulations is the National Consumer Credit Protection Amendment Regulations 2010 (No. 3).

Regulation 2 – Commencement

This regulation provides for the Regulations to commence on the day after they are registered.

Regulation 3 – Amendment of National Consumer Credit Protection Regulations 2010

This regulation provides that Schedule 1 amends the Principal Regulations.

Schedule 1 – Amendments

Item 1 inserts a definition of exempt special purpose funding entity. The term is introduced into a number of the provisions in the Regulations so that a person can be exempt under the conditions specified in proposed regulation 23B where they are engaging in credit activities.

Item 2 inserts a definition of fund raising special purpose entity. The term is relevant to the operation of the exemption in proposed regulation 23B, and is to be defined in accordance with the modification of the Credit Act to be effected by item 3.2 of Schedule 3.

Item 2 also inserts a definition of inappropriate person, which will be relevant for the purposes of determining whether or not a special purpose funding entity meets the criteria to be exempt under Regulation 23B. The provision ensures that a person cannot have a role in the funding entity as director or secretary (if the entity is a body corporate) or as a trustee (if the entity is a trust) where they may be ineligible to fill that role if the entity had to hold an Australian credit licence (ACL) or be registered in its own right.

Item 3 inserts a definition of non-standard business premises. The effect of the item is to change the location of this term from being a phrase used within the definition of unsolicited contact to a term with a specific meaning. This improves the intelligibility of the definition of unsolicited contact, given other changes to that definition.

Item 4 inserts a definition of securitisation entity. This term is relevant to the operation of the exemption in Regulation 23C, and is to be defined in accordance with the modification of the Credit Act to be effected by item 3.4 of Schedule 3.

Item 5 inserts a definition of servicing agreement. This term is relevant to the operation of the exemptions in Regulations 23B and 23C, and is to be defined in accordance with the modification of the Credit Act to be effected by item 3.4 of Schedule 3

Item 6 substitutes a definition of unsolicited contact. That definition is relevant to determining whether or not a person can rely on the exemptions under regulation 23.

The substituted definition introduces the following changes:

• the definition of unsolicited contact is inclusive rather than exhaustive. This means that contact which is not specifically referred to in the definition but still comes within the ordinary meaning of the phrase (such as door to door canvassing) is unsolicited, and, therefore, persons who contact consumers in this way is not exempt; and

• it includes paragraph (b) of the definition, which specifically provides that contact with a consumer more than three months after they provided their contact details is unsolicited.

Item 7 substitutes an amended version of regulation 7A When a licence may be granted – carried over instruments to ensure it operates as intended. New regulation 7A adds an additional requirement that the Australian Securities and Investments Commission (ASIC) must consider when determining whether to grant a licence to non- Authorised Deposit-taking Institutions (ADIs) under section 37 of the Credit Act. It provides that ASIC must not grant a licence to a credit provider, lessor, mortgagee or beneficiary of a guarantee who intends to enter new contracts after 1 July 2010, unless they elect to apply for a licence to cover activities in relation to both their COIs and new contracts. This means that if a person with COIs intends to offer new contracts after 1 July 2010, they have to apply for a licence which would cover all of their contracts uniformly. That is, they can not choose to have the modified regime apply to their COIs and the licensing regime apply to their new contracts.

Item 8 inserts a new regulation 9A, which has the effect of including additional standard conditions applying to any licensee who is a party to a servicing agreement with a special purpose funding entity. The additional conditions require such licensees to notify ASIC of the following matters:

• the special purpose funding entities that they have a servicing agreement with;

• when they cease to be a party to such a servicing agreement; and

• any attempt by a person who is in a position to control or influence a special purpose funding entity to direct the licensee to act inconsistently with either their licence conditions or the credit legislation.

Item 9 amends Regulation 19, which sets out the eligibility requirements for an auditor who is preparing a report in relation to the conduct of a licensee, and, in general terms, requires the person to be a registered company auditor. The effect of the amendment is to limit these eligibility requirements to an auditor who is preparing a trust account audit of a licensee who provides credit services (as required by section 100 of the Credit Act). A person who prepares other types of audit reports (for example, under subsection 49(3) of the Credit Act) does not have to meet these eligibility requirements. It is appropriate that there is flexibility in who can be appointed in these circumstances, as the content of such reports is potentially diverse, and may require different skills or qualifications from those held by a registered company auditor.

Items 10 to 13, 15, 18 and 21 to 29 amend a number of existing exemptions in the Principal Regulations consequent on the introduction of an exemption for special purpose funding entities as inserted by item 20. The structure of some of the existing exemptions is that they only apply where a person is engaging in credit activities in relation to or on behalf of a licensee or registered person. The effect of these items is that the exemption would apply where the third party is a licensee, a registered person or a special purpose funding entity. The nature of each amendment is set out below.

Item 10 amends the exemption in subregulation 20(11) for organisations engaging in credit activities as an incidental aspect of providing services to members, so that the exemption applies where the organisation engages in conduct in relation to a licensee, registered person or a special purpose funding entity.

Item 11 amends the exemption in subregulation 20(12) for charitable bodies engaging in credit activities, so that the exemption applies where the body engages in conduct in relation to a licensee, registered person or a special purpose funding entity.

Item 12 amends the exemption in regulation 21 for debt collectors engaging in credit activities, so that the exemption applies where they engage in conduct on behalf of a licensee, registered person or a special purpose funding entity.

Item 13 amends the exemption in regulation 22 for third parties who send out notices or repossess goods, so that the exemption applies where they engage in that conduct on behalf of a licensee, registered person or a special purpose funding entity.

Items 14 and 16 amends the headings for regulations 23 and 23A, respectively. This ensures consistency between the heading and the effect of the regulations, as these exemptions are not restricted to persons who only provide credit services and also cover, in each case, persons who engage in credit activities on behalf of a licensee or registered person. The headings are changed as follows:

• Regulation 23: from Persons exempt from requiring a licence — providers of point of sale credit services to Persons exempt from requiring a licence — suppliers of goods or services; and

• Regulation 23A: from Persons exempt from requiring a licence — providers of point of sale credit services for a credit card to Persons exempt from requiring a licence — suppliers of goods or services with branded or co-branded credit card.

Item 15 amends the exemption for suppliers of goods and services in regulation 23, so that the exemption applies where they engage in credit activities in relation to a credit contract, consumer lease, mortgage or guarantee offered or provided by a licensee, registered person or a special purpose funding entity.

Items 17 and 19 amends regulation 23A to reflect the different context in which the exemption operates (relative to the exemption in regulation 23).

Regulation 23A applies where a person is being provided with a branded or co-branded credit card and where that credit card may not necessarily be used for the supply of goods or services from the supplier. Accordingly, it is not appropriate to limit the circumstances in which the exemption applies according to whether or not the supply of goods or services is the result of unsolicited contact. The following amendments are therefore made:

• a substituted subregulation 23A(6) so that the exemption only applies where a person engages in credit activities on the premises of the supplier; and

• a substituted paragraph 23A(3)(iii) so that there is internal consistency within the regulation (as previous paragraph 23A(3)(iii) refers to a person who is engaging in a credit activity primarily on the premises of a supplier, rather than exclusively so).

Item 18 amends regulation 23A, so that the exemption applies where a supplier of goods or services engages in credit activities in relation to a credit contract offered or provided by a licensee, registered person or a special purpose funding entity.

Item 20 inserts two regulations, regulation 23B Persons exempt from requiring a licence – fund raising special purpose entity, and regulation 23C Persons exempt from requiring a licence – securitisation entity. These regulations provide exemptions for the two categories of special purpose funding entities (as defined in paragraph 3.4 of Schedule 3). The two categories are fund raising special purpose entities and securitisation entities, with these terms defined in paragraphs 3.2 and 3.4 of Schedule 3, respectively. There are a number of technical aspects to the definitions reflecting existing commercial practices.

In general terms, the purpose of the exemptions is to exempt funding vehicles which are established to raise or receive funds from investors and are acting as either credit providers or lessors (including by way of a legal assignment of rights from a credit provider or lessor).

The effect of regulations 23B and 23C is similar; they operate to exempt entities as follows.

A fund raising special purpose entity or a securitisation entity is exempt where it satisfies the following requirements:

• it is a party to a servicing agreement (as defined in paragraph 3.4 of Schedule 3) with a licensee or registered person who acts on behalf of the entity in relation to the credit contracts or consumer leases it is a party to; and

• a relevant person who has a key role is not an inappropriate person (as defined in item 3 which inserts a definition of this phrase into subregulation 3(1)), with a relevant person being:

– if the entity is a body corporate – each of its directors or secretaries; and

– if the entity is a trust – each trustee; and

• it is a member of an approved external dispute resolution (EDR) scheme:

– if it is a fund raising special purpose entity – from 1 July 2010; and

– if it is a securitisation entity – from 1 October 2010.

The extended period for securitisation entities to become members of an EDR scheme is provided in order to enable them to negotiate changes to the rules of the schemes to reflect specific differences in their structure and operation. It is not considered that consumers be significantly disadvantaged by the extended period, as consumers will still be able to lodge a complaint with an EDR scheme after 1 October 2010 in respect of conduct between 1 July 2010 and 30 September 2010.

Items 21 to 24 amend the exemption in the Principal Regulations in subregulation 24(6) for persons passing on documents so that the exemption applies:

• where the person passes on documents provided or approved by a licensee, registered person or a special purpose funding entity; and

• where the person needs to provide the ACL number of a licensee this requirement can be satisfied by providing the ACL number of the licensee who is a party to a servicing agreement with an exempt special purpose funding entity.

Items 25 to 28 amends the exemption in the Principal Regulations in subregulation 24(7) for persons who allow a third party to use their business name logo or trademark in relation to, in general terms, passing on a document or engaging in a credit activity so that the exemption applies:

• where the person passes on documents provided or approved by a licensee, registered person or a special purpose funding entity; and

Item 29 amends the exemption in the Principal Regulations in subregulation 24(8) for persons passing on factual information, so that the exemption applies where they engage in that conduct in relation to a licensee, registered person or a special purpose funding entity.

Item 30 inserts regulation 25G, which provides that, in relation to a special purpose funding entity or a licensee or registered person who is a party to a servicing agreement with such an entity, some provisions of the Credit Act would apply as set out in Schedule 3.

Item 31 inserts a regulation 111A. Lenders with pre-1 July 2010 contracts only who have chosen not to obtain a license (unlicensed carried over instrument lenders, UCOILs) do not have to be members of an external dispute resolution (EDR) scheme. Where they are not EDR members, regulation 111A would provide that they are not to be required to make EDR related disclosures to debtors in Forms 10, 11, 12, 14, 15, 16 and 17, which are prescribed in the Principal Regulations.

Item 32 amends Form 9 in the Principal Regulations to provide that a credit provider need not provide a signed copy of the guarantee to the guarantor if the guarantor already has a copy of the guarantee.

Item 33 amends Form 10 in the Principal Regulations to provide for a minor correction so that the date only appears on the form once.

Item 34 amends Form 12 in the Principal Regulations to provide a minor typographical enhancement so that the term “you entered into your contract” is not repeated in the form unnecessarily.

Items 35 to 52 makes various corrections and amendments to Schedule 2 to the Principal Regulations, which was inserted by Credit Amendment Regulations 2010 (No. 2). Schedule 2 modifies certain provisions in Chapter 2 of the Credit Act in order to apply it to UCOILs without infringing the Constitution.

Item 35 corrects a cross reference in modified paragraph 5A(1)(g).

Item 36 corrects a typographical error, that is the use of ‘and’ instead of ‘or’ between mutually exclusive conditions, in modified subparagraphs 5A(1)(i) (i) to (iv).

Item 37 ubstitutes a revised heading for modified Division 4 to reflect that the regime applies to UCOILs rather than licensees.

Item 38 replaces reference to licensee with references to UCOIL in modified subsection 47(2) to reflect that the modified regime applies to UCOILs rather than licensees.

Item 39 amends modified subsection 49(3A) to clarify that the audit report must be prepared by a suitably qualified person (rather than registered company auditor). A registered company auditor does not necessarily have the experience to attest to the matters in the report required under modified subsection 49(3A), specifically the UCOILs compliance with contractual disclosure obligations.

Item 40 replaces reference to licensee with references to UCOIL in modified subsection 51(1) to reflect that the modified regime applies to UCOILs rather than licensees.

Item 41 corrects a typographical error in modified subsection 75(1), specifically the omission of the word ‘unlicensed’ from the phrase ‘prescribed unlicensed carried over instrument lender’.

Item 42 clarifies that the notification required by prescribed UCOILs under modified subsection 75(1) must be in an approved form.

Item 43 amneds the notification requirement on prescribed UCOILs in modified paragraph 75(1)(b) to clarify that they must identify the grounds on which they are prescribed under modified section 5A.

Item 44 inserts modified section 75A, which would set out requirements for changes to the appointment of a licensee or registered person to act on behalf of a prescribed UCOIL. The appointment is continuous until the licensee or registered person dies, ceases to engage in business or is unable to perform the required duties. Failure to comply is an offence with a maximum penalty of 25 penalty units or six months imprisonment. The offence could also be treated as strict liability.

Item 44 also inserts modified section 75B, which imposes a notification requirement on a UCOIL who ceases to be prescribed. Failure to comply would be an offence with a maximum penalty of 25 penalty units or six months imprisonment. The offence could also be treated as strict liability.

Item 45 corrects a typographical error in modified subsection 76(1), specifically the omission of the word ‘unlicensed’ from the phrase ‘prescribed unlicensed carried over instrument lender’.

Item 46 clarifies that the notification required by a person appointed by prescribed UCOILS under modified subsection 75(1) must be in an approved form.

Item 47 omits Part 2-4 from modified Chapter 2. This part provides for the banning or disqualification of persons from engaging in credit activities, which can not be used in relation to UCOILs without infringing the Constitution.

Item 47 also substitutes a revised heading for modified Part 2-5 to reflect that the trust account provisions do no apply to UCOILs.

Item 48 omits section 87, which is the guide to Part 2-5. This part has been substantially modified, for example by substituting references to licensee with references to UCOIL and by omitting the trust account provisions. It also corrects minor typographical errors in modified section 88.

Item 49 amends modified subsection 102(1) to insert a reference to subsection 49(3A). This ensures that persons preparing the report on contractual disclosure would have the right to access to the UCOIL’s records.

Item 50 amends modified paragraph 104(2)(b) to insert a reference to section 45. This ensures that an auditor must report any matter which constitutes, or may constitute, a contravention of the obligations imposed on UCOILs by modified section 45.

Item 51 omits paragraph 106(b), which refers to a type of audit report that is not relevant to UCOILs.

Item 52 omits items 2.54 and 2.55, which were included in the 20 May Credit Amendment Regulations in error.

Item 53 inserts a new Schedule 3 into the Principal Regulations, which sets out the modifications to some of the provisions of the Credit Act that impose obligations on licensees, in accordance with regulation 25G. These obligations therefore are modified in two ways:

• extending some obligations on licensees to an exempt special purpose funding entity; and

• excluding the licensee from some of these obligations (given that they are acting on behalf of the lender rather than being the lender in their own right).

The outcome is that, notwithstanding the exemption from licensing, the exempt special purpose funding entity and the licensee who is party to a servicing agreement would be under, as far as possible, the same obligations as if the exemption did not apply.

Item 3.1 ensures that the same definition of ‘court’ as used in Part 4-3 of the Credit Act applies where it is used in the modified provisions in Schedule 3.

Item 3.2 includes a definition of ‘fund raising special purpose entity’ for the purposes of determining whether or not an entity meets the criteria specified in the definition in order to be able to rely on the exemption in regulation 23B. An entity satisfies the criteria where:

• its sole purpose is to raise funds in order to be a credit provider for a credit contract or a lessor for a consumer lease;

• it only raises funds from persons other than natural persons;

• it only engages in credit activities as a credit provider under a credit contract or a lessor under a consumer lease;

• it does not have any employees; and

• it is not otherwise licensed or registered; that is, if the entity needs to hold a licence or registration because it engages in credit activities in some other way then it cannot rely on this exemption, and must conduct all its activities in this capacity.

Item 3.3 ensures that the same definition of ‘registered person’ as used in section 4 of the Transitional Act applies where it is used in the modified provisions in Schedule 3.

Item 3.4 includes definitions of the following terms that are relevant to the operation of the exemption for special purpose funding entities in regulation 23B:

• securitisation entity: This term has a number of criteria that are technical in character to ensure that the definition is consistent with current commercial practices in relation to use of the specific vehicles to raise funds by way of securitisation.

• securitisation product and securitisation transaction: These terms are relevant to the interpretation of the term ‘securitisation entity’.

• servicing agreement: The effect of regulation 23B is that a special purpose funding entity will only be exempt where it is a party to a servicing agreement with a licensee or registered person. Given that a special purpose funding entity is established to be a conduit for flows of money it will need to act through third parties, and this definition requires those third parties to be either licensed or registered.

• special purpose funding entity: This term has two limbs, and can mean either a ‘fund raising special purpose entity’ or a ‘securitisation entity’. It is intended to refer to a funding vehicle whose sole purpose is to raise funds to enable it to become a credit provider or lessor.

Item 3.5 modifies section 29 of the Credit Act by deleting subsection 29(4). Subsection 29(4) of the Credit Act currently provides a defence to the prohibition on engaging in credit activities for a person who is a representative of an exempt principal, including therefore a representative of a special purpose funding entity. Where a licensee appoints a person to act on their behalf under the servicing agreement that person will be a representative of both the licensee and the special purpose funding entity. Without the modification, that person would not need to be appointed as a credit representative and the licensee who appoints them would not need to comply with the requirements in Part 2-3 of Chapter 2 of the Credit Act.

The modification means that a person who is a representative of a special purpose funding entity cannot rely on the defence of being the representative of an exempt person in subsection 29(4), and can only rely on the defences under subsection 29(3).

Item 3.6 modifies subsection 45(1) of the Credit Act by expressly providing that ASIC’s power to impose conditions will include power to impose a condition requiring the licensee to cease engaging in a credit activity on behalf of the special purpose funding entity, and, in practice, act contrary to the servicing agreement. While ASIC’s power to impose conditions in section 45 is not subject to any limitations and would already encompass conditions of this type, it is considered preferable to include this provision to make this explicit.

Items 3.7 to 3.23 inserts a new section 74A and modify sections 74 to 78 of Division 4 of Part 2-3 of the Credit Act. This Division sets out principles for determining the liability of a licensee for their representatives. The effect is to modify these provisions so that:

• a special purpose funding entity is liable for the conduct of its representatives as if it were a licensee; and

• a special purpose funding entity is liable for the conduct of the licensee or registered person who is a party to a servicing agreement as if that licensee or registered person was its representative (as the definition of a representative would not normally include a licensee or registered person).

The provisions ensures that there is no inconsistency in the application of these provisions to a special purpose funding entity, notwithstanding that it is not a licensee or registered person.

Items 3.24 to 3.45 modifies the effect of a number of provisions that are in Chapter 3 of the Credit Act. The Chapter imposes obligations on licensees or registered persons in relation to assessing the suitability of contracts and the provision of credit guides.

The effect is to modify these provisions so that:

• the special purpose funding entity must comply with those obligations that apply to a licensee or registered person who is either a credit provider or a lessor; and

• a licensee or registered person who is a party to a servicing agreement and acting in relation to a credit contract or consumer lease provided by a special purpose funding entity is exempted from the need to comply with the obligations that apply to:

– persons providing credit assistance; and

– persons who become authorised to collect repayments made by either a debtor under a credit contract or a lessee under a consumer lease.

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