Towards Commonwealth regulation of credit: National Consumer Credit Protection (NCCP) update

This update provides you with a short status report on the move towards the Commonwealth regulation of credit.

Executive summary

1. Identify now which entities you will register.
2. Conduct background checks on directors, secretaries, and principals.
3. Wait for further updates from Gadens and the MFAA regarding:

• assessment of unsuitable loans
• IDR requirements
• PI insurance requirements.

4. Obtain advice if you think your business is impacted by conflicts of interest

.

Registration

Any businesses associated with lending, finance broking or servicing need to register with ASIC between 1 April and 30 June 2010. Registration should be a comparatively easy process. Larger businesses should consult Gadens to ensure they register the correct entities.

The key requirements for registration are:

• EDR membership
• a statement/declaration concerning each director, secretary, and principal

Further details are available from ASIC in RG202 available here

For anyone needing to become registered, there are three ways forward:

1. do all the work yourself
2. do the work yourself, but prior to submission have it verified by an advisor
3. outsource all registration and licensing work.

The MFAA is considering providing support for those members who need support. Gadens can help more complex businesses.

Any entity not registered by 30 June 2010 will be banned from trading until it obtains a license. Registration of all entities that you think might want a licence is therefore essential.

MFAA's 'All-in-One Guide'

The MFAA has provided its members with an "all-in-one guide" available in the member centre on the MFAA website.

This document, prepared by Gadens, while lengthy, provides an essential summary of the new laws and their relationship with existing laws.

Non balance sheet lenders and trustees

The regulators are still working on how to deal with non-balance sheet lenders and trustees.

This is unlikely to be resolved before the end of March. The lender of record for non balance sheet lenders is usually a trustee and the options are either:

• trustees will be licensed on the condition that they have a servicing agreement with a licensed servicer; or
• trustees will be exempt so long as they have an eligible servicing agreement with a licensed servicer.

Disclosure documents

Non-balance sheet lenders are concerned that they may need to disclose their margin because they are caught up in the disclosure regime for commissions. The regulators have not yet decided how to address this issue. More news is expected during the first half of 2010, but the issue is not of immediate concern as the disclosure regime does not commence until 1 January 2011.

The disclosure provisions require borrowers to be given credit guides, quotes, loan proposal documents, and copies of credit assessments. In the meantime, intermediaries should continue using finance broking contracts, preferably based on the MFAA's pro forma national finance broking contract.

Documents to be provided

It is likely that the MFAA will provide the following pro forma documents free to members (to be drafted by Gadens):

• Written compliance plan to support the procedures adopted by credit businesses
• IDR scheme procedures (ASIC is to release its requirements at the end of March. It is possible that MFAA's existing IDR scheme will be satisfactory)
• Human resources and risk management plan.

Gadens will assist more complex businesses to customise these pro formas to suit their specific circumstances.

Prior to 1 January 2011 the MFAA will provide pro forma:

• credit guides
• quotes
• loan proposal documents
• credit assessment reports.

Gadens will assist more complex businesses to customise these pro formas to suit their specific circumstances.

Challenges

Besides registration, the key challenges commencing on 1 July 2010 are:

• not to arrange or make an unsuitable loan (does not apply to ADIs or RFCs)
• ensuring clients are not disadvantaged by any conflict of interest.

ASIC proposed to issue RG209 at the end of February 2010 dealing with responsible lending. Once that information is available, the MFAA may provide further guidance. Lenders and mortgage services and mortgage managers may need specialist advice from Gadens. We suggest that work is not commenced until RG209 is released.

Business must ensure clients are not disadvantaged by any conflict of interest. Many businesses face potential conflict because of the tension between volume incentives, different commissions, rebates, referral sources, or other special arrangements. If you think your business is impacted by conflict of interest, you need specialist advice.

UCCC

Remember from 1 July 2010, loans to individuals are regulated if the loan is predominantly:

• to purchase, renovate, or improve property used for residential property investment purposes; or
• to refinance those loans.

Residential property means land on which a dwelling is or will be affixed for predominantly residential purposes.

This will mean that some lenders who currently only do unregulated loans may need to create documents and systems for regulated loans. Gadens can help with this change.

The regulations containing new forms (including the new direct debit default notice) should be released by mid March, and lenders should then arrange for loan documentation to be updated. Again, Gadens is ready to help.

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

For more information please contact: