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Regulating consumer credit intermediation

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This post is a continuation of our Consumer Protection blog series. The next two posts would look at the Evolution of Consumer Protection Laws in India.

Australia and South Africa have introduced separate regulatory regimes for consumer credit, which has consumer protection aspects at the heart of it. These form examples of function-based regulation, which is fundamentally different from institution-based regulation prevalent in India.

Consumer Credit Protection in Australia

The Council of Australian governments (COAG) agreed on 3rd July 2008 that the Australian Government would assume responsibility for regulating consumer credit. The National Consumer Credit Reform Package marks Phase-one of Australia’s attempt to regulate consumer credit and comprises the National Consumer Credit Protection Act 2009 (NCCP Act) as the central piece of legislation. While the legislations for Phase-two are being put in place, phase one comprises of the following:

• Licensing regime for all consumer credit providers and credit assistance providers
• Responsible lending conduct obligations and disclosure obligations
• Enhanced enforcement powers to ASIC to administer the NCCP Act
• Expanded redressal mechanisms
• National Credit Code to replace the state-wise Uniform Consumer Credit Codes

Licensing regime

The goal of this is to promote consumer confidence in using credit, and to promote the undertaking of efficient, honest and fair credit activities by all licensees and their representatives. The National Credit Code applies to only credit1 that is provided to a person or a strata corporation, and for personal, domestic or household purposes, and for refinancing of such credit. It can also be for the purchase, renovation or improvement of residential property for investment purposes. This definition encompasses2 all credit providers such as banks, credit unions, finance companies and other lenders; and all credit assistance providers, such as credit advisers and mortgage and credit brokers.

Responsible lending conduct obligations3

These are intended for the following4 and are meant for both credit providers and credit assistance providers.

(a) Introduce standards of conduct to encourage prudent lending and leasing and impose sanctions in relation to irresponsible lending and leasing, and
(b) Curtail undesirable market practices, particularly where intermediaries are involved in lending.

The licensee is obligated to conduct an assessment5 that the credit contract or lease is not ‘unsuitable’ for the consumer. In doing so, the licensee must make reasonable enquiries about the consumer’s requirements, objectives, and financial situation and take reasonable steps to verify the consumer’s financial situation. The contract is considered unsuitable if it does not meet the consumer’s requirements and objectives or if the consumer will be unable to meet the repayments, either at all, or only with substantial hardship. In such a case, the licensee must not suggest, assist or enter into a credit contract with the customer.

Reasonable inquiries about customer’s financial situation

These could include the following, depending on the circumstances:
1. The consumer’s current amount and source of income or benefits, and assets, including their nature (such as whether they produce income) and value
2. The extent of the consumer’s fixed expenses (such as rent, repayment of existing debts, child support and insurance)
3. The consumer’s variable expenses (and drivers of variable expenses such as dependents and any particular or unusual circumstances)
4. The extent to which any existing debts are to be repaid from the credit advanced
5. The consumer’s credit history
6. Any significant changes to the consumer’s financial circumstances that are reasonably foreseeable
7. Geographical factors, such as remoteness, which may require consideration of specific issues
8. Indirect income sources (such as income from a spouse) where that income is reasonably available to the consumer

Reasonable inquiries about customer’s requirements and objectives

These could include the following, depending on the circumstances:
1. Amount of credit needed or the maximum amount of credit sought
2. Timeframe for which the credit is required
3. Purpose for which the credit is sought and the benefit to the consumer
4. Whether the consumer seeks particular product features or flexibility, and understands the costs of these features and any additional risks

Verifying customer’s financial situation

This obligation differs between credit providers and credit assistance providers. ASIC acknowledges that the latter would not have access to information that the credit provider has, such as credit reports, bank account and credit card information, reports from other lenders (subject to Privacy Act 1988) and so on. However, credit assistance providers are expected to gather information from payslips, income tax returns, statements from the customer’s accountant, business activity statements and so on. This is applicable to credit providers too.

Substantial hardship as a reason for ‘unsuitability’

The NCCP Act 2009 does not define what ‘substantial hardship’ is. ASIC will however take the following factors6 into account when considering whether a transaction is likely to result in financial hardship:

1. The money the consumer is likely to have remaining after their living expenses have been deducted from their after-tax income
2. How consistent and reliable the consumer’s income is and the size of the loan relative to their income level
3. Whether the consumer’s expenses are likely to be significantly higher than average
4. The consumer’s other debt repayment obligations and similar commitments
5. How much of a buffer there is between the consumer’s disposable income and the repayments, and how vulnerable they are to an increase in interest rates, and other product features
6. Whether the consumer is likely to have to sell their assets, such as a car, to repay the loan

ASIC expects the licensees to develop appropriate systems, processes and benchmarks to assess whether the credit contract would cause financial hardship to the customer.

Compensation and insurance arrangements

All credit licensees must have in place arrangements for compensating customers for loss or damage suffered due to breaches of the NCCP Act 2009 by the licensee or its credit representatives. These arrangements are to be in the form of professional indemnity (PI) insurance that meets the requirements in the Act7 . This is aimed at reducing the risk that losses sustained by customers cannot be compensated by a credit licensee due to a lack of available financial resources.

Credit Regulation in South Africa

Similar to the case of Australia above, the National Credit Act 2005 of South Africa regulates the granting of consumer credit by all credit providers. It applies to credit agreements with all consumers and to entities such as companies, partnerships and trusts whose asset value or annual turnover is below a prescribed threshold8. It applies to most credit products where payment is deferred and a charge, interest or fee is payable on the outstanding balance. The National Credit Act also establishes the National Credit Regulator (NCR) to promote the development of an accessible credit market, particularly, to address the needs of historically disadvantaged persons, low income persons, and remote, isolated or low density communities. It is tasked with carrying out registration of credit providers, credit bureaus and debt counsellors, investigation of complaints, education, research, policy development, and ensuring enforcement of the Act. Some of the key consumer protection features of the Act are given below:

Fundamental Consumer Rights

These include:

• Right to be given dominant reason for credit being refused or discontinued (reason/s to be given in writing on request of the consumer)
• Right to information in plain and understandable language in terms of which guidelines may be published
• Right to have access to and to challenge credit records and information held by credit bureaux, to have incorrect records of debt adjustments expunged and, to be given notification before negative information is reported to the credit bureaux

Protection from Over-Indebtedness

The credit provider must conduct a proper assessment of each consumer’s ability to meet obligations, taking reasonable steps to investigate and evaluate the consumer’s:

• Understanding and appreciation of the risks, costs and obligations of the proposed agreement
• Ability to meet those obligations in a timely manner in terms of the consumer’s existing financial means and debt repayment history

A credit agreement will be reckless if the credit provider fails to conduct the required assessment, or having conducted it, enters into an agreement with a consumer despite the fact that the consumer did not appreciate the nature of the risks, costs and obligations, or could not afford them.

The Act allows for over-indebted customers to apply for assistance from a debt counsellor. Debt counsellors then conduct independent enquiries into consumers’ financial circumstances and make recommendations to the courts concerning debt restructuring and suspension of reckless credit agreements.

Protection from Aggressive Advertising

• Prohibition of negative option marketing. (This occurs when goods or services are offered to you with the assertion that if you do not return the products or refuse the service within a certain time period, you have ‘purchased’ them)
• Marketing of credit at the consumer’s home or workplace is prohibited unless the visit is prearranged or the consumer invites the credit provider to visit for that purpose
• The credit provider must give the consumer the option (and must not act contrary to the option selected), to:

a) Decline the option of pre-approved annual credit limit increases,
b) Be excluded from any telemarketing campaign, marketing or customer list that may be sold or distributed, or any mass distribution of email or SMS messages (The credit provider must maintain a register of options selected).

The Act also sets up The National Consumer Tribunal that hears cases on non-compliance with the Act, issues fines and provides redress to consumers.

1 – ASIC Regulatory Guide 203, Appendix 1,2
2 – Debt collectors, pawn brokers and margin lenders are exempt from Phase 1
3 – ASIC Regulatory Guide 209
4 – According to the Explanatory memorandum of the NCCP Bill 2009
5 – Consumer can obtain copy of preliminary assessment upon request
6 – ASIC Regulatory Guide 209
7 – ASIC Regulatory Guide 210
8 – Currently R1 million

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