Banking and Finance

Credit licensing

The National Consumer Credit Protection Act 2009 (Cth) introduced a comprehensive, nationally consistent credit licensing regime for banking institutions and other credit providers in Australia.

Any person who offers credit, or otherwise provides some form of credit assistance to a retail customer, must now either hold an Australian Credit Licence (“ACL”) or become a Credit Representative of an ACL holder.

Legislative context

The key pieces of legislation governing the conduct of ACL holders and Credit Representatives are:

• National Consumer Credit Protection Act 2009 (Cth) (“NCCPA”);
• National Consumer Credit Protection Regulations 2009 (Cth) (“NCR”);
• National Credit Code;
• Corporations Act 2001 (Cth);
• Australian Securities and Investments Commission Act 2001 (Cth).

The regulatory body responsible for administering and enforcing these laws is the Australian Securities and Investments Commission (“ASIC”).

What constitutes a “credit activity” anyway?

Credit activity is defined in section 6 of the NCCPA to include:

• Providing credit under a credit contract or consumer lease;
• Benefiting from mortgages or guarantees relating to a credit contract;
• Suggesting or assisting in relation to a particular credit contract or consumer lease;
• Acting as an intermediary between a lender and a consumer (for a credit contract);
• Acting as an intermediary between a lessor and a consumer (for a consumer lease); and
• Providing other prescribed credit activities.

Who is required to get an Australian Credit Licence?

The types of businesses that would be required to have an ACL include:

• Banks;
• Non-banks (eg. credit unions and building societies);
• Finance companies (eg. credit card companies, payday lenders, etc);
• Mortgage managers;
• Mortgage aggregator;
• Lenders mortgage insurer;
• Debt management service providers;
• Assignee debt collectors;
• Car loan financiers;
• Mortgage brokers;
• Finance brokers;
• Financial advisers who offer credit assistance;
• Comparison websites;
• Businesses offering hire-purchase arrangements; and
• Business selling goods or real property by instalments.

The NCR exempts certain categories of people from the licensing requirement:

• Corporate or personal insolvency practitioners;
• Lawyers;
• Registered tax agents;
• Point-of-sale retailer
• Financial counselling agency
• Third parties;
• Clerks or cashiers;
• State-licensed debt collector or repossession agent;
• Persons who merely pass on factual information in response to a request, or
• Persons who merely refer a consumer to a licensee.

The credit licensing process

ASIC encourages applicants to undertake the licensing process online via its website.   There are different application “streams” available depending which of the following categories you fall into:

• “Standard” applicant;
• “Streamlined” applicant (such as banks, general insurers and life insurers);
• An Australian Financial Services Licence (“AFSL”) holder.

The vast majority of applicants are expected to fall into the first category.

In general terms, applicants will need to satisfy the regulator, amongst other things, that:

• The business will be viable and solvent;
• The business will be managed by “fit and proper” persons;
• The business will be able to manage its risks appropriately;
• The business will be able to comply with its legal and regulatory obligations;
• The business will be adequately resourced and have competent staff.

Obligations of licensees

The holder of an ACL will be required to strictly abide by a number of conditions in order to maintain their licence (and avoid legal and regulatory sanctions).  These include:

• Must comply with the specific conditions set out in the ACL itself;
• Must comply with the credit legislation;
• Must provide its services efficiently, honestly and fairly;
• Must have sufficient financial, technological and other resources;
• Must have risk management and compliance procedures;
• Must have adequate staff monitoring and supervision procedures;
• Must provide adequate training for its staff to ensure competence;
• Must not engage in any misleading or deceptive conduct;
• Must comply with Responsible Lending Conduct provisions;
• Must avoid, or at least properly manage, conflicts of interest;
• Must have a proper internal and external dispute resolution procedure;
• Must maintain adequate professional indemnity insurance;
• Must lodge an Annual Compliance Certificate with ASIC.

Consequences of non-compliance

An ACL holder who fails to comply with its obligations may become subject to one or more of the following sanctions (going from the least serious to the most serious):

• Public sanction;
• Monetary penalty;
• Imposition of additional conditions on licence;
• Enforceable undertaking;
• Variation of licence;
• Suspension of licence;
• Cancellation of licence;
• Prosecution;
• Imprisonment of its directors and officers

For Credit Providers and other ACL holders:  Winthrop Mason Lawyers can assist by:

• Applying for, or varying the terms of your Australian Credit Licence;
• Drafting, updating  or reviewing disclosure documents, such as Credit Guides, Key Fact Sheets and Information Statements;
• Drafting, updating or reviewing internal policies and procedures (such as Conflicts of Policy, Compliance Manual, Training Policy, Dispute Resolution Policy, etc);
• Advising on a credit provider’s rights and obligations regarding their clients;
• Investigating, managing and negotiating the resolution of complaints and claims;
• Developing an enterprise-level risk management program and compliance program;
• Conducting compliance audits of credit providers’ client files;
• Preparing formal breach notifications for ASIC;
• Negotiating the terms of any proposed Enforceable Undertakings with ASIC;
• Liaising with ASIC and other regulators in relation to any potential compliance issues.

For retail customers: Winthrop Mason Lawyers can assist by:

• Reviewing the credit assistance and disclosures provided to you for compliance;
• Advising on your legal rights as against your Credit Representative or ACL holder;
• Considering strategies and options available in the event of a compensation claim ;
• Calculating the monetary value of your potential compensation claim;
• Investigating, managing and negotiating the resolution of client complaints;
• Negotiating compensation claims with your Credit Representative or ACL holder;
• Preparing submissions before the external dispute resolution service (eg. FOS);
• Commencing legal proceedings against the Credit Representative and/or ACL holder.

For a no-obligation initial consultation, go ahead and give us a call.

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APRA compliance

Every authorised deposit-taking institution (ADI), such as banks, building societies and credit unions, is required to comply with the Australian Prudential Regulation Authority (APRA)’s Prudential & Reporting Standards.

The Prudential Standards in particular, supplemented by Guidance Notes and Prudential Practice Guides, cover a range of areas, such as:

• Capital adequacy requirements;
• Securitisation;
• Covered bonds;
• Liquidity;
• Credit quality;
• Large exposures;
• Associations with related entities;
• Outsourcing;
• Business continuity management;
• Pandemic planning and risk management;
• Risk management of credit card activities;
• Management of security risk in information and IT;
• Audit and related matters;
• Governance;
• Fit and proper; and
• Financial Claims Scheme.

APRA reviews an ADI’s compliance with these Prudential Standards very closely through on-site auditing, off-site monitoring, self-reporting and general reporting obligations.  Non-compliance the prescriptive requirements will be treated very seriously by the regulator, and remediation can then become a very expensive and time-consuming process.  Prevention, however, is the key.

Winthrop Mason Lawyers can assist you by:

• Advising on the legal meaning or interpretation of the requirements of certain Standards;
• Reviewing selected business operations to assess for compliance with APRA Prudential Standards
• Reviewing reporting practices and procedures for compliance with APRA Reporting Standards;
• Preparing a formal breach reporting submission to APRA in the event of a possible breach;
• Liaising with APRA on your behalf in relation to specific issues.

For a no-obligation initial consultation, go ahead and give us a call.

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Guarantees and indemnities

If you are going as a guarantor for a borrower (such as for your own company, spouse or family member), a lender will generally require you to sign a “Guarantee and Indemnity” document.  The practical effect of such a document is that you basically have the same legal risks and obligations as the borrower – despite being called a mere “guarantor”. 

What is a Guarantee and Indemnity?

A Guarantee is a legally binding promise to honour the borrower’s obligations in the event that it defaults under the loan agreement – that is, make regular repayments, pay out the loan amount, and pay for any interest, fees, costs and other expenses, including enforcement expenses.

An Indemnity is a legally binding promise to pay the lender for any losses it might suffer as a result of the borrower’s default, or if becomes unable to enforce its legal rights against the borrower (such as where the borrower becomes insolvent, lacks capacity or somehow avoids legal liability on technical grounds).

What are your key obligations as a guarantor?

Your key obligations as a guarantor are summarised as follows:

• If the borrower defaults on its contractual obligations, then you will be responsible for meeting the borrower’s repayments under the loan agreement.  You may also be asked to immediately pay the remaining loan amount, together with interest, fees, costs and other expenses.

• While the Guarantee and Indemnity might say there is a “maximum amount” that you will be required to pay, this is quite misleading because your financial exposure under the arrangement is actually unlimited in practice as no-one knows what the fees, costs and other expenses will ultimately be.

• If you or the borrower has any other loans with the same bank, then your legal obligations as guarantors will generally extend to those other loans, too.

• Even if the lender releases the borrower from some or all of its contractual obligations, you will separately remain fully bound to comply with all of the obligations.

• The lender can elect whether to pursue you or the borrower first to enforce its rights.  It is important for you to understand that the lender is under no obligation to exhaust its rights against the borrower first before pursuing you personally.

• While the Guarantee and Indemnity will typically state that you “may” withdraw at any time, the reality is that you cannot (unless you pay out the loan obligations).  If you attempt to withdraw, then the borrower will be in serious default under the loan agreement, and the lender will then be forced to commence enforcement proceedings against both you and/or the borrower (usually both) for breach of contractual obligations.

What are your key rights as Guarantors?

You have very limited legal rights as guarantors:

• You have the right to ask the lender for a statement of amounts currently owed by the borrower (although you may be charged a fee for the provision of a statement).

• You have the right to object to any changes to the terms of the Guarantee and Indemnity if you have not been given at least 20 days’ notice before the changes take effect.  You also have the right to apply to have those changes set aside if they are “unconscionable”.

• You have the right to reject an extension of the Guarantee and Indemnity where it is intended to cover a new or additional loan to the borrower (although this will likely mean that the borrower will not be granted the loan being sought).

• You have the right to claim an indemnity from the borrower, and seek payment in the event that the borrower becomes liquidated or insolvent, but this right is of little practical value as it is subordinate to the lender’s rights against the Borrower.

What are your key risks of signing the Guarantee and Indemnity?

The main risks associated with signing the Guarantee and Indemnity are:

• You can lose your own house, investments, savings and other assets in the event that the borrower defaults, and may even become bankrupt.

• Your financial exposure is not limited to the amounts owed by the borrower – you will be under an obligation to also reimburse the lender for additional costs it might incur in enforcing its rights under the loan agreement, the Guarantee and Indemnity and any other existing credit contracts.  Those additional costs can be quite significant, and can even exceed the amount(s) originally owed by the borrower.

• You do not have a general legal entitlement to notice of the borrower’s default, so you will need to make it your own responsibility to be on top of the borrower’s financial affairs.

Winthrop Mason Lawyers can assist you by:

• Reviewing your Guarantee and Indemnity for potential legal risk areas;
• Advising you on your rights, obligations and risks under the Guarantee and Indemnity;
• Advising you on any necessary steps required to be taken to protect your interests;
• Negotiating the terms of the Guarantee and Indemnity where appropriate;
• Advising you in relation to the terms and conditions of the primary loan agreement;
• For lenders, drafting or revising a Guarantee and Indemnity to remain current with new laws.

We offer a fixed fee pricing for advising on, and drafting, Guarantees and Indemnities.  For a no-obligation initial consultation, go ahead and give us a call.

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