National Consumer Credit Protection Act Manual

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1 Mortgage Industry Regulation All in One Guide including National Consumer Credit Protection Act Manual Last updated 6 April 2010

2 2 About this Manual This manual has been prepared by the MFAA and Gadens Lawyers for the assistance of MFAA members. This document does not comprise legal advice and neither the MFAA nor Gadens Lawyers accept any responsibility for it. Gadens Lawyers and the MFAA asserts copyright in respect of this work. This Manual covers: the National Consumer Credit Protection Act 2009 (NCCP Act) the National Credit Code (NCC) other laws and codes impacting on the mortgage industry. Although this manual covers a lot of ground, it does not claim to deal with all relevant laws and codes. You should obtain legal advice on specific issues. This manual will be updated as more information comes to hand and as laws and commercial practice changes. The manual was last updated on the date specified on the cover sheet. How to use this Manual You can access each of the items listed below by clicking on the relevant link. If your main interest is the NCCP, the first ten parts will be most relevant to you. Part 1 Overview of the Commonwealth regulation of credit Part 2 - Broker s Action List what do I need to do now? Part 3 - Lender s Action List what do I need to do now? Part 4 Getting registered and licensed. Appointing credit representatives Part 5 Assessing whether a loan is unsuitable Part 6 - Mortgage Managers and non-balance sheet lenders Part 7- Disclosures Part 8 NCCP Information about some provisions Part 9 Summary of key provisions - NCCP and associated legislation and regulations Part 10 Example documents AML identification form Appointment of credit representative - company

3 3 Appointment of credit representative - individual Compliance Plan for small businesses comprises a check list (required from when licence applied for) Credit assessment report (required from 1 January 2011) Credit Guide, Quote, and Credit Proposal Documents (required from 1 January 2011) Declaration by directors and secretaries of companies applying for registration IDR Procedures (required from when licence applied for) NCCP Charter National Finance Broking Contract (for use to 1 January 2011) Policy to ensure clients are not disadvantaged by any conflict of interest Privacy consent brokers Privacy consent managers Privacy consent lenders Registration Checklist Part 11 Other laws including state laws applying to finance brokers Part 12 Door to door sales legislation Part 13 The Hawking Prohibitions in the Corporations Act Part 14 The emarketing Code of Practice Part 15 Financial Sector (Collection of Data) Act Part 16 Australian Financial Services Licences Part 17 Privacy Act Module Part 18 Workplace Relations Part 19 - Anti-Money laundering / Counter Terrorism Financing Act Part 20 ASIC regulation of debt collection under the ASIC Act

4 4 Part 1. Overview of the Commonwealth Regulation of Credit 1.1 Two phase implementation In 2008, the Council of Australian Government (COAG) agreed that the Commonwealth Government should take over responsibility for the regulation of consumer credit. Under these proposals, ASIC becomes the national regulator for consumer credit and finance broking. The proposals are to be implemented in two phases. Phase 1 1 April June 2010 Registration period. CAUTION: If you fail to register by 30 June 2010, you cannot conduct a credit activity business unless and until you are licensed (unless you are appointed as a credit representative)!! Licensing could take time. CAUTION: ASIC encourages early registration. If you apply for registration after 18 June 2010, ASIC says it may not be able to approve your application by 30 June 2010 and you will need to cease trading until you receive a licence (or are appointed as a credit representative) see RG202 1 July 2010 The National Consumer Credit Protection Act (NCCP) commences in part. The Uniform Consumer Credit Code (UCCC) is replaced with the National Credit Code (NCC). The NCC extends regulated loans to include loans to individuals in relation to residential investment properties. Only registered businesses can conduct the business of credit activities (eg lending, leasing, and broking). Applications for licences must be made by 31 December 2010 or registration will lapse. Brokers and lenders who are not authorised deposit taking institutions (ADIs) or registered financial corporations (RFCs) must ensure they do not make or arrange an unsuitable loan, loan increase, or lease. Mandatory membership of an external dispute resolution body (EDR) for registered/licensed businesses and for credit representatives. CAUTION: If you do not apply for a licence by 31 December 2010, you cannot conduct a credit activity business unless and until you are licensed (unless you are appointed as a credit representative)!! Licensing could take time. Registration only applies to businesses involved with NCC regulated loans and leases.

5 5 1 January 2011 Responsible lending provisions commence for ADIs and RFCs. Other responsible lending obligations commence including providing: * credit guides by lenders and brokers * quotes and credit proposal disclosure documents by brokers * copies of credit assessments on request by lenders if loans are made or principal increased, and by brokers if credit assistance is provided Businesses must cease to trade unless they have applied for or obtained a licence, or been appointed as a credit representative. New businesses will be unable to conduct business until they obtain a licence which could involve some delay. CAUTION: If you fail are not licensed by 30 June 2011, you cannot conduct a credit activity business unless and until you are licensed (unless you are appointed as a credit representative)!! Licensing could take time. Licensing only applies to businesses involved with NCC regulated loans and leases. Phase 2 during 2010 and Registration Review unfavourable lending practices such as credit card limit extension offers and other fringe lending issues (micro lending) Review regulation of credit for small businesses Review regulation of investment loans other than margin loans and loans for residential investment properties Review mandatory comparison rates Review regulation and tailored disclosure of reverse mortgages Review Islamic loans / finance Review exemption for state licensed credit providers Review exemption for point of sale credit Businesses can register between 1 April 2010 and 30 June Businesses which are not registered by 30 June 2010 will be unable to conduct credit activity business until they are registered, which could involve a significant delay. Registering is expected to be a simple on line process. Companies can be registered. A company s employees and directors automatically become the company s representatives. However, employees and directors of credit representatives are not automatically authorised and must themselves be appointed a credit representative. Registered businesses can appoint companies or individuals as credit representatives at any time after the business is registered. Each credit representative is given an unique number

6 6 which stays with the credit representative even though the credit representative swaps to another registered business or licensee. To be registered a person must: make an application to ASIC make a statement that the applicant is a member of an approved external dispute resolution (EDR) scheme state in respect of the applicant and each director and secretary of a company applicant that they are not banned or disqualified etc. There are no insurance, IDR, or education requirements to achieve registration. A registered business must: (a) (b) (c) (d) (e) (f) conduct business efficiently, honestly, and fairly comply with any conditions imposed on their registration comply with all credit legislation take reasonable steps to ensure its representatives (this includes employees as well as credit representatives) comply with all credit legislation ensure clients are not disadvantaged by any conflict of interest of the person or its representatives comply with any other obligations prescribed by the regulations CAUTION: You will need strategies (and probably a written policy) to ensure compliance with the requirement that clients are not disadvantaged by any conflict of interest. 1.3 Licensing The licence is called an Australian Credit Licence. Companies can be licensed. A company s employees and directors automatically become the company s representatives. Licensed businesses can appoint companies or individuals as credit representatives. Each credit representative is given an unique number which stays with the credit representative even though the credit representative swaps to another licensee or registered business.. Licensees must in addition to the requirements imposed on registered businesses: be issued with an unique ACL number which must be shown on certain documents have an internal dispute resolution process (IDR) this requirement does not apply during the registration period

7 7 be a member of an ASIC approved EDR. The key schemes are the Credit Ombudsman Service Limited (COSL) and the Financial Ombudsman Service (FOS) hold PI insurance complying with ASIC s requirements see RG210 expected to be released on 29 March 2010 (not required for registration) meet education and experience qualifications (not required for registration) 1.4 Representatives and credit representatives There is a difference between a representative and a credit representative. Registered or licensed businesses may operate through their own staff and directors. These internal representatives do not need separate licenses and do not need to be appointed as a credit representative or join an EDR. They are one type of representative. Registered or licensed businesses may also appoint third parties as credit representatives to engage in specified credit activities on behalf of the licensee. Credit representatives are another type of representative. Employees and directors of corporate credit representatives are not automatically authorised. Credit representatives must: be a member of an EDR scheme unless they are an employee or director of a credit representative which is an EDR member not be subject to a banning or disqualification order (applies to directors, secretaries, and senior managers of a company which is appointed as a credit representative) not have been convicted within the last 10 years of serious fraud Although ASIC has not made a final decision when this manual was prepared, it is expected that credit representatives may be: covered by the licensee s insurance; or the licensee and each credit representative has their own insurance 1.5 Not make or arrange an unsuitable loan or lease These provisions apply from 1 July 2010 to all lenders and credit assistants (brokers) other than ADIs and RFCs. These provisions commence for ADIs and RFCs on 1 January These obligations can be summarised in the NCCP Charter THE NCCP CHARTER I will not make or arrange a loan or principal increase that is unsuitable. A loan or principal increase will be unsuitable if: (a) the borrower could not repay or could only repay with substantial hardship; or

8 8 (b) the loan will not meet the borrower s objectives having regard to (amongst other things) the loan type, term, interest rate, repayment, fees and charges, and special conditions. To make that assessment, I will (a) (b) (c) make reasonable enquiries about the borrower s requirements and objectives make reasonable enquiries about the borrower s financial situation; and take reasonable steps to verify that financial information. If the borrower can only repay by selling their principal place of residence, the loan will be unsuitable unless the contrary is proved. Brokers will make the assessment no longer than 90 days before assistance is provided (ie the loan is arranged). Lenders will make the assessment no longer than 90 days before the credit contract is entered or principal increased (120 days if the loan is to purchase residential property and is secured by a mortgage over the property). In addition, from 1 January 2011, all lenders and brokers must supply a copy of the assessment upon request by the borrower. A copy of the assessment need only be supplied if: in the case of lenders, the loan is made or increased in the case of brokers, if credit assistance is provided. This means a copy of the broker s preliminary assessment may be required to be provided even if a loan is not made or increased. Credit assistance occurs when a person: suggests the consumer apply for a loan, an increase to a loan, or a lease with a particular credit provider suggests the consumer stay with an existing lender or lessor assists the consumer apply for a loan, an increase to a loan, or a lease with a particular credit provider. 1.6 Credit guides, quotes, and credit proposal disclosure documents From 1 January 2011, licensees must provide a credit guide setting out details of: their services; and for credit assistants, the commissions they may receive and the fees the borrower must pay. Credit assistants (but not lenders) must also provide: a quote for any fees or charges payable by the borrower a credit proposal

9 9 Part 2. Broker s Action List Date Now Action Review all finance broking contracts (FBC) and other pro forma agreements with consumers to ensure they include no unfair contract terms. Unfair contract terms are void. The Victorian Fair Trading Act 1999 applies now, and soon Commonwealth law will make unfair contract terms void. You must continue to use an FBC until the credit guide provisions commence on 1 January Now Attend training sessions so you become familiar with the new law. Read this manual. Now By 1 May 2010 Ensure that your directors, company secretaries, and partners are not ineligible. [See list of ineligible criteria at the end of this table] Determine whether your aggregator or lender (if any) will require you to obtain your own licence, or will appoint you as a credit representative. Decide whether you are happy to be a credit representative, or would prefer to be licensed. If you are an aggregator or large intermediary, decide whether you will require your loan writers to be licensed or will appoint credit representatives. There is no reason why you can t have a mix of both, but businesses which are licensed cannot be appointed as credit representatives. Some aggregators and large businesses may delay making a decision about whether to appoint credit representatives until more information is known. In that case, all members should be registered. They can easily obtain registration, and if it is later decided to appoint them as credit representatives, they can cancel their registration at the same as they are appointed as credit representatives (ensure this is no timing gap). 1 April June 2010 Unless you will be a credit representative, obtain registration with ASIC. To obtain registration you will need to: (a) (b) (c) make an application to ASIC be a member of an ASIC approved external dispute resolution scheme state in respect of the applicant and each director and secretary of a company of an applicant that they are not banned or disqualified etc. Care must be exercised to identify each legal entity which needs to be registered. In some corporate groups more than one entity may need to be registered. It is possible for a registered entity to appoint other companies and individuals as their credit representative. ASIC will provide useful information to assist registration and this task should not be complex. You should be able to do this yourself, unless you run a large business

10 10 Date Action where special advice may be required. The trick is ensuring you register all the correct entities. If you will be appointed a credit representative, ensure your appointer is registered and has appointed you a credit representative. If you operate through a company, your company will need to be appointed as a credit representative and you will need also need to be appointed a credit representative (which can be direct from the licensee in which case both your company and you need an EDR membership, or by way of authorisation by your company with the consent of the licensee in which case if you are an employee or director you will be covered by your company s ER membership. CAUTION: Any entity not registered by 30 June 2010 will be banned from trading until it obtains a license. The penalty for conducting business if you are not registered or appointed as a credit representative is a civil penalty of up to $1.1m and a criminal penalty of up to $22,000 or 2 years imprisonment! 30 June 2010 CAUTION: Ensure all the other businesses you deal with who are conducting a credit activity are registered, licensed, or a credit representative. This is important because the NCCP provides that a licensee (registrant) must not engage in a credit activity with another person who should be licensed (registered) or a credit representative but is not. The penalty for dealing with an unauthorised person is a civil penalty of up to $1.1m and a criminal penalty of up to $22,000 or 2 years imprisonment! 1 July 2010 The National Credit Code replaces the UCCC. Loans to purchase renovate or improve residential investment real estate (includes vacant land on which a dwelling is intended to be built) and refinancing of those loans will be regulated by the NCC. A new business purpose declaration needs to be used. Application for hardship and postponement of enforcement can be made in respect of loans made after 1 July 2010 where the principal sum is $500,000 or less. 1 July 2010 From this date, you must not arrange an unsuitable loan, nor recommend that a borrower remain in an unsuitable loan. Do you have appropriate procedures and check lists to enable compliance? (ADIs and RFCs are exempt from this requirement) See the MFAA s NCCP Charter at paragraph 1.5. Read Part 5 of this Manual Assessing whether a loan is unsuitable

11 11 Date 1 July December 2010 Action Unless you are a credit representative, apply for an Australian Credit Licence. To obtain a licence, you will need in addition to the requirements to become registered: an internal dispute resolution process (IDR) have compensation arrangements in place as specified in the regulations. (PI insurance yet to be finalised) have systems and a written compliance plan have an adequate financial and human resources and risk management plan The MFAA will be providing example documents see Part 10 Example Documents. CAUTION: Any entity not registered by 30 June 2010 and which has not applied for a licence by 31 December 2010 will be banned from trading until it obtains a license. 1 July December January 2011 Develop procedures and documents to enable compliance with the disclosure requirements commencing on 1 January 2011 (see below). The MFAA will be providing example documents see Part 10 Example Documents. Unsuitable loan provisions commence for ADIs and RFCs. Disclosure provisions apply for all. You will need to give borrowers credit guides quotes credit proposal disclosure documents; and on request a copy of the credit assessment if you provided credit assistance The MFAA will be providing example documents see Part 10 Example Documents. 30 June 2011 All businesses conducting credit activities must be licensed unless they are exempt or appointed as a credit representative of a licensee. CAUTION: Any entity not licensed by 30 June 2011 will be banned from trading until it obtains a license. CAUTION: Ensure all the other businesses you deal with who are conducting a credit activity are licensed or a credit representative. Disqualification criteria

12 12 The directors, company secretaries, and partners of a registered entity must not fall into any one or more the following classes: (a) (b) (c) (d) (e) a banning order or disqualification order under Part 2-4 of the National Credit Act is in force against the person a banning order or disqualification order under Division 8 of Part 7.6 of the Corporations Act 2001 is in force against 4 the person the person is banned from engaging in a credit activity under a law of a State or Territory if the person is or has been registered the person s registration is either suspended or cancelled an Australian financial services licence of the person is either suspended, or has been cancelled within the last 7 years, under: (i) paragraph 915B(1)(d) or subparagraph 915B(4)(b)(iii) of the Corporations Act 2001 (which deals with suspension or cancellation because of mental or physical incapacity); or (ii) section 915C of the Corporations Act 2001 (which deals with suspension or cancellation after offering a hearing) (f) (g) if the person is the trustees of a trust the person is insolvent; and if the person is a natural person: (i) (ii) (iii) the person is disqualified from managing corporations under Part 2D.6 of the Corporations Act the person has been convicted, within 10 years before the application is made, of serious fraud a prescribed State or Territory order is in force against the person. In any event under s12(3), ASIC may refuse to register a person if ASIC has reason to believe that: (a) (b) the application is false in a material particular or materially misleading; or there is an omission of a material matter from the application.

13 13 PART 3. Lender s Action List Date Now Action Read Part 2 - Brokers Action List. Most of those steps will apply to you. In addition, you need to take the steps in this table. Mortgage managers and servicers are generally treated as intermediaries (also called credit assistants) and so must comply with all the requirements for brokers. If you organise a loan program, you need to take the steps in this table. Whether trustees and other SPVs will require to be registered and subsequently licensed is not known when this table was prepared. Now Review all credit contracts, mortgages, guarantees, and other pro forma agreements with consumers to ensure they include no unfair contract terms. The Victorian Fair Trading Act 1999 already applies, and soon Commonwealth law will make unfair contract terms void. Now Review procedures for the new EDR rules commencing on or about 1 January FOS + COSL rules provide: if a dispute has been referred to EDR, the lender cannot commence proceedings until the dispute is determined (existing) once proceedings have been commenced, if a matter is referred to EDR, you must cease proceedings unless: (a) (b) judgment has been signed; or the customer has filed a defence and taken a further step in the proceedings (eg pre-trial conference) Already about 70% of COSL's cases are hardship applications referred to EDR after proceedings have been commenced. This has not caused great inconvenience or injustice. The EDRs will hopefully act promptly to ensure that there is a genuine short or medium term hardship issue to be resolved. The background is that many borrowers ignore recovery action until they are served with court process. It is only at that stage that they realise that the issue is serious. By 30 June 2010 Consider whether any credit policies need amendment because of the extension of the UCCC/NCC to residential investment loans. Amend documents and procedures to comply with the NCC which starts on 1 July Develop a policy for identifying unsuitable loans unless you are an exempt ADI or RFC.

14 14 Date Action 30 June 2010 Ensure all the other businesses you deal with who are conducting a credit activity are registered or a credit representative. Each lender will need its own registration and licence because a lender cannot operate as a credit representative because a lender is acting as a principal and not on behalf of another licensee. However, mortgage managers can operate as a credit representative. This is important because the NCCP provides that a licensee (registrant) must not engage in a credit activity with another person who should be licensed (registered) or a credit representative but is not. The penalty for dealing with an unauthorised person is a civil penalty of up to $1.1m and a criminal penalty of up to $22,000 or 2 years imprisonment! 1 July 2010 The National Credit Code replaces the UCCC. Loans to purchase renovate or improve residential investment real estate (includes vacant land on which a dwelling is intended to be built) and refinancing of those loans will be regulated by the NCC. New business purpose declarations and default notices must be used. 1 July 2010 From this date, you must not make or increase an unsuitable loan. Do you have appropriate procedures and check lists to enable compliance? (ADIs and RFCs are exempt from this requirement.) 1 January 2011 Unsuitable loan provisions commence for ADIs and RFCs. Disclosure provisions apply for all. You will need to give borrowers credit guides, and upon request a copy of your assessment if the loan is made or principal increased. Disclosure requirements for managers were not known when this table was prepared.

15 15 Part 4. Getting Registered and Licensed - Appointing Credit Representatives Part 4A. Who needs to be licensed? 4.1 Who needs to be registered or licensed? Persons conducting a credit activity need to be registered and subsequently licensed. To fall within the NCCP, the credit activity must relate to credit (including consumer leases) regulated by the National Credit Code, which replaces the old Uniform Consumer Credit Code (UCCC) on 1 July Remember that the NCC is extended to include loans to individuals and strata corporations predominantly to purchase, renovate or improve real estate used predominantly residential property investment purposes and refinancing those loans. A person engages in a credit activity if in relation to NCC regulated credit or leases it: makes loans or exercises the rights of a lender (including recovery) provides credit assistance or acts as an intermediary is a lessor of a consumer lease or exercises the rights of the lessor, including recovery has the benefit of a mortgage or guarantee taken to secure a loan 4.2 What is credit assistance? A person provides credit assistance when the person carrying on business in Australia: suggests that a consumer apply for a loan, an increase to a loan, or a lease suggests the consumer stay with an existing lender or lessor assists the consumer apply for a loan, an increase to a loan, or a lease see s8 NCCP It will be seen that this definition is quite specific. It does not extend to all the customer care activities an intermediary might undertake such as assisting a borrower to arrange a loan settlement. Rather, the activity focuses on the selection of a credit product and obtaining an approval for the credit product. Accordingly, many businesses involved in the finance industry will not be providing credit assistance, and so will not be obliged to comply with the obligations imposed on credit assistants (such as not arranging an unsuitable loan or providing a credit guide). However, these businesses may still need to be licensed or be a credit representative because they are either: exercising the rights of a lender, lessor, mortgagee, or guarantee holder; or acting as an intermediary.

16 Acting as an intermediary A person acts as an intermediary if a person carrying on a business in Australia acts an intermediary (directly or indirectly) between the consumer and the lender or lessor see s9 NCCP. This captures entities such as aggregators, mortgage managers and mortgage services. If a loan or a lease is legally assigned so that the lender/lessor of record becomes the assignee, the assignee will be conducting a credit activity and will need to be licensed see s10 NCCP. This captures changes to the lender/mortgagee of record, but will not catch beneficial assignments involved in securitisation. 4.4 Debt collectors, managers, and servicers Debt collectors, managers, and servicers who are solely involved in servicing do not provide a credit service, because a credit service means arranging loans, increases in loans, or leases. Rather, they are obliged to obtain a licence principally because of Item 1 and 3 of s 6 NCCP Act. Item 1 of s 6 NCCP Act provides that credit contracts includes a business which performs the obligations or exercises the rights of a credit provider. However, this does not mean that a debt collector, manager, or servicer is a credit provider. Similarly, a business which performs the obligations or exercises the rights described in Item 3, 4, and 5 regarding consumer leases, mortgages, and guarantees respectively does not thereby become a lessor, mortgagee, or lender. 4.5 Exemptions from licensing The NCCP Regulations provide for a number of exemptions, including: debt collectors who are licensed or registered under the State or Territory law point of sale credit providers (for example when a supplier of goods arranges credit, but only if the credit is to buy the goods) lawyers conducting their usual business a clerk or cashier (eg simply handing over documents or providing administrative activities) mere referrers who disclose their commission The exemption of mere referrers is controversial as the referrer is only exempted from licensing if the referrer discloses commission. However, referrers who are not in the loan industry won t know about this law. Licensees need to be careful because if they pay a commission to someone who fails to disclose the commission the result is that the licensee is dealing with someone who should be licensed but isn t. It is an offence for a licensed person to conduct credit activities with someone who should be licensed but isn t. 4.6 Private lenders The NCC only applies to regulated loans if the credit provider provides the credit in the course of a business of providing credit carried on in Australia or as part of or incidentally to any other business of the credit provider carried on in Australia.

17 17 This means that a person who is not in business but occasionally makes loans, those loans won t be regulated by the NCC even though the loans would otherwise be regulated. It will be a question of fact whether the frequency with which loans are made amounts to conducting a business. On the other hand, if a business makes a loan incidental to its business (ie even a one off loan) then it is likely that the loan will be regulated and a licence will be needed to make the loan. This could prevent businesses from making occasional one off loans to associates or friends because of the need to obtain a licence to do so.

18 18 Part 4B. Registration 4.7 Getting registered The registration process should be reasonably easy. The MFAA expects ASIC to provide easy online registration with prompts to assist the process. Small businesses should be able to complete registration without external help. Read Part 2 - Broker s Action List to see the requirements for registration. CAUTION Any entity not registered by 30 June 2010 will be banned from trading until it obtains a licence. Registration only applies to businesses involved with NCC regulated loans and leases. A registered business must: conduct business efficiently, honestly, and fairly comply with any conditions imposed on their registration comply with all credit legislation take reasonable steps to ensure its representatives (this includes employees as well as credit representatives) comply with all credit legislation ensure clients are not disadvantaged by any conflict of interest of the person or its representatives comply with any other obligations prescribed by the regulations [nothing proposed to be prescribed yet]

19 19 Part 4C. Appointing credit representatives 4.8 Appointing Credit Representatives Once you are registered, you can commence appointing credit representatives. You can do this both before and after 1 July Remember, that there is no need to appoint your directors or your employees as they are automatically your representatives. However, directors and employees of credit representatives are not authorised by the appointment of their company as a credit representative. If you want to appoint external third parties as credit representatives, you must: check that the credit representative is eligible see below appoint the credit representative in writing (ASIC may provide a pro forma appointment, and if they don t, the MFAA will) notify ASIC of the appointment (expected to be no fee and an easy on-line form) You can appoint individuals (ie human beings) and companies as your credit representative as soon as you are registered. See Part 10 Example Documents for a form of appointment of credit representative. Representatives of licensees Directors and employees (but not secretaries) of licensees are automatically representatives authorised to undertake credit activities on behalf of the licensee. There is no need for any further formal appointment or notification to ASIC. For the technically minded, this derives from s29(3) NCCP Act, which provides that employees or directors of a licensee or a related corporation of the licensee don t need a licence to act on behalf of the licensee. Appointment of credit representatives However, when a company is appointed as a credit representative, the directors, and employees of the credit representative company are not authorised to conduct credit activities. Directors, employees, and any subcontractors of a credit representative company need to be sub-authorised by the corporate credit representative. The corporate credit representative requires consent from the licensee to do this. Only natural persons can be sub-authorised. The sub-authorised credit representatives become credit representatives of the licensee and not of the credit representative. If a subcontractor loan writer of the credit representative operates through a company, the licensee will need to appoint the corporate subcontractor directly as credit representatives can t sub-authorise companies. Instead of the credit representative sub-authorising its directors, employees, and any subcontractors, a licensee could appoint those people directly. Licensees may prefer to keep control over the appointment of credit representatives by not consenting to any sub-authorisations and appointing all credit representatives directly.

20 20 Sub-authorised directors and employees of a credit representative company can rely on the company s EDR membership. However, contractors who are sub-authorised will need their own EDR membership. This derives from section 65(6) of the NCCP Act, which provides that a sub-authorisation is void unless the natural person is a member of an EDR scheme. However, regulation 16 of the NCCP Regulations adds the proviso that the natural person doesn t need to be a member of an EDR scheme if the natural person is an employee or director of the credit representative. Although ASIC has not yet made its final decision in relation to PI insurance, it appears that credit representatives (including sub-authorised credit representatives) could be covered by the licensee s PI insurance, or a combination of the licensee s insurance and separate insurance affected by each credit representative. ASIC allocates credit representatives a unique credit representative number. That stays with the credit representative even if they change licensees. You must notify ASIC of appointments of credit representatives within 15 business days of the appointment and notify ASIC of any change of details or revocations within 10 business days of the change see s71 NCCP. The licensee is responsible for notifying ASIC about appointments and variations to credit representatives directly appointed, but the credit representative company is responsible for notifying ASIC of appointments and changes to sub-authorised credit representative. CAUTION Civil penalty $220,000 or $1,100,000 for companies and multiple trustees Criminal penalty $2,750 or 6 months imprisonment for failure to notify these changes within the time limits 4.9 Liability for Credit Representatives You will be liable to the client for the conduct of your credit representatives s78(3) NCCP. If the credit representatives operate under your brand, the fact that you are now liable under the NCCP to the client for their conduct may add little liability as the client will look to you in any event. However, if the credit representatives trade under their own name, you are taking on a significant new liability by being responsible for their conduct to borrowers. Irrespective of whether credit representatives uses your brand, you are not liable to ASIC or the courts for breaches of the NCCP by the credit representative. However, you may be subject to significant criticism if you have not had an appropriate compliance plan and have not properly monitored the conduct of your credit representatives. Representatives may indemnify licensees, and licensees may indemnify other licensees for the conduct of their credit representatives see s78(6) NCCP. A form of indemnity is included in the example Appointment of Credit Representative provided in Part 10 of this manual Eligibility of Credit Representatives A credit representative may be appointed in respect of some or all of a licensee s credit activities. A credit representative must: be a member of an EDR scheme

21 21 not be subject to a banning or disqualification order (and if a company is appointed as a credit representative its directors, secretaries, and senior managers must not be subject to a banning or disqualification order) not have been convicted within the last 10 years of serious fraud see s.64(4) NCCP A person can be the credit representative of two or more licensees so long as the licensees consent or are related body corporates see s 66 NCCP. A licensee can t appoint another licensee as a credit representative see s 67 NCCP. Care must be exercised when appointing a credit representative as it is an offence to appoint an ineligible person see s69 NCCP. CAUTION Civil penalty $220,000 or $1,100,000 for companies and multiple trustees Criminal penalty $11,000 or 2 years imprisonment or both 4.11 Sub-authorisation of Credit Representatives With the consent of the licensee, a credit representative that is a company may authorise one or more natural persons (but not companies) to be a credit representative of the licensee. The natural persons must: be a member of an EDR scheme unless the credit representative is a director or employee of a company which has been appointed as a credit representative see reg 16 NCCP Regulations not be subject to a banning or disqualification order not have been convicted within the last 10 years of serious fraud see s 65 A person so sub-authorised becomes a credit representative of the licensee, and not a credit representative of the credit representative making the sub-authorisation Information about representatives The term representative includes directors, employees, and credit representatives. ASIC can tell licensees information about a proposed or existing representative. Licensees must only use that information to decide what action (if any) to take in relation to that representative see s 73 NCCP.

22 22 Part 4D. Getting a licence 4.13 Getting a licence CAUTION Any entity not registered by 30 June 2010 and which has not applied for a licence by 31 December 2010 will be banned from trading until it obtains a licence. Licensing only applies to businesses involved with NCC regulated loans and leases. CAUTION Ensure all other business you deal with, who are conducting a credit activity are registered, a licensee, or a credit representative In order to get your licence you will need to provide some information to ASIC which was not required for registration. To obtain a licence, in addition to the requirements to become registered you will need: an internal dispute resolution process (IDR). ASIC guidance regarding the requirements for IDR had not been published when this manual was prepared. It is hoped these guides will allow for small one or two person businesses where true independence will be difficult to arrange. compensation arrangements in place as specified in the regulations. The compensation arrangements are expected to comprise professional indemnity insurance. Lenders and lessors are likely to be exempt. The requirements for PI insurance are not yet finalised. ASIC expects to release its requirements in a regulatory guide RG210 on or about 29 March systems and a written compliance plan. The MFAA will be providing example documents see Part 10 Example Documents. A director or senior manager is required to have oversight of the compliance program. adequate financial and human resources and a risk management plan. The MFAA will be providing example documents see Part 10 Example Documents. There are streamlined procedures for ADIs and holders of WA A and B class brokers licenses. Each licensee will have a unique ACL number. If the person holds an Australian Financial Services Licence (AFSL), the ACL will be the same number as the person s AFSL. The requirements for a registered business must continue to be observed. A registered business must: conduct business efficiently, honestly, and fairly comply with any conditions imposed on their registration comply with all credit legislation take reasonable steps to ensure its representatives (this includes employees as well as credit representatives) comply with all credit legislation

23 23 ensure clients are not disadvantaged by any conflict of interest of the person or its representatives comply with any other obligations prescribed by the regulations [nothing proposed to be prescribed yet] 4.14 Directors will no longer need a licence in their own name. The NCCP licensing regime differs from the WA regime in relation to licensing companies and individuals. Under the current WA regime, a small broker who operates through a family company usually needs to hold a licence for both the company and personally. Under the NCCP, the company will be licensed, and any directors will be 'representatives' of that company without the need for any further licensing. However, employees and directors of companies which are appointed credit representatives are not automatically authorised see para 4.7 above. There are two terms: 'credit representatives' which are third party contractors appointed to be the credit representative of a licensee s64; and 'representatives' which includes directors and employees to a company, as well as credit representatives s RG 204 Applying for and varying a credit licence ASIC has released RG204 which provides guidance on applying for and varying a credit licence. A summary of the key messages from RG204 appears in the following table. What do I need to do before I start my on-line application? see para RG Type of credit activities Think about the type of credit activities you will engage in as part of your business because you need to select between: (a) (b) (c) engage in credit activities other than as a credit provider or lessor; engage in credit activities as a credit provider or lessor; or engage in all credit activities. ASIC encourages applicants only to choose the authorisation that is necessary to cover the credit activities you propose to engage in. Subsequent variation to licenses are allowed if your business change at a later date. Only lenders/lessors of record or assignees of the lender/lessor s rights should register under category (b). Managers and servicers are not the actual credit provider, and they should select category (a). Section 6 of the NCCP Act describes credit contract as a category of credit activity. Exercising the rights of a credit provider are included in that category. However, the

24 24 description of credit contract in s 6 is not relevant for the purpose of selecting the type of authorisation. Rather, the authorisation categories focuses on whether you are a credit provider or lessor, rather than whether your credit activities fall within the s 6 category of credit contracts Some applicants may want to cover the field by selecting (c). ASIC may refuse to grant a licence if it considers that authorisation is too wide for your business. 2. Background checks on key people Do background checks on your fit and proper people because you will need to provide to ASIC the following reports as supporting information to your application: educational qualifications and previous employers (where relevant); police check (not more than 12 months old); bankruptcy check (not more than 12 months old or a statutory declaration for overseas people); credit history report (not more than 3 months old). These time limits apply from the time you lodge your licence application. 3. ASIC registers Ensure that all information about your company recorded at ASIC is up to date. As the streamlined online process will pre-populate this information, if it is incorrect your application cannot be completed until it has been updated. Fit and proper persons see para RG As part of the application, you will need to: identify the people involved in the management of your business (these people must be fit and proper people) specify which of those people will be your responsible managers provide information about each of the fit and proper people, their role in your credit business and their past conduct, and if they will be responsible managers, their knowledge and experience. RG says that a fit and proper person means that the person: is competent to operate a credit business (as demonstrated by the person s knowledge, skills and experience) has the attributes of good character, diligence, honesty, integrity and judgment is not disqualified by law from performing their role in your credit business has no conflict of interest in performing their role in your credit business, or any conflict that exists will not create a material risk that the person will fail to properly perform their role in

25 25 your credit business. You will need to provide a statement about: if you are a company, each director, secretary and senior manager if you are a partnership, each partner but only in respect of those people who will perform duties in relation to the credit activities. The statement will be that: a person s registration or licence under the credit legislation or AFS licence has never been suspended or cancelled there is no banning order or disqualification order against the person there has been no order under the Crimes (Criminal Organisations Control) Act 2009 (NSW) or the Serious and Organised Crime (Control) Act 2008 (SA) the person has never been banned from engaging in a credit activity under a law of a state or territory the person has never been insolvent the person has never been disqualified from managing corporations under Part 2D.6 of the Corporations Act the person has no criminal convictions within the last 10 years. If a statement cannot be provided in relation to each of these requirements, for example, because the person has a criminal conviction within the last 10 years, you will need to provide further information setting out a full explanation of each matter in issue. Compliance arrangements see para RG As part of the licensing process you will be asked a group of questions that are designed to obtain a confirmation that you have in place and will maintain adequate compliance arrangements and systems including: you have a written plan that documents your arrangements and systems the arrangements specify how often compliance with procedures is monitored and reported on there are people internal to your business responsible for ongoing monitoring and reporting. These are the minimum requirements, if these arrangements and systems are not in place your application will not proceed. Outsourcing - see para If you outsource any of your functions as a credit licensee ASIC expect that you will have appropriate processes in place to ensure that:

26 26 you have taken due skill and care in choosing a suitable service provider will monitor their ongoing performance can deal effectively with any breaches of the outsourcing agreement or actions that lead or might lead to a breach of your licensee obligations. Supervising and training representatives see para RG You will be asked a group of questions regarding whether you: have a written policy that details the minimum training requirements maintain a training register have a documented process for monitoring and supervising all representatives (including credit representatives) undertake certain checks during your recruitment process for representatives will ensure that mortgage broker representatives will have a minimum of Certificate IV in financial services (finance/mortgage broking) have processes to ensure credit representatives are members of an approved EDR scheme. Adequacy of financial resources see para RG You will be asked questions to obtain your confirmation that you have: a written plan that documents your measures for ensuring that your financial resources are adequate and monitoring your financial resources to ensure they continue to be adequate a business planning process that includes consideration of the employees and other representatives that you need to engage in your credit business IT systems to support the business processes. Information on what ASIC considers adequate resources can be found in RG205. The MFAA will issue a Compliance Bulletin on RG205 soon. General conduct obligations see para RG As part of your application for a credit licence you will be asked for information about how you propose to comply with the general conduct obligations under the following headings: broad compliance obligations engaging in credit activities efficiently, honestly and fairly complying with the conditions on your licence complying with the credit legislation

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