Referral of the inquiry
1.1
The National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 (No. 2) (the bill) was introduced in the Senate and read a first time on 2 December 2019.
1.2
On 5 December 2019, the Senate referred the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report by 6 April 2020. The committee agreed to extend the reporting date to 21 September 2020, in accordance with the Senate motion of 23 March 2020 authorising committees to extend inquiry reporting dates due to the COVID-19 pandemic.
Purpose of the bill
1.3
The bill proposes a number of amendments to the National Consumer Credit Protection Act 2009 (Credit Act) to adjust consumer protections relating to small amount credit contracts (SACCs) and consumer leases.
1.4
If enacted, the bill seeks to:
cap the total repayment amounts for consumer leases;
require SACCs to have equal repayment amounts and equal repayment intervals;
prohibit SACC providers charging monthly fees to consumers if loans are repaid early;
prevent SACC providers and credit assistance providers from making unsolicited invitations for credit to current and former SACC consumers;
prohibit door-to-door selling of consumer leases;
introduce anti-avoidance measures relating to SACC and consumer leases providers that circumvent provisions of the Credit Act; and
strengthen the penalties for providers of SACCs and consumer leases that do not comply with relevant law.
1.5
The bill also amends the Credit Act to facilitate, via amending the National Consumer Credit Protection Regulations 2010 (Credit Regulations), a new protected earnings amount (PEA) for consumers of SACCs and consumer leases to prevent repayments exceeding 10 per cent of consumers' net income.
Background
1.6
The bill replicates the Australian Government's exposure draft legislation that was released for consultation in October 2017. The purpose of the exposure draft legislation was to implement the government's response to the independent Review of the Small Amount Credit Contract Laws (the Review).
1.7
During consultation on the exposure draft legislation, the Department of the Treasury (Treasury) received over 140 submissions from industry stakeholders and consumer groups, and the government has considered issues raised in those submissions.
1.8
On four occasions between February 2018 and September 2019, bills that replicated the provisions of the exposure draft legislation were introduced to the House of Representatives by non-government members. Those bills were removed from the House of Representatives Notice Paper.
Small amount credit contracts and consumer leases
1.9
SACCs are non-ongoing credit contracts, with contract terms between 16 days and one year, and a credit limit of $2000. The Credit Act provides that a credit contract is a SACC if all of the following criteria are met:
the contract is not a continuing credit contract;
the credit provider under the contract is not an authorised deposit taking institution;
the credit limit of the contract is $2000 (or such other amount as prescribed by the Credit Regulations) or less;
the term of the contract is at least 16 days, but not longer than one year (or such other number of years as prescribed by the Credit Regulations);
the debtor's obligation under the contract are not, and will not be, secured; and
the contract meets any other requirements prescribed by the regulations.
1.10
Consumer leases are 'contracts for goods hired wholly or predominately for personal, domestic or household purposes' for a period greater than four months. Consumers pay the lessor, usually every fortnight, over a fixed term ranging between 12 and 48 months. The consumer does not have a contractual right or obligation to purchase the leased good, and the total amount payable by the consumer exceeds the cash price of the good.
1.11
SACCs and consumer leases, including those licensed to provide those products, are legislated by the Credit Act.
Credit Act and responsible lending obligations
1.12
The Credit Act commenced in July 2010 and established a national framework for the legislation of credit products by the Commonwealth. Provisions of the Credit Act significantly improved consumer protections for those borrowing money for 'personal, domestic or household needs' and aimed to deter 'predatory lending practices'.
1.13
Chapter 3 of the Credit Act makes provisions for responsible lending obligations which apply to those engaging in credit activities via an Australian credit license (licensees). The responsible lending obligations:
…set in place expected standards of behaviour of licensees when they enter into consumer credit contracts or leases, where they suggest a credit contract or lease to a consumer, or assist a consumer to apply for a credit contract or lease.
1.14
The key obligation of licensees is to ensure that they do not provide, suggest, or assist a consumer to enter a credit contract, or lease, if the product is unsuitable for the consumer. Licensees must assess that a credit contract, or lease, 'is not unsuitable for the consumer's requirements' and that the consumer is able to meet their financial obligations under the product.
Maximum costs
1.15
The maximum amount that can be charged in relation to a credit contract is capped at an annual percentage rate (APR) of 48 per cent. However SACCs are exempted from the APR cap. Instead, SACC providers impose prescribed fees and charges to consumers, including:
an establishment fee not exceeding 20 per cent of the credit amount;
a monthly fee not exceeding four per cent of the credit amount; and
a default fee of no more than twice the credit amount.
1.16
There is no statutory cap on the price that can be charged for a consumer lease.
1.17
The SACC Review Panel (the Review Panel) considered that the APR exemption for SACCs and consumer leases ‘is a concession which should not continue to the extent that it produces outcomes which are inconsistent with that objective'.
Consumer Credit Legislation Amendment (Enhancements) Act 2012
1.18
From March 2013, the Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Credit Enhancements Act) amended the Credit Act to strengthen consumer protections relating to SACCs and consumer leases.
1.19
For SACCs the Credit Enhancements Act included provisions which required licensees to: disclose additional product and financial awareness information to consumers; access consumers' bank statements for the previous 90 days; not enter into a SACC with a duration of less than 15 days; only impose prescribed fees and charges; and not enter into a SACC if a consumer is in default under another SACC, or has been a debtor under two, or more, SACCs in the past three months.
1.20
Provisions of the Credit Enhancements Act also introduced a requirement for licensees not to enter into SACCs 'with a class of consumers prescribed by the regulations.' The Credit Regulations defines these consumers as people receiving 50 per cent or more of their gross income under the Social Security Act 1991 (i.e. through Centrelink). Further, the Credit Regulations provide that a consumer who receives 50 per cent or more of their gross income through Centrelink must not be required to make SACC repayments which exceed 20 per cent of their gross income.
1.21
The Credit Enhancement Act also added section 335A to the Credit Act, which required the Minister to establish an independent review of the SACC laws, as soon as practicable after 1 July 2015.
Independent review of small amount credit contract laws
1.22
The government announced the review of SACC laws in August 2015. The Review Panel was chaired by Ms Danielle Press, and included two members, Ms Catherine Walter AM and Mr Stephen Cavanagh.
Consultation paper
1.23
The Review Panel released its initial consultation paper in September 2015. The paper presented 16 key discussion questions, including in relation to: regulatory burden; restrictions on repeat borrowing; efficacy of warning statements; anti-avoidance measures; and capping costs. The Review Panel called for submissions by mid-October 2015 and more than 40 submissions were received.
Interim report
1.24
The Review Panel's interim report was released in December 2015 and considered matters relating to: responsible lending; repeat borrowing; SACC default fees; and regulated consumer leases. Possible policy options were presented and the Review Panel sought feedback on options from stakeholders.
Final report
1.25
The Review Panel's final report was submitted to the then Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP, in March 2016. In presenting its findings, the Review Panel said:
…the laws applying to SACCs and consumer lease providers should be designed in a way that promotes financial inclusion and attempts to protect consumers from descending into a spiral of financial exclusion. We are recommending refinements of the laws applying to SACCs and consumer leases to ensure that they promote financial inclusion and that they are fit for purpose for the Australian economy now and into the future.
1.26
The Review Panel made 24 recommendations. For SACCs, the Review Panel's recommendations included: extending the PEA to all consumers and reducing the PEA for repayments to 10 per cent of a consumer's gross income; removing the rebuttable presumption that a loan is unsuitable if a consumer is in default under a SACC, or has had two or more SACCs in the last 90 days; SACCs must have equal repayments over the life of the loan; and banning monthly fees if the loan is repaid early.
1.27
For consumer leases, the Review Panel's recommendations included: capping the cost of leases to 4 per cent of the base price of a good for each month of the lease term; requiring the base price of a good to be the recommended retail price (RRP) (or less); introducing a PEA whereby lessors must not pay more than 10 per cent of their net income for all consumer lease products; and banning the unsolicited marketing of consumer leases.
1.28
The Review Panel's recommendations that apply to both SACCs and consumer leases, include: retaining the obligation for providers to consider 90 days of bank statements; requiring providers to disclose a product's APR to a consumer; and anti-avoidance measures for licensees adopting practices to avoid restrictions relating to charges or conduct.
Government response
1.29
In November 2016, Minister O'Dwyer announced the government's response to the independent SACC review. The Government supported the 'vast majority of the recommendations, in part or in full.' Of the Review Panel's 24 recommendations, the government accepted 14 in full; partially accepted three; accepted three with amendments; supported one in principle; noted one; and did not accept two.
1.30
To implement the proposed changes, Minister O'Dwyer stated the government would progress legislation through Parliament in 2017, subject to legislative priorities. In October 2019, Assistant Treasurer Michael Sukkar MP indicated that the government is still committed to the reforms:
The Government is committed to progressing these important reforms which will ultimately improve the accountability of financial product issuers and improve outcomes for consumers.
Provisions of the bill
1.31
The provisions of the bill are presented in one schedule. The provisions are summarised in paragraphs 1.4 to 1.5 and are outlined in further detail below.
Provisions relating to SACCs
1.32
The bill includes several provisions relating to SACCs that are intended to '…reduce the risk of SACC consumers, who are often lower income consumers in a financially vulnerable position, becoming unable to meet their basic needs or defaulting on other necessary commitments'.
Protected earnings amount
1.33
The bill provides that the Credit Regulations may be amended to create a new PEA for all SACC consumers. This extends the existing PEA for SACCs and prevents a provider from offering, entering into, or accepting repayments for a SACC if a consumer's repayments would exceed the PEA.
1.34
The government has stated its intention to amend the Credit Regulations to specify that the PEA is 10 per cent of a consumer's net income. Currently, a 20 per cent PEA applies only to consumers who receive 50 per cent or more of their gross income through Centrelink.
Removal of the rebuttable presumption
1.35
The bill removes the ‘rebuttable presumption that a SACC is unsuitable if the consumer entered into two or more SACCs in the last 90 days, or is in default under a SACC.'
1.36
The Review recommended this amendment on the basis it was implemented alongside the proposed PEA of 10 per cent. The Review Panel found that the rebuttable presumption 'has not been effective in addressing issues in relation to repeat borrowing and debt spiral' and has:
…resulted in uncertainty and complexity for SACC providers and increased compliance costs in circumstances where these issues can be more effectively dealt with by a bright line requirement.
Equal repayments and equal repayment intervals
1.37
The bill requires SACCs to have equal repayment amounts and equal repayment intervals over the life of the loan, subject to limited and practical exemptions. There are currently no restrictions on unequal repayment or repayment periods.
1.38
Providers who breach the equal repayments and intervals provisions would be subject to a civil penalty of up to 2000 penalty units. A criminal penalty of up to 100 penalty units also applies, and this is a strict liability offence.
1.39
This provision responds to the Review Panel's finding that some SACC providers were engaging in a practice of 'front loading' a consumer's repayments, and extending the life of the loan to generate extra revenue for the provider from monthly fees charged to the consumer.
Ban on monthly fees for repaid loans
1.40
SACC providers will be prohibited from charging monthly fees if a consumer repays the loan early. Currently, SACC providers are not restricted in structuring the loan contracts in a way that consumers are required to repay monthly fees for the full contract term, even if the loan is discharged early. This provision applies to '…the months after the final repayment is made' and providers may charge a fee for the month in which the SACC is paid out.
Ban on unsolicited SACC invitations
1.41
Provisions of the bill will ban providers from making unsolicited invitations to people who have a current SACC with the provider, or has had a SACC with the provider in the past two years, or a person who the provider knows has, or has recently had, a SACC with another provider. These same provisions apply to credit assistance providers. The ban would not apply to the general advertising relating to SACCs.
1.42
Providers who contravene these provisions are subject to civil penalties of up to 2000 penalty units, and a criminal penalty of up to 100 penalty units, including a strict liability offence of up to 10 penalty units. SACC providers will lose the right to charge a consumer establishment and monthly fees if it reasonably concluded that the consumer entered into the SACC as a result of the provider making an unsolicited offer.
Reforms relating to consumer leases
1.43
The bill includes several reforms to consumer protections to reduce the financial risks associated with consumer leases. As consumer leases are not regulated as credit contracts, the obligations of the Credit Code which apply to credit contracts do not automatically apply to consumer leases.
Cap on costs
1.44
The bill imposes a cap on the total costs that lessors can charge to consumers under the lease. The permitted cap will be calculated as the sum of the base price of the good, with a monthly fee of no more than 4 per cent of the base price of the good, for a maximum of 48 months. Leases with an indefinite term are capped at an equivalent level, calculated as the sum of the base price of the goods multiplied by 1.92.
1.45
For new goods, the base price will be the RRP of the goods (excluding GST), or a lesser agreed value. For a good where the RRP it is not known, the base price will be lesser of the market value of the goods or the agreed purchase price. The bill provides that for second hand goods, the base price is considered to be the RRP at the date of the goods manufacture, depreciated by 10 per cent for each year since the good's manufacture to a maximum depreciation rate of 30 per cent, or a lesser agreed value.
1.46
Lessors who enter into consumer leases that breach the cap on costs provisions will be subject to civil and criminal penalties, and lose their rights to charge consumers fees under the contract.
Requirement to obtain bank statements
1.47
The bill introduces a requirement on lessors to obtain and consider 90 days of a consumer's bank statements when assessing a consumer's financial situation. This does not limit lessors existing obligations to make reasonable inquiries regarding a consumer's financial suitability for the lease, as required under the Credit Act's responsible lending obligations. A similar obligation is imposed on licensees who provide credit assistance in relation to consumer leases.
1.48
The requirement to obtain bank statements replicates existing equivalent provisions relating to SACCs and intends to address concerns that licensees may not make appropriate inquiries regarding lessees capacity to pay.
Establishment of a protected earnings amount
1.49
The bill establishes a PEA for consumer leases, consistent with the provisions for the new PEA applicable to SACCs, of 10 per cent of a consumer's net income. The PEA will apply to all consumer leases held by the lessee.
1.50
In conjunction with the bill's proposed amendments, the Credit Regulations would need to be updated to reflect the new PEA.
1.51
The bill prohibits licensees from entering into, or offering to enter into, a consumer lease which does not meet the requirement of Credit Regulations. For licensees who contravene these provisions, a civil penalty of up to 2000 penalty units applies, coupled with criminal penalties contingent on whether the licensee entered, or offered to enter into, a non-compliant lease (up to 50 penalty units) or whether the licensee required a lessee to make a payment which breaches the PEA provisions (up to 100 penalty units).
Ban on door-to-door selling
1.52
Licensees will be banned from the door-to-door selling of consumer leases, unless there is a prior agreement with a resident. This provision is intended to address concerns raised by the Review Panel that unsolicited selling of consumer leases has the capacity to cause lessees' financial harm.
1.53
Lessors that contravene the door-to-door selling provisions are subject to civil and criminal penalties, including a strict liability offence of up to 10 penalty units. Lessors in contravention of the prohibition are also subject to loss of charge penalties, to create a greater incentive for provider compliance.
Base price disclosure
1.54
The bill provides that lessors must disclose to lessees the base price of goods hired under a consumer lease, and the difference between the good's base price and the total amount payable under the lease. The Australian Securities and Investments Commission (ASIC) will have the power to prescribe, via legislative instrument, additional information that lessors must disclose.
1.55
The Review Panel recommended base price disclosure to allow consumers to better assess the cost of the lease and promote the use of cheaper alternatives through better information transparency.
1.56
Lessors in contravention of the base price disclosure provision will be subject to an existing criminal penalty under the bill of up to 100 penalty units.
Reforms applying to both SACCs and consumer leases
Use of bank statements
1.57
The bill proposes to restrict SACC and consumer providers' use and disclosure of bank statements to purposes of: complying with obligations under the Credit Act or Credit Code; court or tribunal proceedings; or considering financial hardship notices.
Assessment of consumers' suitability
1.58
The bill requires providers of SACCs and consumer leases for household goods to record their assessment in writing, that the product is not unsuitable for the consumer and provide a copy of this assessment to the consumer. It will be for ASIC to determine the form and content of these assessments via legislative instrument. This is a strict liability offence (50 penalty units) and also has a civil penalty (2000 penalty units).
Warning statements
1.59
The bills seeks to reform warning statements which licensees provide to consumers by granting ASIC power to determine via legislative instrument the information and provision—how and when—of these warning statements. Failure to comply with the warning statements carries a civil penalty (2000 penalty units) for licensees and also a criminal penalty (50 penalty units) for licensees that provide consumers leases for household goods.
Anti-avoidance measures
1.60
The bill introduces three anti-avoidance measures. A person is prohibited from entering into or carrying out a scheme to avoid:
the application of a provision of this act; and
a contract from being a SACC or a consumer lease.
Both of these prohibitions carry a civil (2000 penalty units) and criminal penalty (120 penalty units, or 2 years imprisonment, or both).
1.61
In addition, indefinite period consumer leases are regulated, subject to constitutional limitations.
Commencement
1.62
The provisions of the bill will commence 12 months after the bill receives Royal Assent.
Human rights implications
1.63
The bill's Explanatory Memorandum (EM) comments that the strict liability offences in the bill are appropriate due to the 'potentially serious financial impact a contravention may have on an affected consumer.' The EM concludes the bill is compatible with human rights.
1.64
In May 2018, the Parliamentary Joint Committee on Human Rights (HRC) considered an earlier iteration of the bill, which replicated the provisions of the government's draft legislation, and reported concerns with the bill's civil penalty provisions and strict liability offences.
Civil penalty provisions
1.65
The HRC reported that the civil penalties proposed by the bill may be regarded as criminal under international human rights law, in part, due to the significant pecuniary sanctions for the bill's civil penalty provisions.
1.66
The bill imposes a range of civil penalties for SACC and consumer lease providers who fail to comply with relevant regulations, including:
civil penalties of up to 2000 penalty units (currently $420 000) for SACC providers that fail to record assessments of consumers' suitability, do not provide prescribed product information, or enter into SACCs for which consumers' repayments are not equal; and
civil penalties for consumer lease providers who engage in prohibited conduct, such as the retailing of leases at places of residence; or SACC and consumer lease providers that use consumers' account statements in a prohibited way, charge prohibited monthly fees, or engage in a scheme designed to avoid the bill's provisions.
1.67
If the bill's civil penalties could be assessed as criminal under human rights law, then those provisions must be consistent with the criminal process guarantees in article 14 of the International Covenant on Civil and Political Rights. This includes the right not to be tried twice for the same offence, and the right to be presumed innocent until proven guilty under the law.
1.68
The HRC expressed concern that it is not clear whether a person could be subject to a bill's corresponding civil and criminal penalties for the same conduct. Further, the HRC noted that:
… the standard of proof applicable in the civil penalty proceedings introduced by the bill is the civil standard of proof (requiring proof on the balance of probabilities) rather than the criminal standard of proof (requiring proof beyond reasonable doubt), raising concerns as to whether the measure is compatible with the presumption of innocence.
Strict liability offences
1.69
The bill seeks to introduce several strict liability offences, with pecuniary penalties ranging from 10 to 100 penalty units. The HRC observed the bill's strict liability offences may 'allow for the imposition of criminal liability without the need [for a prosecution] to prove fault.' The explanatory materials for the government's exposure draft legislation maintains that the strict liability provisions are appropriate, due to the serious financial impact contravention of the provisions may have on consumers.
1.70
The HRC observed that the bill' strict liability offenses are probably rationally connected to the legitimate objective of consumer protections.
Legislative scrutiny
1.71
The Senate Standing Committee on the Scrutiny of Bills (Scrutiny Committee) referred Senators to its consideration of a prior iteration of the bill from 21 March 2018.
Delegated legislation
1.72
The Scrutiny Committee previously expressed concern that significant elements of the bill's civil penalty provisions are left to regulations or other delegated legislation. The Scrutiny Committee noted examples of civil penalty offences for licensees that enter into a SACC or consumer lease that does not meet requirements that would be prescribed in the Credit Regulations.
1.73
The Scrutiny Committee also observed that it would be desirable for the bill to separate the offence provisions from the provision itself, so that the offences are set out clearly and affected persons may ascertain their obligations.
Strict liability offences
1.74
The Scrutiny Committee raised concerns, similar to the HRC, regarding the bill's proposed strict liability offences that, in relation to criminal law, would remove the requirement for a prosecution to establish a defendant is at fault. The Scrutiny Committee considers that strict liability offences undermine fundamental criminal law principles and, as such, a clear justification of those provisions is required.
1.75
The Scrutiny Committee also observed that the Guide to Framing Commonwealth Offences states strict liability offences are only considered appropriate where the offence is not punishable by a prison sentence or by a fine of more than 60 penalty units. Some strict liability penalties in the bill, relating to providers who enter into a SACC where repayments are not equal, or charge monthly fees following early repayment of a contract, attract a penalty of up to 100 penalty units.
The 'Henry VIII clause'
1.76
The Scrutiny Committee raised concerns that proposed section 323D makes exemptions for provisions of the bill which would allow delegated legislation to override the primary legislation passed by Parliament and 'subvert the appropriate relationship between the Parliament and the Executive.'
Regulatory impact and financial burden
1.77
The explanatory material for the government's exposure draft legislation outlined the significant consultation which had occurred on the draft legislation through the Review Panel process and noted the consultation had considered and identified the policy responses reflected in the bill.
1.78
The explanatory material estimated that the bill's reforms would result in a compliance cost to industry of $18.4 million. This includes:
… up-front costs to SACC providers and lessors to update their [information technology] systems, policies and procedures, training staff and updating disclosure documents. It also includes the ongoing costs of meeting the new obligations, such as documenting suitability assessments and complying with the protected earning amounts.
Conduct of the inquiry
1.79
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by
21 February 2020.
1.80
The committee received 42 submissions as well as additional information and answers to questions on notice, which are listed at Appendix 1.
1.81
The majority of submissions were received from organisations that provide legal and financial counselling services. These organisations were generally supportive of the bill's provisions for enhanced consumer protections. Several submissions were also received from industry bodies and these submissions generally supported some of the bill's provisions and rejected others.
1.82
The committee held a public hearing for the inquiry in Melbourne on
13 March 2020. The names of the witnesses who appeared at the hearing can be found at Appendix 2.
Acknowledgements
1.83
The committee thanks the individuals and organisations who assisted the committee with its inquiry, particularly those that made written submissions and participated in the committee's public hearing.