The Government announced in September last year its intention to require providers of debt management companies to hold an Australian Credit Licence in order to carry on their businesses.
Treasury has just finished consulting on an exposure draft of the proposed legislation – the National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021
Treasury summarises the rationale for the reforms in these terms:
An element of the reforms is protecting consumers from the often predatory practices of debt management firms by requiring them to hold an Australian Credit License when they are paid to represent consumers on matters related to credit activities.
While the reforms will be welcomed by credit providers in relation to the activities of credit repair companies, the reforms also extend to include debt agreement administrators who are already regulated under Part IX of the Bankruptcy Act 1966 (Cth)
The changes are to be implemented by Regulation – specifically by amendment to the National Consumer Credit Protection Regulations 2010 by adding new regulations:
- 4A Debt management services
- 4B Meaning of debt management assistance
- 4C Meaning of credit reporting assistance
Regulation 4A proposes make the provision of a debt management service a “credit activity” for the purposes of section 6 of the National Consumer Credit Protection Act 2009 (Cth) – that section sets out what are “credit activities” for the purposes of the Act.
Proposed commencement date
The changes are proposed to take effect on 1 July 2021.
Transitional arrangements will apply.
The debt management service amendments apply in relation to a debt management service provided on or after 1 July 2021, regardless of whether the arrangement under which the service is provided is entered into before, on or after 1 July 2021
Even though credit licenses may not have been issued to a debt management company or a credit repair company prior to 1 July 2021, their position is protected as long as they have prior to that date:
- Lodged an application with ASAIC for grant of an ACL or a variation to the authorisations under an existing ACL which is still pending at that date, and
- Joined AFCA as a member of that scheme.
How ASIC will assess Licence Applications
It is unclear as to what criteria ASIC will use to assess applications – no doubt policies and procedures will have to be in place designed to demonstrate that the licensee will comply with its licensing obligations under the NCCP Act being:
- conduct credit activities efficiently, honestly and fairly;
- have adequate arrangements in place to manage conflicts of interest;
- comply with any applicable credit licence conditions;
- comply with the credit legislation;
- ensure representatives comply with the credit legislation;
- have adequate resources (including financial, human and technological);
- maintain competence to provide the credit activities;
- adequately train representatives and ensure they are competent;
- have adequate risk management systems
- have adequate internal dispute resolution procedures; and
- have compensation arrangements in place (PI insurance)
Importantly, the directors, managers and controllers of debt management service companies will need to meet the fit and proper person test.
Exemption for lawyers from licensing requirements to be restricted.
Currently lawyers providing legal service are generally exempt from the NCCP Act by virtue of Regulation 24. Many debt management and credit repair companies have business associations with law firms. Accordingly, the lawyer exemption is to be further limited and will not apply where lawyers are involved in arrangements with debt management service providers – See proposed Regulation 24 (4A)
We predict these changes will herald a major shakeup in the debt management and credit repair industries and we will see many players struggle to obtain and maintain licenses from ASIC.