Surprise! Government drops Small Business Lending Reforms

Surprise! Government drops Small Business Lending Reforms

Recently Mr Bill Shorten MP surprised everyone when he announced that the Federal Government would be dropping the small business lending reforms to the National Consumer Credit Protection Act 2009 (NCCP).

The small business lending reforms were part of the Federal Government’s Phase 2 Consumer Credit Reforms.  The Phase 2 Consumer Credit Reforms cover:

  1. credit provided for investment lending;
  2. some forms of private lending;
  3. short-term and indefinite term consumer leases; and
  4. anti-avoidance provisions.

The small business lending reforms were the most significant of the reforms that had been proposed by the Federal Government. As a result of considerable protest and lobbying from various small business groups, the Federal Government decided, many believe due to the fact that it is an election year, to drop the small business lending reforms.

The official notice from Treasury is that the small business lending reforms have been ‘delayed’ because:

“there is a need to further examine a number of key issues. The release of the exposure draft has raised consideration of whether the benefits could be delivered in a more targeted way, through the development model from that in the Phase 2 Bill. As a result any reforms to small business finance will be deferred, and the Government will not be seeking passage of Schedule 2 in the life of the current Parliament.”

Investment purposes lending

Under the proposed reforms, any credit which is provided for investment purposes will be subject to the consumer protection regime currently in place under the NCCP, other than:

  1. in relation to residential property for investment purposes or
  2. to refinance credit provided in relation to residential property for investment purposes and
  3. if more than half of the credit is intended to be used for those investment purposes or
  4. where the credit is used to obtain goods or services for different purposes – the goods or services are intended to be most used for those investment purposes.

Currently, the NCCP and National Credit Code (NCC) only covers loans used for investment in residential real estate. The reforms will require that all providers of loans for investment purposes to individuals and strata corporations obtain an Australian Credit Licence (ACL) and the terms of any such investment be regulated under the NCC.

Other credit reforms

Other proposed reforms worth noting are:

  1. Short term leases and indefinite term leases:  currently the NCC exempts these credit leases.  However, under the reforms these types of leases would be regulated where:
    1. at the time of entering into the lease, the lessor should have known that the consumer wanted the use of the goods for a longer or different period of time (“the anticipated period of use”) and
    2. the consumer would pay more than the cash price of the goods if they made rental payments for the anticipated period of use (rather than for the term of the lease).
  2. Regulation of “credit activity investors“:  this includes individual or small entity lenders or lessors who engage in credit activities through a service arrangement with an intermediary.  A credit activity investor will be exempt from the requirement to hold an ACL, but only if:
    1. they are a member of an ASIC-approved external dispute resolution scheme
    2. the intermediary holds an ACL and
    3. there is an agreement between the intermediary and the private credit providers and private lessors.
  3. Introduction of anti-avoidance provisions prohibiting parties from carrying out schemes to avoid the operation of the NCCP and NCC.

Next steps

It is not known whether the current Schedule 2 reforms will become a reality, given that the Government will not be seeking passage in the current Parliament and most are tipping a change in Government on 14 September 2013.