The National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 has been read a first and second time in the House of Representatives and has now been referred to the Senate Economics Legislation Committee for scrutiny with a report being due from that Committee by the 12 March 2021.
While public commentary on the Bill has focused on the proposed roll back of responsible lending obligations, the Bill does much more, in particular it further restricts small amount credit lending and fundamentally changes the regulation of consumer leasing to an extent that it will probably force consumer leasing businesses out of the industry.
While responsible lending requirements might be easing for most lenders the requirements are tightening for lenders making small amount credit loans (SACCs) and lessors engaging in consumer leasing.
We now consider the changes proposed to SACC lending and consumer leasing.
Reforms to Small Amount Credit Lending
In essence a SACC is a consumer loan contract where the term of the loan does not exceed 1 year and the amount let does not exceed $2000. SACCs are already heavily regulated due to perceived consumer harm that may arise from this type of lending and the possibility of debt traps arising as a result.
The 2 main changes that will impact on the industry are:
- Repayments under SACCs will be capped at 20% of a protected earning amount and this restriction will apply to all borrowers (currently this restriction applies only to those borrowers who receive more than 50% of their income from government benefits) receipt.
- prohibiting lenders from making unsolicited communications to consumers to apply for or enter into a small amount credit contract after they have repaid their existing loans.
For the sake of completeness, a summary of all the changes are set out below (based on the table contained in the explanatory memorandum)
|New law||Current law|
|Lenders must not enter into a small amount credit contract with a consumer if the repayments under the contract are not within the protected earning limits prescribed by regulation.||Protected earning limit only applies to those borrowers obtaining more than 50% of their income form government pensions and other support mechanisms.|
|The rebuttable presumption is repealed. (the reason for this repeal is that it was concluded that the presumption was not working in practice)||A small amount credit contract is presumed to be unsuitable for a consumer if:
the consumer has had two or more other small amount credit contracts in the past 90 days; or
is in default under another small amount credit contract.
|Small amount credit contracts must have equal repayments and equal repayment intervals over the life of the loan, subject to certain limited exceptions.||No equivalent.|
|Lenders cannot charge a consumer monthly fees in respect of the residual term of the small amount credit contract where the consumer fully repays the loan early.||No equivalent.|
|Lenders are prohibited from making unsolicited communications to a consumer that contain an offer or invitation to enter into or apply for a small amount credit contract in virtually all circumstances.||No equivalent.|
|Lenders must document in writing their assessment that a small amount credit contract is not unsuitable for a consumer.||No equivalent.|
|Licensees must display information and give information to consumers about small amount credit contracts in accordance with requirements determined by ASIC in a legislative instrument. Is makes it easier to change the requirement of any warning notices.||Licensees must display information about small amount credit contracts in accordance with the requirements prescribed by the regulations.|
|New penalties introduced for non-compliance involved loss of entitlements to fees and charges.|
Reforms to Consumer Leasing
Many of these changes proposed to consumer leases mirror the consumer protections that apply to small amount credit contracts, with some modifications to reflect the differences between the two products.
A consumer lease normally involves the lease of white goods to a consumer where at the end of the term technically the goods must be returned to the hirer, although in practice the renter keeps the good and might pay a minimal sum to buy them.
One change is to for the first time regulate leases for an “indefinite period” which are currently exempt.
While there are many other changes introduced, we will only focus on the introduction of price controls in the rest of this article.
To date there have been no effective price controls on this industry. Franchise and “head lessor” arrangements are common and this model only gives a decent return to parties in the “food chain” if the rental payments required to be made by the hirer are a multiple of what the hirer would have to pay for the goods if they bought then for cash or using a credit card to make the purchase. For example, a quick check of the web reveals that:
- a 55” TV can be rented over a 36-month term for weekly payments of $24.95. The total cost being $3892.20. or,
- an iPhone 11 can be rented over a 36-month term for weekly payments of $32.95 – total cost $5140.20. (which can be purchased cash for around $1000)
The profile of hirers is that generally they won’t be able to pay cash for the goods, not will they have access to credit cards as many hirers will be in receipts of government benefits.
The killer blow struck by this new legislation to the consumer leasing industry is to introduce price controls and a cap on what may be charged. This will be done by regulation. The controls effectively impute a notional price cap equivalent to 48% annualised interest and stop avoidance by defining and capping the allowed base price of the goods and how much may be charged for delivery and installation. Specifically, the explanatory memorandum explains what may be charged as follows:
4.17 The permitted cap for a consumer lease is the sum of:
- the base price of the goods hired under the lease;
- the permitted delivery fee (if any) for the consumer lease;
- the permitted installation fees (if any) for the consumer lease; and
- the sum of the above amounts, multiplied by:
- in the case of a consumer lease for a fixed term—0.04 for each whole month of the consumer lease to a maximum of 48 months; or
- in the case of a consumer lease for an indefinite period— 1.92.
Even with the proposed price controls leased goods will still not be cheap. An example given in the explanatory memorandum explains how the price cap will work in practice in a given instance.
Example 4.2: Application of the permitted cap
Anh enters into a consumer lease with Whitegoods for You to lease a refrigerator with a base price of $1,000 for two years.
Anh is charged:
– permitted delivery fees of $100; and
– installation fees of $50.
The maximum amount that Anh can be charged over the two-year lease is the permitted cap of $2,254, comprising:
– the base price, permitted delivery and installation fees ($1,150); and
– monthly fees of $1,104 ($1,150 x 24 months x 0.04).
The lease contract requires Anh to make payments of $5 per month to cover the risk of damage to the goods and $15 per month for a service contract provided to a third-party service provider. These charges must be within the permitted cap of $2,254 to comply with subsection 175AA(1).
The price cap, coupled with the other changes makes it difficult to see how the consumer leasing industry will be able to remain viable, certainly with its current structure.
What has always surprised us is that the National Consumer Credit Protection Act 2009 (Cth) has never really contained any anti avoidance measures as such. The legislation has relied upon deemed certain transactions as credit transactions even though they might be structured as sale transactions etc.
With the new restrictions imposed upon small amount credit contracts and consumer leasing transaction, there will be an added incentive for providers of those forms of credit to attempt to structure transactions so they are not caught by the legislation.
Accordingly, the Bill, in Chapter 5 introduces comprehensive anti-avoidance provisions in relation to small amount credit contracts and consumer leasing. The legislation prohibits “schemes” and is based generally on the anti-avoidance provisions in the A New Tax System (Goods and Services Tax) Act 1999 and the Income Tax Assessment Act 1997.
The new anti-avoidance provisions are comprehensive, technical and lengthy. If any clients wish to explore these provisions in further detail, we are happy to assist.
These amendments will change the nature and scope of the SACC and Consumer Leasing industries. Already many providers have left the industry or are trying to desperately reinvent themselves. Let’s see what the industry landscape looks like 12 months hence!