Senate

Revised Explanatory Memorandum

Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP

Chapter 5 - Caps on costs etc. for credit contracts

Outline of chapter

5.1 The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) introduces new obligations to provide for a tiered cap on the costs that can be charged under credit contracts.

5.2 The key elements of these obligations are:

•

credit providers under small amount credit contracts (in general terms, contracts where the amount of credit is less than $2,000 and the term is less than one-year) will only be able to charge the following amounts:

-

an establishment fee that can be a maximum of 20 per cent of the adjusted credit amount (defined as, in practice, the amount of credit the debtor receives in their hand);

-

monthly fees that can be a maximum of 4 per cent of the adjusted credit amount;

-

fees payable in the event of default; and

-

any government fee, charge or duty payable in relation to the contract;

•

all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent (with the inputs into the annual cost rate adjusted according to the size of the loan); and

•

the introduction of penalties against credit providers for breaching either cap, and penalties against providers of assistance for suggesting credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap.

Context of amendments

5.3 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth.

5.4 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence.

5.5 Under Phase Two, COAG agreed the Commonwealth would consider whether or not to regulate the costs that can be charged under credit contracts.

5.6 The Enhancements Bill introduces caps on credit contracts to address specific risks of financial detriment or harm to consumers, through the use of relatively high-cost credit.

5.7 The risk to a consumer of this financial detriment increases according to the following factors:

•

the borrower's income - the lower the income the greater the reduction in income that will result from having to meet repayments under a credit contract (noting that a significant percentage of borrowers who use these products will have very low incomes);

•

the term of the credit contract - the shorter the term the less income the borrower can expect to receive from other sources while they need to repay it, so that there is less opportunity for a borrower to receive sufficient income to either repay the debt or avoid an immediate need for additional credit to meet expenses temporarily deferred in order to make that repayment;

•

the number of credit contracts - the more credit contracts that the borrower takes out within a short period of time (whether concurrently or successively), the more likely it is that income is being diverted to meet repayments, rather than ongoing expenses; and

•

the level of costs charged by the credit provider - there can be significant differences in the level of costs charged by credit providers, in part reflecting the difficulties some debtors have in being able to obtain credit from other credit providers (with the result they enter into contracts irrespective of the costs being charged).

5.8 The combination of these factors can result in such a reduction in income that the borrower may, in a very short period, be placed in a position where the debt cannot be repaid, or can only be repaid through a significant drain on the borrower's financial resources.

5.9 The tiered approach to the cap on costs allows credit providers to receive a greater return for small amount credit contracts, given the higher establishment costs they may incur relative to the amount of the loan.

5.10 The Senate Economics Committee and the Joint Parliamentary Committee on Corporations and Financial Services (the Parliamentary Committees) both reviewed the operation of the cap on costs. Both Committees supported the need for a restriction on costs to protect borrowers, but considered that the level at which it was set should be reconsidered to address concerns about the viability of the industry.

5.11 The Senate Economics Committee in its report on the Enhancements Bill stated at paragraph 2.46: There is, therefore, a sound and principled case for national legislation to curb excessive interest rates, fees and charges by the payday loan industry in Australia.

5.12 Consistent with the observations and recommendations of the Parliamentary Committees, it is proposed to create a tiered cap on costs to balance the interests of consumers with the viability of the industry.

5.13 Lenders argued that the high establishment costs for short term credit contracts are not recouped under the current interest rate caps and the model set out in the Enhancements Bill. The avoidance of caps through various artificial legal constructs is common in all relevant jurisdictions.

5.14 The tiered model seeks to accommodate the costs of lenders as they transition between the caps while targeting specific problems in the market. In particular, the amendments introduce prohibitions on providing a short term credit contract, increase the maximum amount of permitted fees for a small amount credit contract and provide for a bridging cap on costs for a medium amount credit contract.

Table 5.1 Summary of Tiered Cap on Costs

Summary of new law

5.15 Schedule 4 of the Enhancements Bill introduces new obligations in relation to the restricting the maximum amount that can be charged in under both small amount credit contracts and all other credit contracts regulated by the Code.

5.16 The obligations will commence on 1 July 2013.

5.17 Schedule 4 will introduce the following obligations:

•

a cap on small amount credit contracts so that the maximum cost (other than in the event of default) will be the total of:

-

20 per cent of the amount of credit the debtor receives in their hand;

-

monthly fees of four per cent of this amount; and

-

any government fees, charges or duties payable in relation to the contract;

•

all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent;

•

credit providers are liable to penalties for breaching either cap;

•

providers of credit assistance who suggest credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap are liable to penalties (including being required to refund any fees or charges paid by the consumer); and

•

a number of provisions are introduced to address specific avoidance practices that have developed in response to the operation of similar caps currently in force in some Australian States and the Australian Capital Territory.

Comparison of key features of new law and current law

Detailed explanation of new law

Schedule 4 - Caps on costs etc for credit contracts

5.18 The obligations in Schedule 4 will commence on 1 July 2013. [Item 2, provision 3 in the table in subsection 2(1)]

5.19 The definition of small amount credit contract will be included in section 5 of the NCCP Act. It is defined as a credit contract:

•

that is not a continuing credit contract;

•

where the credit provider is not an Authorised Deposit-taking Institution (ADI);

•

that is not secured by a mortgage (over any type of property);

•

where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations);

•

where the term of the contract is two years or less (or any term prescribed by the regulations); and

•

where the contract meets any other requirements that may be prescribed by regulations.

[Schedule 3, item 1, subsection 5(1)]

5.20 Section 17 of the Code prescribes disclosure requirements for credit providers. The changes proposed in relation to small amount credit contracts means that credit providers will only be able to impose an upfront establishment fee and monthly fees (and not interest charges in respect of this class of contracts. As a result, there is a consequent need to exempt providers of small amount credit contracts from the disclosure requirements that relate to annual percentage rates and interest charges. [Schedule 4, item 1, subsections 17(4) to (6)]

5.21 Section 23A will introduce prohibited monetary obligations that only apply to small amount credit contracts. As a result amendments are introduced to, first, change the heading for section 23 (to clarify the distinction between that section and section 23A), and, secondly, to amend section 23 so that it does not apply to small amount credit contracts. [Schedule 4, items 2 and 3, section 23 and subsection 23(1)]

5.22 Section 23A will introduce a prohibition on a provider of a small amount credit contract from charging, under the contract, the following amounts:

•

interest charges (irrespective of whether there has been a default by the debtor);

•

fees and charges prohibited by the Code (which would not include the establishment fee and monthly fees permitted under section 31A); or

•

an amount that is greater than the amount of a permitted fee and charge (for example, overcharging a government fee).

[Schedule 4, item 4, section 23A]

5.23 Subsection 23A(2) provides a specific penalty for contravention of this requirement. A credit provider who, under a small amount credit contract, imposes a prohibited liability will lose their entitlement to all fees and charges (including the establishment fee and monthly fees). The credit provider is therefore not only required to refund the amount of any excess fee, charge or cost, but cannot retain any amounts, including those fees that would otherwise be permitted under section 31A. The debtor can recover any such amounts as a debt. [Schedule 4, item 4, subsection 23A(2)]

5.24 The purpose of this provision is to create a greater financial incentive for credit providers to comply with the prohibition. The nature of small amount credit contracts means that if credit providers charge amounts in breach of the prohibition they are likely to be relatively low in dollar terms. Allowing a penalty whereby the consumer can recover all fees and charges that were imposed will therefore encourage stricter compliance.

5.25 Section 24 of the Code will be amended to introduce a criminal penalty of 100 penalty units for a breach of section 23A, or for a credit provider requiring or accepting payments in breach of the prohibition. [Schedule 4, items 6 and 7, subsections 24(1A) and (2)]

5.26 The effect of this amendment is that a credit provider who breaches the prohibition in section 23A will have committed an offence under subsection 24(1A), with the contravention also being an offence of strict liability under subsection 24(2). A contravention of section 23A will be an offence of strict liability to encourage credit providers to maintain rigid compliance with the cap on costs (given that the amount they charge in respect of a small amount credit contract is within their control).

5.27 In order for the caps on small amount credit contracts to be effective it is considered necessary to introduce strict penalties against providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap. This will address situations where small amount credit provider have commercial relationships with brokers who may direct consumers to that credit provider irrespective of the cost of their products, or where the credit provider has adopted a legal structure to avoid the cap, but where the broker may not be willing to assume the same risks as the credit provider. [Schedule 4, item 8, section 24A]

5.28 The introduction of section 24A has resulted in a need to change the heading of section 24, to clarify that the two sections apply to prohibited monetary obligations in relation to credit providers and providers of credit assistance respectively. [Schedule 4, item 5, section 24]

5.29 Part 2 Division 3 of the Code prescribes requirements in relation to the charging of interest under credit contracts. The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to exempt small amount credit contracts from this Division. [Schedule 4, item 9, section 27A]

5.30 Section 31 of the Code provides a power to make regulations prohibiting credit providers from imposing particular credit fees of charges, or particular classes of such fees or charges. The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose any credit fees of charge other than those expressly permitted under section 31A. There is a consequent need to amend this provision so that the regulation-making power does not apply to small amount credit contracts. [Schedule 4, items 10 and 11, section 31]

5.31 Section 31A prohibits a provider of a small amount credit contract from charging fees and charges other than:

•

an establishment fee that can be a maximum of 20 per cent of the adjusted credit amount;

•

monthly fees that can be a maximum of 2 per cent of the adjusted credit amount;

•

fees payable in the event of default; and

•

a government fee, charge or duty payable in relation to the contract.

[Schedule 4, item 12, section 31A]

5.32 The adjusted credit amount is defined in section 204 of the Code as the first amount of credit that is to be provided under the contract (excluding fees). The meaning of this term is discussed in detail at paragraphs 5.81 and 5.82, but in substance it refers to the amount of money that the debtor will receive under the contract.

5.33 The prohibition applies to all fees and charges imposed or provided for under the contract. It is therefore not restricted to credit fees and charges as defined in section 204 of the Code. The use of the broader term is deliberately used to restrict the debtor's liability under a small amount credit contract, by only allowing credit providers to charge those amounts specifically listed in subsection 31A(1).

5.34 The amendments to the cap for small amount credit contracts will result in the maximum amount that can be charged being doubled. Setting the cap at this level would allow for a viable small amount lending industry to continue while meeting the Government's objective of indirectly encouraging longer term loans.

5.35 This is demonstrated by Table 5.2 below, which compares the effect of the model in the Enhancements Bill with other models proposed to the Joint Parliamentary Committee on Corporations and Financial Services by individual credit providers, and by an industry body for small amount lenders, the National Financial Services Federation (NFSF).

5.36

5.37 These other models were:

•

an upfront fee of 28 per cent of the adjusted credit amount, and a monthly fee of 2 per cent of this amount - by the NFSF ^[1] ;

•

an upfront fee of 27 per cent of the adjusted credit amount, and a monthly fee of 3 per cent of this amount - by Cash Stop Financial Services Pty Ltd ^[2] ; and

•

an upfront fee of 25 per cent of the adjusted credit amount, and a monthly fee of 3 per cent of this amount - by Money3 Corporation Limited ^[3] .

Table 5.2 Comparison of return under different models

Note: Charges are expressed as a percentage of the adjusted credit amount.

5.38 Table 5.2 demonstrates that the '20/4 model' provides a higher return than the other models after a period of time of between five and nine months.

Restrictions on fees and charges for small amount credit contracts

5.39 Paragraph 31A(1)(a) currently includes a requirement for the permitted establishment fee to reflect the credit provider's costs in respect of that contract. This means that if the credit provider's costs are less than 20 per cent of the adjusted credit amount, than they are restricted to this lower figure. It is proposed to simplify this provision, so that credit providers can charge a maximum of 20 per cent in all cases.

5.40 Items 12 and 23 replace the definition in paragraph 31A(1)(a) of the permitted establishment fee to remove this limitation, and provides that 20 per cent of the adjusted credit amount can be charged as an establishment fee. [Schedule 4, items 12, subsection 31A(2) and item 23, subsection 204(1)]

5.41 These items also include a prohibition on imposing a permitted establishment fee if refinancing the original small amount credit contract. This prohibition addresses the conduct of some providers in regularly refinancing consumers to increase the amount of the debt.

5.42 Items 12 and 24 increase the permitted monthly fee for a small amount credit contract in subsection 31A(3) from 2 per cent to 4 per cent. [Schedule 4, items 12, subsections 31A(3) and item 23, subsection 204(1)]

5.43 Table 5.3 below provides examples of the permitted establishment and monthly fees under two loans of $100 with terms of 4 and 5 weeks respectively.

Table 5.3 Comparison of maximum amount repayable on $100 loans of four and five weeks

5.44 A prohibition is introduced on a credit provider or a person prescribed by regulations from requiring or accepting a payment by the debtor of a fee or charge in relation to a small amount credit contract, or the provision of the amount of credit under a small amount credit contract, or a thing that is connected with a small amount credit contract or the provision of the amount of credit under such a contract. [Schedule 4, item 12, section 31B]

5.45 This prohibition operates as an anti-avoidance mechanism. This addresses both historic and current concerns about credit providers in the short term lending market using sophisticated legal techniques to avoid existing State and Territory caps on costs. Avoidance mechanisms include a 'broker' model, using third parties to obtain additional fees and charges by way of brokerage, the requirement to purchase a product at an inflated price in order to obtain a loan, and the requirement to obtain, from a third party, verification that the applicant is creditworthy. Allowing for the prohibition to extend to third parties is necessary to prevent such avoidance techniques migrating to small amount credit contracts.

5.46 The Enhancements Bill introduces a cap on costs for all other contracts other than small amount credit contracts. Section 32A will introduce a prohibition on a credit provider entering into a credit contract where the annual cost rate exceeds 48 per cent. [Schedule 4, item 13, subsection 32A(1)]

5.47 As with the caps on small amount credit contracts, strict penalties are introduced for providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap. [Schedule 4, item 13, subsections 32A(2) and (3)]

5.48 The 48 per cent cap does not apply in the following circumstances:

•

where the credit provider is an ADI (to give this class of credit providers certainty where they may otherwise inadvertently breach the cap, particularly in relation to contracts where both credit and debit facilities are provided, and noting that they are subject to a broader range of prudential and regulatory oversight than other classes of credit providers);

•

where the credit contract is a small amount credit contract (as the cap in section 31A will apply); or

•

where the credit contract is a bridging finance contract (where a combination of a short term and relatively high upfront costs may result in the 48 per cent cap being exceeded). [Schedule 4, item 13, subsection 32A(4)]

5.49 A definition of a bridging finance contract is included in the Enhancements Bill. It is defined as a contract where:

•

at the time the contract is made the debtor:

-

reasonably expects to receive a lump sum before the end of the contract; and

-

intends to use that sum as far as possible to meet their obligations under the contract;

•

the contract is for a term of two years or less; and

•

if the regulation prescribe any conditions, those conditions are met. [Schedule 2, item 5, subsection 204(1)]

5.50 Section 32AA provides that a credit provider is considered to have exceeded the annual cost rate of 48 per cent if the annual cost rate would have been exceeded when the contract was entered into but the calculation was made on the basis that:

•

the annual percentage rate under the contract would have been increased; or

•

there was an increase in the credit cost amount as a result of an increase, as prescribed by the regulations, in the amount of a fee and charge (as referred to in subsection 32B(3)), including an increase from zero dollars where no fee was previously charged.

[Schedule 4, item 13, section 32AA]

5.51 Section 32AA applies to a credit provider who is party to a credit contract other than a small amount credit contract or bridging finance contract, provided they are not an ADI.

5.52 The difference in approach between increases in the annual cost rate resulting from changes to the annual percentage rate and from increases in fees and charges reflects the greater potential compliance burden for credit providers in having to monitor changes to the annual cost rate from the imposition of fees. The fees and charges that may be prescribed by the regulations are likely to include those developed by credit providers to avoid the cap on costs, with a need for ongoing flexibility as new techniques are developed.

5.53 The prohibition ensures that credit providers can apply consistent compliance practices across their portfolio of credit contracts, with the need to review the impact of particular fees and charges in specific and limited circumstances only. A breach of this prohibition attracts a criminal penalty of 50 penalty units.

5.54 Section 32B sets out the formula for calculating whether or not the 48 per cent annual cost rate has been exceeded. This formula largely adopts the model currently in force in New South Wales, pursuant to the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Act 2011. [Schedule 4, item 13, section 32B]

5.55 The use of an existing formula avoids the need for changes by credit providers who currently have developed practices to comply with the New South Wales cap on costs.

5.56 Section 32B will, however, allow for amounts to be prescribed by regulation that would need to be taken into account in calculating the annual cost rate. The introduction of this regulation-making power will enable the Government to quickly respond to attempts to circumvent the objective of these reforms. [Schedule 4, item 13, paragraph 32B(3)(c)]

5.57 Subsection 32B(4A) provides the flexibility to exclude, by regulations, certain fees or charges from a class of credit contracts that would otherwise be required to be included in the credit cost amount. This complements section 32AA, and will allow for fees and charges to be taken into account in applying the annual cost rate over the life of the contract, where an assessment has been made that the fee or charges are of a nature that they are relevant to the cost of credit and therefore should be included in the annual cost rate. [Schedule 4, item 13, subsection 32B(4A)]

5.58 This regulation-making power is included in recognition, in the Australian jurisdictions that have a cap on costs, of the development of a diverse range of methods of charging the borrower additional amounts that do not meet the definition of costs to be included in calculating the cap in State or Territory legislation. Credit providers have adopted a range of practices in order to be able to generate a return of more than 48 per cent while still complying with the cap.

5.59 A contravention of the annual cost rate requirement in section 32A will be a consequential breach of the current prohibition in section 23 on credit providers charging amounts in excess of the monetary liabilities allowed under the Code.

5.60 Subsection 34(6) of the Code prescribes requirements in relation to the disclosure of interest charges in a statement of account. The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to exempt small amount credit contracts from subsection 34(6). [Schedule 4, item 14, subsection 34(6)]

5.61 A credit provider under a small amount credit contract (or any person prescribed by the regulations) will be prohibited from receiving any part of the amount of the credit provided under the contract. [Schedule 4, item 15, subsection 39A(1)]

5.62 Any amount of credit provided under the contract retained or paid to the credit provider or to any person prescribed by the regulations is defined as a prohibited credit amount. [Schedule 4, item 25, subsection 204(1)]

5.63 The intention of this prohibition is to address existing practices that have developed following the introduction of similar caps on credit contracts in some States and the Australian Capital Territory. The purpose of the provision is to prevent credit providers from increasing the amount that must be paid by the debtor under the contract through, for example, practices such as requiring the debtor to also purchase goods or services at inflated prices, with the cost of those goods or services included in the amount of credit provided under the contract.

5.64 This practice enables a credit provider to obtain a higher return in two ways: first, the debtor must pay an inflated price for the goods relative to the cost to the credit provider of providing them; and, second, the debtor pays interest on the cost of the goods or services.

5.65 Similar arrangements between credit providers and third parties have developed to avoid the restriction on costs, so that the amount of credit is increased by fees or amounts payable to those third parties (with commercial arrangements between those parties in relation to the charging of the fees or costs). The regulation-making power, that will enable payments to prescribed third parties to be included in the prohibited credit amount, will enable the Government to respond promptly to any such practices. [Schedule 4, item 15, paragraph 39A(1)(b)]

5.66 Subsection 39A(2) provides that this prohibition does not apply to the permitted establishment and monthly fee, government fees or charges, credit used to refinance any amount of credit provided under another small amount credit contract, or to any types of payments permitted by regulations (so that credit providers can include those charges in the amount of credit provided (although subject to other restrictions). [Schedule 4, item 15, subsection 39A(2)]

5.67 The regulation-making power will enable exemptions from the prohibition to be made where it would be appropriate for the credit provider to pass on the cost to the debtor. [Schedule 4, item 15, paragraph 39A(2)(c)]

5.68 The effect of Section 39B is to cap the amount the credit provider can charge by way of default fees, by specifying that the maximum amount that can be recovered under a contract in the event of default by the borrower must not exceed an amount that is twice the adjusted credit amount. [Schedule 4, item 15, subsection 39B]

5.69 A credit provider is allowed to retain money used to pay for a refinance of some or all of the credit provided under another small amount credit contract. [Schedule 4, item 15, paragraph 39A(2)(ba)]

5.70 The effect of this provision is that the total of the permitted establishment and monthly fees and the default fees can, at most, only be equal to twice the adjusted credit amount. For example, in relation to a small amount credit contract where the adjusted credit amount was $1000 and the period of the contract was four months, the total of the establishment and monthly fees would be $180. If the debtor then defaulted the total amount the credit provider could recover would be $1000, or a maximum of $820 in default fees.

5.71 If a term of a small amount credit contract allows the credit provider to recover default fees in excess of the maximum amount, that term or provision is void to the extent it authorises the credit provider to collect the excess. The credit provider would, however, still be allowed to receive or retain default fees up to the maximum amount. [Schedule 4, item 15, subsection 39B(2)]

5.72 The rate at which default fees can be charged is not regulated by the Enhancements Bill. However, credit providers would be subject to other requirements that apply more broadly (including common law principles that the default fees must reflect their loss from any default by the debtor).

5.73 The restriction on the maximum amount that can be recovered under a contract - so that this figure must not exceed an amount that is twice the adjusted credit amount - does not apply to enforcement expenses. [Schedule 4, item 15, subsection 39B(3)]

5.74 The Code already regulates the way in which enforcement expenses can be charged, and expressly provides, in section 107, that the amount must not exceed those reasonably incurred by the credit provider.

5.75 A regulation-making power is to be introduced that would require a credit provider to do specified things, where they are party to a small amount credit contract that is being repaid by a direct debit, and there has been a failure in the direct debit request (and payment has not occurred).

5.76 This provision is intended to address the risk of fees accruing to a debtor's account through repeated unsuccessful use of a direct debit. It is contemplated the regulations would require the credit provider to try and make contact with the debtor in order to clarify why the direct debit is being rejected (in circumstances where a debtor is in default and likely to be in financial hardship). The exact nature of the obligations is to be determined following specific consultations on this issue. A breach of this provision attracts a criminal penalty of 50 penalty units. [Schedule 4, item 15, section 39C]

5.77 The amendments will provide that a contravention of the annual cost rate requirements in section 32A and 32AA will be a breach of a key requirement under section 111. Under section 111 a court can penalise the credit provider by finding that they should forfeit up to a maximum of all interest charged under the contract (and not simply reduce the interest charges to 48 per cent). This recognises that the Government has intended to create a significant disincentive to credit providers exceeding the annual cost rate of 48 per cent or the other cap on costs. If, for example, the credit provider was only at risk of losing the amount charged in excess of the annual cost rate some credit providers may consider the potential gains that can still be realised are sufficient to engage in conduct in breach of the prohibition. They may be influenced particularly when they are dealing with vulnerable consumers who are less likely to complain to ASIC. [Schedule 4, items 16 and 17, subsection 111(1) and paragraph 111(2)(f)]

5.78 There are a number of key requirements that a credit provider can breach other than in relation to prohibited monetary obligations.

5.79 The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to modify section 114, which sets out the orders a court can make where a credit provider has breached a key requirement in relation to a small amount credit contract.

5.80 The Enhancements Bill therefore makes consequential amendments to section 114 as follows:

•

small amount credit contracts are excluded from subsection 114(1) (which enables orders to be made in relation to interest charges payable under a credit contract); and

•

subsection 114(1A) is inserted, which provides that the maximum penalty that a court may impose is the total of the permitted establishment and monthly fees payable under the contract.

[Schedule 4, items 18 and 19, subsections 114(1) and (1A)]

5.81 The term adjusted credit amount means, in relation to a small amount credit contract, the first amount of credit that is, or is to be, provided under the contract. [Schedule 4, item 20, subsection 204(1)]

5.82 The adjusted credit amount is defined by reference to the first amount of credit provided under the contract, and will typically be the amount of money the borrower receives in their hand. The credit provider will determine this sum as the amount they are prepared to lend to the borrower, typically as a result of undertaking the assessment required by the responsible lending obligations in Chapter 3 of the Credit Act.

5.83 The establishment fee and monthly fee must be calculated as 20 per cent and 4 per cent respectively of the adjusted credit amount. The adjusted credit amount would therefore exclude:

•

any fees that the credit provider may be considering financing under the contract;

•

the amount of any prohibited credit amount, where there is a contravention of subsection 39A(1); and

•

any other amounts that may be prescribed by the regulations.

5.84 The operation of this provision is illustrated by the following examples.

Example 5.1

A consumer seeks a loan for $1000. They can pay an establishment fee from their existing funds.

The consumer will enter into a contract under which the amount of credit provided is $1000. The adjusted credit amount is also $1000.

The consumer can be charged a permitted establishment fee of 20 per cent of the adjusted credit amount (or $200), and permitted monthly fees of 4 per cent of the adjusted credit amount (or $40).

A consumer seeks a loan for $1000. They are unable to pay an establishment fee from their existing funds

The consumer will enter into a contract under which the adjusted credit amount is $1000.

The consumer can be charged a permitted establishment fee of 20 per cent of the adjusted credit amount (or $200), and permitted monthly fees of 4 per cent of the adjusted credit amount (or $40).

The amount of credit provided under the contract will therefore be $1200.

5.85 The definition of a medium amount credit contract will be included in the Enhancements Bill. A medium amount credit contract is a credit contract that meets the following criteria:

•

it is not a continuing credit contract;

•

the credit provider is not an ADI;

•

the credit limit of the contract is at least $2,001 but not more than $5,000 (or another amount prescribed by the regulations);

•

the term of the contract is at least 16 days but no longer than two years (or number of years as prescribed by the regulations); and

•

the contract meets any other requirement prescribed by the regulations.

5.86 The definition can therefore be varied through the use of regulations. This is required to address any potential avoidance of the definition and related compliance requirements. [Schedule 4, item 22, subsection 204(1)]

5.87 The Enhancements Bill will insert a number of 'signpost' definitions, referring to terms that are central to the operation of these provisions and specifying the sections in which they appear. These terms are annual cost rate, credit cost amount, permitted establishment fee, permitted monthly fee, prohibited credit amount and small amount credit contract. [Schedule 4, items 21, 22, 23, 24, 25 and 26]