The Federal government introduced new laws with effect from 1 July 2021 which now require providers of debt management services to operate under an appropriate credit licence. These amendments operate within the existing National Consumer Credit Protection Act 2009 (National Credit Act) legislative framework. The provision of debt management services was not previously legislated for or managed by the National Credit Act, and service providers previously did not need to obtain a credit licence.
The key purpose of the National Credit Act is to ensure that businesses that lend credit to consumers do so responsibly, make appropriate enquiries about a consumer’s financial situation, and do not lend where a credit contract would be unsuitable for a consumer. The Treasury, which is charged with responsibility for these new laws regulating debt management services, cites that the purpose of the new licencing obligations is to support customers that have engaged debt management firms to represent them in financial disputes with their credit providers.
For the purposes of the new credit licencing requirements, a debt management service is one where service providers engage in some activity in relation to a consumer who is a creditor, and that consumer pays a fee in relation to this service. This can include providing debt managing assistance, or credit reporting assistance to a customer.
ASIC provides the following examples of what they would consider to be debt management services:
|
Service |
Description |
|
‘Credit repair’ services |
Offering to ‘repair’, ‘clean’ or ‘fix’ entries in a consumer’s credit report that relate to a consumer credit contract |
|
‘Debt negotiation’ services |
Offering to help a consumer negotiate repayment arrangements or changes to a debt under a consumer credit contract with the credit provider |
|
Dispute lodgement assistance |
Helping a consumer lodge a dispute with a credit provider or AFCA in relation to the consumer’s credit contract |
|
Hardship notice assistance |
Helping a consumer give a hardship notice to a credit provider where they are having difficulties meeting their repayment obligations under their credit contract |
These categories are not exhaustive. Some services not described here may be classified as a debt management services under the new legislation. Service providers should seek further legal advice if they are concerned that they may be providing a debt management service, and customers may consider enquiring with businesses about whether they are holders of appropriate credit licence, if they are providing services that appear to be classified as debt management services.
If your business operates a debt management service, you will need to immediately apply for a credit licence to obtain authorisation to continue to operate a debt management service. Even if the business has previously held a credit licence, it will need to apply for a variation to the licence to gain authorisation to specifically operate a debt management service. Service providers must also apply to become a member of the Australian Financial Complaints Authority (AFCA).
If you are operating a debt management service, and have not already obtained, or lodged an application to obtain debt management authorisation under a credit licence before 1 July 2021, you may be in breach of the National Credit Act for operating a credit activity without an appropriate credit licence and significant consequences may flow (addressed below).
Holders of a credit licence in Australia are subject to certain ongoing obligations, including the obligation to satisfy a ‘fit and proper person test’ and the obligation to undertake their services ‘efficiently, honestly and fairly’.
Licence holders will also need to fulfil the general conduct obligations as members of the Australian Financial Complaints Authority which includes their codes of practice, which can be found on their website here: https://www.afca.org.au/about-afca/rules-and-guidelines/code-compliance.
The penalties for failing to obtain a credit licence authorising the relevant credit activity can incur a maximum fine of up to $550,000 and 2 years imprisonment.
Businesses should also be careful that the messaging used to describe their services does not imply that they hold a credit licence if this is not the case. The maximum penalty for holding out or advertising a business’ credit licence status incorrectly is also a fine of up to $550,000 and 1 year imprisonment.
If you require any assistance in connection with the obligations of providing debt managed services or advice in relation to the new laws governing eligibility to provide such services, please contact our team by clicking here.