On 11 June 2010, ASIC announced it has commenced proceedings in
the Federal Court of Australia against Australian Lending Centre
Pty Ltd and Sydney Lending Centre Pty Ltd, two finance brokers.
ASIC alleges that:
- the brokers contravened the Australian Securities and
Investments Commission Act by falsely representing that
certain loan contracts were provided wholly or predominantly for
business or investment purposes rather than for personal, household
or domestic use;
- a company associated with the finance brokers engaged in
unconscionable conduct in entering the loan transactions; and
- the sole director of all three companies aided and abetted the
contraventions by two of the companies in relation to one
particular loan transaction.
ASIC is seeking declarations that the contraventions occurred
and orders restraining the relevant parties from making business
purposes representations in circumstances where loans are sought
for personal, household or domestic purposes.
The Uniform Consumer Credit Code
(UCCC) provides a range of protections for
borrowers who take out loans for personal, household or domestic
purposes; the same protection is not afforded to borrowers who take
out loans for wholly or predominantly business or investment
purposes.
The UCCC will be replaced by the Consumer Credit Protection
Act 2009 (Act or New Credit
Code), which comes into force on 1 July 2010. The New
Credit Code is more stringent than the UCCC in a number of areas
such as licensing requirements and information disclosure. ASIC has
been given 'front line' national responsibility for consumer credit
and finance broking under the Act.
Clause 5 of the New Credit Code provides the key details of the
transactions it is designed to regulate. The clause states that
credit provided or intended to be provided wholly or
predominantly:
(i) for personal, domestic or household purposes; or
(ii) to purchase, renovate or improve residential property for
investment purposes; or
(iii) to refinance credit that has been provided wholly or
predominantly to purchase, renovate or improve residential property
for investment purposes,
are regulated transactions for the
purposes of the Act.
The business or 'pure investment'
borrowing 'carve out' remains a feature of the New Credit Code.
This can be seen clearly from Clause 13 of the New Credit Code.
Clause 13 of the New Credit Code provides as follows:
"(2) It is presumed for the purposes of
this Code that credit is not provided or intended to be provided
under a contract wholly or predominantly for any or all of the
following purposes (a Code purpose):
(a) for personal, domestic or household
purposes;
(b) to purchase, renovate or improve
residential property for investment purposes;
(c) to refinance credit that has been
provided wholly or predominantly to purchase, renovate or improve
residential property for investment purposes;
if the debtor declares, before entering
the contract, that the credit is to be applied wholly or
predominantly for a purpose that is not a Code purpose, unless the
contrary is established.
(3) However, the declaration is
ineffective if, when the declaration was made, the credit provider
or a person (the prescribed person) of a kind prescribed by the
regulations:
(a) knew, or had reason to believe;
or
(b) would have known, or had reason to
believe, if the credit provider or prescribed person had made
reasonable inquiries about the purpose for which the credit was
provided, or intended to be provided, under the contract;
that the credit was in fact to be
applied wholly or predominantly for a Code purpose.
(4) If the declaration is ineffective
under subsection (3), paragraph 5(1)(b) is taken to be satisfied in
relation to the contract.
(5) A declaration under this section is
to be substantially in the form (if any) required by the
regulations and is ineffective for the purposes of this section if
it is not.
(6) A person commits an offence if:
(a) the person engages in conduct;
and
(b) the conduct induces a debtor to
make a declaration under this section that is false or misleading
in a material particular; and
(c) the declaration is false or
misleading in a material particular.
Criminal penalty: 100 penalty units, or
2 years imprisonment, or both.
(7) Strict liability applies to
paragraph (6)(c)."
The sting in the tail, however, is
this: Clause 13(3) places the onus on the credit provider not to
take at face value statements by borrowers that the purpose for
which they require credit is not a Code purpose - ie, a business or
non residential property investment purpose - or take comfort from
a borrower's willingness to sign a declaration to that effect.
Greater 'due diligence' in this regard will now be required by
credit providers before credit is extended.
A failure to do so will have serious civil and potentially
criminal ramifications. The proceedings taken by ASIC referred to
in this note should be treated as a 'first shot across the bow' for
credit providers and finance brokers, with potentially more to come
if they do not strictly adhere to the requirements of the New
Credit Code.
For more information, please contact:
Elpis Korosidis, Partner
Phone (direct): +61 3 9608
2115
Email:
e.korosidis@cornwalls.com.au