Understanding credit and finance

The National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’) and National Credit Code (NCC) apply to credit contracts as defined in the NCC. For the purposes of the NCC, credit is provided if, under a contract:

• payment of a debt owed by the borrower to the credit provider is deferred; or
• the borrower incurs a deferred debt to the credit provider (s 3(1) NCC).

For example, credit includes a person being lent money by a business (a debt) and being required to pay it back at a later date (deferral).

The amount of credit is the amount of the debt actually deferred but does not include any interest, fees or charges (s 3(2) NCC).

Aside from the exceptions discussed below, the NCC applies to a credit contract:

• if the credit contract was entered into before 1 July 2010, the credit is provided for personal, domestic or household purposes; or
• if the credit contract was entered into on or after 1 July 2010, the credit is provided for personal, domestic or household purposes, to invest in residential property, or to refinance credit already obtained for one of these purposes; and
• the person obtaining the credit is a natural person (i.e. not a company or strata corporation); and
• the credit provider charges a fee for providing the credit to the person; and
• the credit provider provided the credit in the course of conducting its business.

Credit contracts that meet each of the above tests (set out in section 5 of the NCC and section 6 of the Old Code) will be covered by the NCC (item 3 sch 1 National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (‘Transitional Act’)). Each of these tests is considered in more detail below.

Importantly, if a party claims in legal proceedings that the NCC applies to a credit contract, a court will presume that the NCC does apply unless the contrary is established (s 13(1) NCC). In other words, it is up to the party that says the NCC does not apply to prove that the NCC does not apply.

However, this presumption may be displaced if the borrower has signed a declaration that the loan is for a purpose that is not regulated by the NCC, such as a business purpose (s 13(2) NCC) (see ‘Preliminary requirements for the National Credit Code to apply’, below).

Contracts entered into before 1 July 2010

Because the old state-based laws, such as the Old Code, were repealed to make way for the new Commonwealth credit laws, complex transitional arrangements were adopted in the Transitional Act.

Generally, the NCC will apply to a consumer credit contract if the contract was entered into and still on foot on 1 July 2010 and the Old Code applied to that contract. However, to stop the new law being unfairly retrospective some provisions of the new NCC will not apply to such a contract. Where this is the case, the equivalent provisions of the Old Code apply (item 3 sch 1 Transitional Act).

For example, the inclusion of certain fees and charges for the purposes of determining whether the NCC applies to short-term credit contracts (s 6(2) NCC) (see ‘Payday loans’) and the prohibition on certain types of securities (s 50(2)–(5):(8) NCC) (see ‘Mortgages over household goods and tools of trade’ in ‘Mortgages’), do not apply to contracts entered into before 1 July 2010 (item 3(4) sch 1 Transitional  Act).

Given that credit contracts may run for years, this chapter endeavours to note where the treatment of contracts entered into before 1 July 2010 is different to those contracts entered into after this date.

Natural person or strata corporation

The NCC does not apply to a credit contract unless the person who obtains the credit is a flesh and blood person or an owners corporation (see Chapter 6.5: Owners corporations). Credit obtained by a corporation or trust is not covered by the NCC.

The purpose of the credit

The NCC does not apply to a credit contract unless the credit has been provided wholly or predominantly for a ‘Code purpose’. A Code purpose is where credit is provided for personal, domestic or household purposes. If the credit contract was entered into on or after 1 July 2010, the Code purpose includes credit obtained to purchase, renovate or improve residential property for investment purposes, or to refinance credit provided for such a purpose. The regulation of credit provided for residential property investment is one of the significant changes in the new regime.

Conversely, the NCC does not apply if the credit is provided wholly or predominantly for business, or for investments other than residential property investment (s 5(3) NCC). This poses important questions:

1 What percentage of credit must be for a Code purpose to qualify the transaction as being wholly or predominantly for a Code purpose?

This question is answered in the NCC (s 5(4)). Credit will be provided wholly or predominantly for business, domestic or household purposes if:

1. more than half of the credit is intended to be used for a Code purpose; or
2. where the credit is intended to be used to obtain goods and services for more than one purpose, the goods are intended to be mostly used for a Code purpose.

2 Whose purpose?

The law here is unsettled. Courts have applied at least two different tests for determining the purpose for which credit is provided under a credit contract.

One test is concerned with the substance of the transaction; that is, the way the credit provided under the credit contract was ultimately used (see Linkenholt Pty Ltd v Quirk [2000] VSC 166 at [98], [121]; Jonsson v Arkway Pty Ltd [2003] NSWSC 815; Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611 at [47]).

The other test looks objectively at the intention of the credit provider, and asks what a reasonable person in the shoes of the credit provider would have understood to be the predominant purpose for which the credit was provided (see Rafiqi v Wacai Investments Pty Ltd [1998] ASC 1550–024, Brabazon DCJ; Park Avenue Nominees Pty Ltd v Boon (on behalf of Weir) [2001] NSWSC 700; Taylor & Taylor v Third Szable Holdings Pty Ltd [2001] VCAT 1841 at [59]–[64]); Commonwealth Bank of Australia v Stephens [2017] VSC 385). This test involves taking into account the information communicated by the consumer to the credit provider prior to and at the time the credit contract was entered into.

3 What is the effect of a declaration that the credit is for a non-Code purpose?

Sometimes a credit provider will ask a consumer to sign a declaration that the credit sought is to be provided for a non-Code purpose, such as a Business Purpose Declaration. Signing a declaration creates a presumption that the credit contract and the credit provided under it, is not covered by the NCC (s 13(2)). However, unlike under the Old Code, this presumption is not conclusive under the NCC.

For contracts entered into on or after 1 July 2010, the declaration must be substantially in the form prescribed by regulation 68 of the NCCP Regulations (otherwise it will be ineffective), and must contain a warning that the protection of the NCC may be lost as a result of signing the declaration.

The declaration will not be effective if, at the time the declaration was made, the credit provider, or a person prescribed by the NCCP Regulations, knew or had reason to believe (or would have done if they had made reasonable enquiries) that the credit would in fact be applied wholly or predominantly for a Code purpose (s 13(3) NCCP). Because regulation 67 of the NCCP Regulations defines a prescribed person broadly, the knowledge of most people ordinarily involved in arranging a business purpose declaration will be relevant in deciding whether a business purpose declaration is effective.

If a declaration is found to be ineffective under the NCC (s 13(3)), the credit will be taken to have been provided for a Code purpose. This exception protects debtors, who might otherwise be tricked into signing away their right to protection under the NCC. This is a significant improvement on the Old Code and should help to address Code-avoidance mechanisms.

For contracts entered into before 1 July 2010, section 13 of the NCC does not apply. Instead, section 11 of the Old Code applies in effect (item 3 sch 1 Transitional Act).

Charge for providing credit

The NCC applies only if there is a charge (e.g. interest or certain fees) for providing the credit.

This requirement has been construed broadly by the courts. For example, in Australian Securities and Investments Commission v BHF Solutions Pty Ltd [2022] FCAFC 108, the Full Court of the Federal Court held that a charge for services related to the provision of credit (e.g. under a related services contract) was ‘a charge made for providing credit’. The court found that legislation must be looked at in a way that ‘looks to the substance of the credit arrangements rather than their contractual form and ensures that the remedial provisions of the Code are not easily avoided by carefully structured credit arrangements.’ BHF Solutions Pty Ltd worked with Cigno Pty Ltd to operate a lending model that provided small loans to a large number of consumers and charged substantial fees.

The credit provider must provide credit in the course of a business

The NCC only applies if the credit provider pro­vides credit in the course of a business of providing credit or as part of, or incidental to, any other business.

The courts have held that the concept of carrying on a business implies a repetition of acts, the sum of which constitutes the business (see Kirkwood v Gadd [1910] AC 422) and that the word ‘business’ imports ideas about system, repetition and continuity. The approach taken by the courts has been that the question of whether a loan was made in the course of business is a question of fact in each case. A one-off loan by a person to a friend would not be covered by the NCC, whether or not interest was charged on that loan.

However, where credit is provided incidentally to the operation of another business, there appears to be no requirement that the business routinely provide credit of that kind. For example, if a retailer allows a customer to pay for goods by instalments, it is only necessary that the credit is provided incidentally to the retail business. Therefore, even if the retailer provides credit on only one occasion, the transaction will probably be covered by the NCC, provided the other requirements for the NCC to apply are met.

Sale of goods or land by instalments

For contracts entered into after 22 May 2009, the Old Code and NCC apply to:

• executory contracts for the sale of land by instalments, known as ‘vendor terms contracts’ or ‘terms contracts’ (s 10 NCC); and
• certain contracts for the sale of goods by instalments – often called ‘rent to buy contracts’ (ss 11–12 NCC).

These types of contracts have commonly been used to provide high-cost credit to low-income and disadvantaged consumers on onerous terms and have not previously been covered by consumer credit protection laws.

Section 6 of the NCC exempts from regulation certain categories of contracts that would otherwise be covered by the NCC.

Short-term credit

Generally, the NCC will not apply to a credit contract that limits the period for which credit will be provided to 62 days or less (s 6(1)(a) NCC). However, the NCC will apply to a loan of less than 62 days if fees and charges exceed 5 per cent of the amount of the loan or if the interest rate exceeds 24 per cent p.a. (s 6(1)(b)–(c) NCC).

For contracts entered into on or after 1 July 2011, fees and charges for the purposes of this exemption include:

• a fee or charge payable by the debtor to any person for an introduction to the credit provider;
• a fee or charge payable by the debtor to any person for any service if the person has been introduced to the debtor by the credit provider; and
• a fee or charge payable by the debtor to the credit provider for any other service related to the provision of credit (s 6(2) NCC).

These provisions seek to ensure that credit provided by short-term, high-cost lenders such as payday lenders will be covered by the NCC.

Credit without prior arrangement

The NCC does not apply to credit that is provided without prior agreement between the credit provider and the debtor (s 6(4) NCC). For example, the NCC does not apply when a cheque account becomes overdrawn but there is no agreed overdraft facility, or when a savings account falls into debit.

Credit contracts where only an account charge is payable

Continuing credit contracts (e.g. credit cards and overdraft facilities) are excluded from the NCC if the only charge that is made for providing the credit is a periodic or other fixed charge (s 6(5) NCC).

However, such a contract is covered by the NCC if the charge is more than $200 for the first 12 months and more than $125 for each 12-month period after that (reg 51 NCCP Regulations). Some ‘buy now, pay later’ arrangements fall within this exemption.

Joint credit and debit facilities

A number of banks and other financial institutions now offer products that can be used by consumers as both a savings account and credit facility. Under such a facility, a consumer with funds in their account will receive interest on those funds but can also run the balance below zero to an agreed credit limit on the terms set out in the contract. The NCC will apply only to the part of the contract that relates to the credit facility, or both the credit facility and the savings account. It will not apply to the part of the contract that relates only to the savings account (s 6(6) NCC).

For example, the NCC could not be used to challenge the validity of a new fee that is payable only when there are funds in the account. However, it could be used to challenge a new fee, such as a monthly account charge, that is payable irrespective of whether the account is in credit or debit.

Bills of exchange and promissory notes

The NCC applies to bills of exchange and promissory notes except where they are provided by an authorised deposit-taking institution (such as a bank or credit union), or are otherwise exempted under the NCCP Regulations (s 6(7) NCC).

Insurance premiums payable by instalments

Many insurers now allow annual insurance premiums to be paid by monthly instalments. Often the combined amount of the monthly premiums exceeds the annual premium by an amount equivalent to a finance company interest rate (e.g. 20 per cent). However, these agreements are not regulated by the NCC (s 6(8) NCC).

Pawnbrokers

The NCC does not apply to credit provided by a pawnbroker, in the ordinary course of a pawnbroker’s business, as long as:

• the pawnbroker is lawfully conducting business; and
• if the debtor is in default, the pawnbroker’s only recourse is against the goods provided as security (s 6(9) NCC).

However, pawnbroking transactions may be con­sidered to be unjust and re-opened under sections 76 to 81 of the NCC. See also ‘Pawnbrokers’.

Trustees of estates

The NCC will not apply where credit is provided by a trustee of the estate of a deceased person to a beneficiary or prospective beneficiary of the deceased’s estate. However, such arrangements are also subject to the unjust transactions provisions of sections 76 to 81 of the NCC (s 6(10) NCC).

Employee loans

A partial exemption from the NCC applies where credit is provided by an employer (or a corporation related to an employer) to an employee or former employee if:

• credit is provided on the condition that the debtor is either an employee or a former employee of either the employer or the related corporation; or
• where the employer or related corporation provides the credit in the course of a business of providing credit, the credit is provided to the debtor on terms more favourable than the credit provider would grant to non-employees.

Nevertheless, Part 1, Part 4, Division 3 of Part 5, Division 4 and 5 of Part 7 and Parts 12, 13 and 14 of the NCC do apply to employee loans (s 6(11) NCC).

Margin loans

The NCC does not apply to margin loans within the meaning of section 761EA(1) of the Corporations Act 2001 (Cth) (s 6(12) NCC). Margin loans are regulated as a financial product under chapter 7 of the Corporations Act 2001 (Cth).

Credit specifically excluded by NCCP Regulations

A number of exemptions apply to various govern­ment schemes, the provision of credit by particular credit providers, and other limited circumstances pursuant to regulations 51–65C of the NCCP Regulations. Most notable among these is the exemption in certain circumstances of credit under $50 (reg 52 NCCP Regulations) and the provision of charge cards by a number of specified corporations.

Buy-now-pay-later and similar arrangements

The consumer protections under the NCCP Act and the NCC do not generally apply to buy-now-pay-later (BNPL) and similar arrangements (e.g. wage-advance products). For example:

• Where a BNPL arrangement does not charge consumers for providing the credit, the arrangement is not regarded as being ‘credit’ under the NCC.
• A BNPL arrangement is not regulated if:
  • the credit is for a term of 62 days or less, and
  • the fees or charges do not exceed five per cent of the amount of the credit, and
  • the interest charges do not exceed an amount equal to 24 per cent per annum (s 6(1) NCC).
• BNPL arrangements styled as ‘continuing credit contracts’ are not regulated where they only include charges for credit that amount to an upfront fee (e.g. an establishment fee) or a periodic fee (e.g. an account-keeping fee) that is fixed, does not vary according to the amount of credit that is provided, and is less than specified amounts (s 6(5) NCC; reg 51 NCCP Regulations).

Persons engaging in ‘credit activities’

Chapter 2 of the NCCP Act generally requires all persons engaging in ‘credit activities’ to hold an Australian Credit Licence. In practice, this means that most credit providers, finance brokers and lease providers have to hold an Australian Credit Licence. You can check if a business is licensed to engage in credit activities by visiting ASIC’s website and searching the professional register.

‘Credit activity’ is defined comprehensively in section 6 of the NCCP Act. In brief, a person is engaged in a credit activity if the person:

• is a credit provider under a credit contract regulated by the NCC;
• carries on a business of providing regulated credit;
• provides credit assistance;
• acts as an intermediary;
• is a lessor under a regulated consumer lease;
• carries on a business of providing regulated consumer leases;
• is a mortgagee under a regulated mortgage; or
• is a beneficiary of a regulated guarantee.

From 1 July 2021, certain debt management services are considered to be a ‘credit activity’ where the activity is in relation to consumer credit contracts and a fee, charge or other amount is paid or payable by, or on behalf of, the consumer in relation to the service (see National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021 (Cth)).

Debt management services involve suggesting/helping a consumer to:

• apply for a change to a credit contract for which the consumer is a debtor;
• apply for a postponement of enforcement proceedings;
• make a complaint or claim to a credit provider, AFCA, ASIC, or the Information Commissioner; or
• apply for a change to information collected by a credit reporting body about a credit contract for which the consumer is a debtor.

ASIC has published ‘Information Sheet 254’, which provides more information about credit licensing and debt management services.

Lawyers are generally exempt from credit licensing, unless they hold out or advertise to consumers that they provide debt management services.

What is ‘credit assistance’?

Section 8 of the NCCP Act defines the following activities as credit assistance:

• suggesting that the consumer apply for a particular credit contract with a particular credit provider;
• suggesting that the consumer apply for an increase to the credit limit of a particular credit contract with a particular credit provider;
• suggesting that the consumer remain in a particular credit contract with a particular credit provider;
• assisting the consumer to apply for a particular credit contract with a particular credit provider;
• assisting the consumer to apply for an increase to the credit limit of a particular credit contract with a particular credit provider;
• suggesting that the consumer apply for a particular consumer lease with a particular lessor;
• suggesting that the consumer remain in a particular consumer lease with a particular lessor; or
• assisting the consumer to apply for a particular consumer lease with a particular lessor.

The definition captures finance broking services.

However, under the NCCP Regulations (reg 24), certain activities that fall within this definition are exempted, including in certain circumstances, credit activities provided by lawyers, tax agents and clerks or cashiers.

Intermediaries

Historically, consumer credit protection laws have not been effective at regulating the conduct of intermediaries (e.g. finance brokers, aggregators, mortgage managers) in multi-party credit arrange­ments. To address this, a broad definition of the phrase ‘acts as an intermediary’ has been included in the NCCP Act so that a broader range of actions require the actor to hold an Australian Credit Licence and be subject to regulation under the new regime.

Under the NCCP Act, a person acts as an intermediary if the person:

• acts as an intermediary (whether directly or indirectly) between a credit provider and a con­sumer for the purposes of securing the provision of credit for the consumer with that credit provider under a credit contract; or
• acts as an intermediary (whether directly or indirectly) between a lessor and a consumer for the purposes of securing a consumer lease for the consumer with that lessor.

At first glance the section is clumsily drafted but brands involvement, by a third party, in securing a particular product for a consumer with credit provider or lessor, as acting as an intermediary.

It does not matter whether the person acts on their own behalf or on behalf of another person (s 9 NCCP Act).

Obligations of licence holders

Australian credit licences fall into different categories, depending upon the credit activity or activities they are engaged in. However, there are some obligations imposed on all licencees. These include:

• doing all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly (s 47(1)(a) NCCP Act);
• complying with the conditions on the licence, the credit legislation and any other obligations prescribed by the NCCP Regulations (s 47(1)(c)–(d), (m) NCCP Act);
• ensuring that its representatives are adequately trained, and are competent to engage in the credit activities authorised by the licence (s 47(1)(g) NCCP Act);
• having an internal dispute resolution procedure that complies with ASIC standards (s 47(1)(h) NCCP Act); and
• being a member of AFCA (s 47(1)(i) NCCP Act).

Additionally, licencees must have professional indemnity insurance cover that is adequate to compensate consumers for loss or damage suffered because of a contravention of the NCCP Act (ss 47(1)(j), 48; reg 12 NCCP Regulations).