Go to content

Credit law toolkit

Finance brokers (Ch 2 & 3 NCC)

Main Points

  • Brokers are referred to in the Credit Law as credit assistance providers.
  • Brokers are required to give a Credit Guide and a Quote before providing credit assistance in relation to a contract.
  • There are some limited protections in relation to fees (there is no ability to challenge fees as excessive as has been possible under some State legislation).
  • Brokers must not suggest or assist consumers to enter unsuitable loan contracts or leases.
  • In order to assess whether a loan is unsuitable a broker must:
    • Make reasonable enquiries about the consumer’s financial situation
    • Make reasonable enquiries about the consumer requirements and objectives in seeking a loan
    • Take reasonable steps to verify the consumer’s financial situation
  • A loan will be unsuitable if:
    • The consumer cannot meet the financial obligations under the contract, or not without substantial hardship
    • The loan does not meet the consumer’s objectives and requirements
  • Consumers can apply for remedies including changes to the contract and compensation if brokers breach these provisions.
  • Unfair or dishonest conduct

What is a finance broker?

A finance broker is a go–between (or intermediary) between a consumer wanting credit and a credit provider. Ideally, a finance broker should find the best loan for a consumer from the range of products and credit providers in the market. In practice, finance brokers can only source loans from a limited panel of credit providers and products and in some cases, finance brokers only refer to one credit provider.

In the Credit Law, there is no mention of finance brokers; they are called “credit assistance providers” instead.” Credit assistance is defined as where a person or entity that is not the credit provider’s agent (in other words the consumer’s agent):

  • Suggests that a consumer apply for a loan, an increase to a loan, or a lease
  • Suggests that a consumer stay with an existing credit provider or lessor
  • Assists the consumer to apply for a loan, an increase to a loan or a lease

This is a very wide definition. Anyone who carries out any of these functions is a credit assistant and must be licensed, or appointed a credit representative by a licensee, and be a member of EDR (s. 29 NCCP). Credit providers must not do business with unlicensed persons (s. 31 NCCP). Consumers can seek compensation for both unlicensed conduct and for loss caused by a licensee dealing with an unlicensed person.

There is an exemption from Licensing and EDR for credit assistance at the point of sale. This would include:

  • Car dealers
  • Retailers, eg, stores such as Myer and Harvey Norman

The credit provider under any credit contract, even if sold at a retail store or car dealership, must be licensed and must comply with the responsible lending conduct provisions.

Required disclosures

Consumers dealing with a credit assistant are required to be given a Credit Guide. The Credit Guide (s. 113 NCCP) must:

  • Be in writing
  • Specify the name, contact details, and licence number of the credit assistant
  • Specify any fees payable for the credit assistance
  • Specify the six credit providers that the credit assistant refers to most often (if the credit assistant deals with less than six credit providers, then the names of those credit providers)
  • Specify any commissions to be received (and a reasonable estimate and how they are calculated) for the referral
  • Provide details of the credit assistant’s–
    • Internal dispute resolution procedures and
    • The EDR of which the credit assistant is a member
  • Inform the consumer of the prohibition on credit assistants suggesting, recommending, or assisting consumers to enter or remain in contracts that are unsuitable for the consumer, and of the consumer’s rights in relation to requesting a copy of the assessment
  • The credit assistant must give a Quote (s. 114 NCCP) to the consumer that–
    • Must be in writing
    • Specifies the services being provided
    • Specifies the maximum amount that will be payable by the consumer (including fees and charges)
    • States whether the fee is still payable if the consumer does not proceed with the loan

The Quote must be signed and dated, or there must be some other indication that the consumer has accepted the quote and the date that this acceptance occurred. The latter provision is basically to accommodate online broking.

Failure to comply means that the credit assistant may be liable for a penalty. Penalties can only be obtained through court or by ASIC. Consumers can also apply for compensation as part of a dispute if they can demonstrate a loss.

Compliance with these provisions is not required until 1 January 2011. In some States, broker legislation has been extended to cover this period. You will need to get advice in your state about broker disputes arising between 1 July 2010 and 1 January 2011.

Credit representatives

Like credit providers, brokers may also appoint credit representatives. In this case, additional disclosure is required about the representative. (See Responsible lending conduct for a summary.)

Preliminary assessment

Credit assistants are required to comply with responsible lending conduct requirements from 1 July 2010. This means that credit assistants must make a preliminary assessment as to whether the loan is unsuitable.

The consumer can request a copy of the preliminary credit assessment up until seven years after the original quote for arranging the loan was made (s. 120 NCCP).

It is likely that the preliminary credit assessment will be very generic in nature as the credit assistants will need to incorporate this into their procedures. This preliminary assessment may provide vital evidence in the case of a dispute.

In making a preliminary assessment, the credit assistant must (s. 117 NCCP):

  • Make reasonable inquiries of the consumer’s requirements and objectives
  • Make reasonable inquiries about the consumer’s financial situation
  • Take reasonable steps to verify the consumer’s financial situation

More information about these concepts is provided in Responsible lending conduct.

In many ways, the preliminary assessment made by a credit assistant will be similar to the assessment eventually made by the credit provider.

Arranging unsuitable loans

The loan arranged by a credit assistant may be unsuitable if (s. 118(2))

  • The consumer could not repay the loan at all or only with substantial hardship
  • The loan will not meet the consumer’s requirements and objectives

The credit assistant is prohibited under s. 123 of the NCCP from providing credit assistance in relation to unsuitable loan contracts. There is a penalty applicable for arranging an unsuitable loan. Civil penalties are only available through court or ASIC. Consumers can also apply for compensation as part of a dispute if they can demonstrate a loss.

Can a credit provider rely on the information provided or verified by a broker?

The law places a separate obligation on both the credit assistance provider and the credit provider to assess loan suitability. The fact that the former has performed this role will not excuse the latter at law if they fail to do so. However, ASIC RG 209 (p.18, See Responsible lending conduct for more details) indicates that credit providers may be able to rely on information gathered by credit assistance providers as part of the preliminary assessment and passed on but also suggests that reasonable and prudent credit providers:

  • Will have processes in place to ensure the reliability of any information collected by third parties, including information contained in a preliminary assessment (eg, spot checks where random information is re–verified)
  • Will only use information from intermediaries assessed as having robust compliance arrangements
  • Will have processes to actively discourage inappropriate practices, including the structuring of incentives
  • Will, despite all the above, not rely on information about which they have any reason to doubt the reliability

Broker fees

Some previous State finance broker legislation provided the following consumer protections:

  • The broker fee could not be charged unless the finance broker strictly complied with all disclosure requirements and
  • The broker fee could be challenged on the basis it was excessive.

None of those protections are available under the Credit Law. However, a refund of the fee may be sought as compensation in the event that the credit assistance provider fails to comply with a requirement of the law, including the requirement to give a signed quote, a credit guide and not to assist the consumer enter, or increase the limit, of an unsuitable loan contract. If the credit assistance provider complies with these provisions, it will be difficult to get relief purely because the fee is excessive for the work done, provided it does not exceed the maximum quoted. The NCCP does include a prohibition on:

  • Fees that exceed the maximum quoted (s. 114 (4) NCCP)
  • Fees payable prior to the credit assistance being provided (s. 114(5) NCCP)
  • Lodging, or threatening to lodge, a caveat over land in order to induce payment of the credit assistant’s fees (s. 144(6) NCCP)

Unfair and dishonest conduct

A new provision inserted in the phase 2 reforms and commences on 1 March 2013 was s. 180A NCCP which enables a court to make orders following unfair and dishonest conduct. This section does not apply to credit providers. It does apply to credit assistance providers (finance brokers) and other intermediaries that arrange credit.

There a four parts to this section:

  1. There must be:
    1. conduct by the service provider connected with the provision of a service; and
    2. the conduct is unfair and dishonest
  2. The conduct resulting in:
    1. the consumer entered into a loan or lease contract or guarantee they would not have entered into
    2. the consumer entered into a loan or lease contract or guarantee on different terms
    3. The consumer incurs fees and charges
  3. Determining whether the conduct was unfair and dishonest the following need to be considered:
    1. the consumer is at special disadvantage or in a class of persons more likely to be disadvantaged and a reasonable person would consider the conduct was directed at that class
    2. the consumer was unable or considered themselves to be unable to enter to a loan or lease contract or guarantee other than the credit provider the service provider arranged.
    3. the conduct involved a technique that was manipulative and should not have been used in good conscience
    4. the service provider could significantly influence the terms of the contract
    5. the terms of the contract were less favourable

Although the court is not limited to the above circumstances

  1. The court can make the following orders:
    1. an order to refrain from or take a specified action
    2. an order to pay an amount
    3. an order that an amount is not payable
    4. any other order to address the unfairness or dishonesty EXCEPT an order that affects the credit contract, lease or guarantee.

If you think the conduct of a credit assistance provider or other intermediary is dishonest and unfair then seek legal advice.

Problem solving

There are a number of aspects of the Credit Law that may assist caseworkers in solving a consumer’s problem with a finance broker:

  1. The requirement to be licensed
  2. The requirement for credit providers to deal only with licensed brokers
  3. The requirement to give a Credit Guide
  4. The requirement to conduct a preliminary assessment (and provide copy to consumer if requested)
  5. Prohibition on arranging unsuitable loans
  6. Obligation to conduct business efficiently, honestly, and fairly (s. 47 (1)(a) NCCP)
  7. Obligation to manage conflicts to interest (s. 47 (1)(b) NCCP)
  8. Prohibition on providing false or misleading information (s. 33 NCCP)
  9. Compensation for consumers for breaches of the Credit Law
  10. Compensation for the consumer can include an order from the court:
  11. Declaring part or all of the contract to be void
  12. Varying the contract
  13. Refusing to enforce one or more terms in the contract
  14. For the credit assistant to refund money or return property
  15. For payment of loss or damage
  16. For the credit assistant to supply a specified service
  17. Unfair and dishonest conduct

Common broker problems

The following table lists some common complaints consumers make about brokers and the sections of the law that may be useful.

Problem Useful law

Failure to provide a loan with required features – eg, redraw, two credit cards attached

Responsible lending conduct provisions in relation to loans which meet the consumer’s requirements and objectives.

Misleading and deceptive conduct under the ASIC Act (where loan features actively misrepresented).

Failure to provide the cheapest loan.

Responsible lending conduct provisions in relation to loans that meet the consumer’s requirements and objectives; argue that the cheapest loan was one of the consumer’s requirements and objectives (may be difficult to prove – no obligation to provide the most suitable loan).

Failure to manage conflicts of interest (if this is the case).

Failure to arrange a loan in time (eg, for settlement on a home purchase).

Responsible lending conduct provisions in relation to loans which meet the consumer’s requirements and objectives.

Charged fees when consumer did not proceed.

Check whether this is permitted according to the Quote, if so no prohibition on this – try arguing the responsible lending conduct provisions in relation to loans which meet the consumer’s requirements and objectives if this is true.

Recommend/assist with loan the consumer cannot afford.

Responsible lending conduct prohibition on providing assistance in relation to unsuitable loans.

(This rarely occurs without also false or misleading information also being provided to the credit provider – see below.)

Provided false information on the loan application (including false financial information and false business purpose declarations).

Responsible lending conduct prohibition on providing assistance in relation to unsuitable loans.

Obligation to act honestly and fairly.

Prohibition on providing false and misleading information.

Presumption that loan is regulated and provisions for challenging false declarations. (See How to Guide: Setting aside an inaccurate business purpose declaration.)

Provided poor advice – eg, to refinance credit card debt into home or take out a line of credit loan with a linked credit card.

Credit Law will not assist unless unsuitable loan recommended/applied for.

Argue misleading and deceptive conduct under the ASIC Act and/or breach of fiduciary duty to client.

Excessive fees.

Fee cannot exceed maximum quoted.

If loan unsuitable, claim reduction/reversal of the fee as part of compensation.

Argue unconscionable conduct under the ASIC Act if the client is at a special disadvantage.

If the broker is not licensed, the fee is not payable under the s. 32 NCCP.

Broker is unlicensed.

Prohibition on unlicensed conduct.

Prohibition on licensees dealing with unlicensed persons.

Note: EDR may not be available, complain to ASIC and get legal advice.