Consumers seeking the services of debt management firms are often at their most vulnerable and experiencing significant financial hardship. Unfortunately, there is now substantial evidence from a range of industry stakeholders, including consumer advocates, industry ombudsman, credit providers, and industry associations that certain debt management firms are engaging in harmful practices to the detriment of their customers. This has been highlighted of late as countless Australians face worsened and uncertain financial positions amidst the COVID-19 pandemic.
In response to this growing concern, the Federal Government has introduced the National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021 (Regulations). One of the principal changes brought about by the Regulations is the introduction of a licensing regime for persons providing debt management services to debtors and guarantors. Debt management services are defined under the Regulations to include assisting consumers in dealings with credit providers or to correct their credit report.
More specifically, from 1 July 2021, subject to transitional arrangements (which allow for the continued provision of debt management services while a provider is actively taking steps to be covered by a credit licence), providers of debt management services must hold an Australian credit licence with an authorisation that covers debt management services (debt management authorisation) and meet ongoing obligations imposed on licensees. These obligations include the requirement to meet the ‘fit and proper person’ test, to undertake their activities ‘efficiently, honestly and fairly’, ‘have appropriate compensation arrangements’ and to be members of the Australian Financial Complaints Authority (AFCA) scheme.
The Regulations prescribe debt management services as a new type of credit activity which (broadly) covers activities in relation to consumer credit contracts where a fee or charge is paid or payable by or on behalf of the consumer in relation to the service.
Debt management assistance includes suggesting and/or 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
Credit reporting assistance includes suggesting and/or helping a consumer to apply for a change to information collected by a credit reporting body about a credit contract for which the consumer is a debtor. The complete definition of what constitutes a ‘debt management service’, ‘debt management assistance’ and ‘credit reporting assistance’ are set out at s6 of the National Consumer Credit Protection Act, as inserted by regs4B and 4C of the Regulations).
There are certain carve outs under the Regulations, including for lawyers. The Regulations permit lawyers in some circumstances to engage in credit activities (including the provision of debt management services) in their professional capacity and in the ordinary course of their activities as a legal practitioner without needing to hold a credit licence.
However, this exemption will not apply if the lawyer/firm advertises to consumers that they are able to provide credit services or debt management services. This may include a lawyer representing on their website that they can assist a consumer to “repair” information in relation to their credit report.
The Regulations signal a proactive approach in consumer debt protection and addressing the regulatory gaps within the industry. In our view it is a positive step for consumers, as the amendments offer a new added layer of security and protection especially during these times of vulnerability and uncertainty.
Now you can start by asking your provider “license please?” before you embark on the road of debt management.
If you have any questions in relation to the Regulations and require advise as to whether the new laws impact you or your business, please give us a call and we would be happy to assist.