THG Developments Pty Ltd and Australian Securities and Investments Commission
[2012] AATA 8
•10 January 2012
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION
[2012] AATA 8
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2011/2910
GENERAL ADMINISTRATIVE DIVISION ) Re THG Developments Pty Ltd Applicant
And
Australian Securities and Investments Commission
Respondent
DECISION
Tribunal Mr R P Handley, Deputy President
Ms J L Redfern, Senior Member
Date10 January 2012
PlaceSydney
Decision The decision under review is affirmed.
....................[sgd].......................
Mr R P Handley
Deputy President
CATCHWORDS
CORPORATIONS – National Credit Code - application for credit licence – authorisation of representative to conduct on behalf of licensee – agency - whether lending in credit provider’s own name is “on behalf of” and as agent of licensee – responsible lending obligations of credit providers – Act does not permit a credit representative who does not have an Australian credit licence to enter into a credit contract on their own account and in their own name – applicant likely to contravene its obligations to comply with credit legislation.
WORDS AND PHRASES – “on behalf of”
RELEVANT ACT/S
National Consumer Credit Protection Act 2009 ss 6, 7, 29, 31, 35, 36, 37, 47, 64, 69, 75, 77, 158, 169, Sch 1
CITATIONS
Industry Research and Development Board v Phai See Investments Pty Ltd (2001) 112 FCR 24
Baycorp Advantage Ltd v Royal and Sun Alliance Insurance Australia Ltd [2003] NSWSC 941
R v Toohey; Ex parte Attorney –General (NT) (1980) 145 CLR 374
OTHER AUTHORITIES
National Consumer Credit Protection Bill Explanatory Memorandum
National Consumer Credit Protection Bill Revised Supplementary Explanatory Memorandum
REASONS FOR DECISION
10 January 2012 Mr R P Handley, Deputy President Ms J L Redfern, Senior Member 1.THG Developments Pty Ltd (THG) has applied to the Tribunal for the review of a decision of the Australian Securities and Investments Commission (ASIC) to refuse THG’s application for an Australian credit licence (a licence).
Background
2.On 25 November 2010, THG lodged an application for a licence under s 36 of the National Consumer Credit Protection Act 2009 (the Act) in order to engage in all credit activities. In a summary of its business description, THG disclosed that:
The business will be conducted primarily by Credit Representatives through broker and personal referrals. Credit representatives will make the loan in their own name as a representative pursuant to our licence.
3.On 10 May 2011, ASIC advised THG that it had concerns about certain matters of which it was required to be satisfied pursuant to s 37 of the Act and provided details of these concerns. THG was offered the opportunity to attend a hearing for the purpose of addressing those concerns and making submissions as to why a credit licence should be granted. On 25 May 2011, Darian Iacono, the sole director and secretary of THG, attended an ASIC hearing with his counsel, Mr O’Sullivan, and gave evidence and made submissions.
4.On 28 June 2011, ASIC decided to refuse THG’s application for a licence. The delegate concluded that THG’s business model prevents it from being able to comply with the credit legislation and, in particular, that THG will:
16.1. Contravene s 69 of the Credit Act by purporting to authorise a credit representative under s 64(1) or s 65(1), if, at the time THG first purports to give the authorisation, it is of no effect, to any extent, under Division 2 of the Act ; and
16.2. Contravene s 31 of the Credit Act which provides that a licensee must not engage in a credit activity and in the course of engaging in that credit activity, conduct business with another person who is engaging in a credit activity, if, by engaging in the credit activity, the other person contravenes s 29(1) of the Credit Act (subsection 29(1) of the Credit Act prohibits a person from engaging in credit activity if the person does not hold a licence authorising them to engage in the credit activity).
5.On 20 July 2011, THG lodged an application for review of this decision by the Tribunal.
The Relevant Legislation and Issue for determination
6.Section 29(1) of the Act states: “A person must not engage in credit activity if the person does not hold a licence authorising the person to engage in the credit activity.” Section 6(1) sets out when a person engages in a credit activity, including when “the person is a credit provider under a credit contract” and when “the person provides a credit service”. Section 5(1) of the Act and s 204 of Schedule 1, the National Credit Code, provide that a ‘credit provider’ is “a person that provides credit”. Section 4 of the Code states that a ‘credit contract’ “is a contract under which credit is or maybe provided”. Section 3(1) of the Code states that credit is provided if under a contract: (a) payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred, or (b) one person (the debtor) incurs a deferred debt to another (the credit provider). Thus, a credit provider under a credit contract is the person to whom the debtor owes the debt.
7.Section 35(1) states: “An Australian credit licence is a licence that authorises the licensee to engage in particular credit activities.” Section 35(2) provides for those activities to be specified in a condition of the licence. Section 36 provides that a person may apply for a licence by lodging an application with ASIC in the approved form. Section 37(1) states:
(1) ASIC must grant a person (other than an ADI) a licence if (and must not grant the person a licence unless):
(a)the person has applied for the licence in accordance with section 36; and
(b)ASIC has no reason to believe that the person is likely to contravene the obligations that will apply under section 47 if the licence is granted; and
(c)ASIC has no reason to believe that the person is not a fit and proper person to engage in credit activities; and
(d)the person has given ASIC any additional information or audit report requested by ASIC under subsection (4); and
(e) the person meets any other requirements prescribed by the regulations.
8.Section 47(1) sets out the obligations of a licensee. Relevantly, s 47(1)(d) requires that the licensee must “comply with the credit legislation”. ASIC contends that THG is likely to contravene this requirement by reason of its proposed credit representatives acting on their own behalf and not on behalf of THG when providing credit under a credit contract.
9.Section 64 states relevantly:
64 Licensee may authorise credit representatives
Authorisation of credit representative by licensee
(1) A licensee may give a person a written notice authorising the person to engage in specified credit activities on behalf of the licensee.
(2) A person who is authorised under subsection (1) is a credit representative of the relevant licensee.
(3) The credit activities specified may be some or all of the credit activities authorised by the licensee's licence.
When authorisation is of no effect
(4) The authorisation:
(a)is of no effect if subsection (5) applies to it when it is given; and
(b)ceases to have effect if and when subsection (5) starts to apply to it after it is given;
to the extent that subsection (5) applies.
(5) This section applies to the authorisation to the extent that it purports to authorise:
(a)a person to engage in a credit activity that is not authorised by the licensee's licence; or
…
10.The principal issue for the Tribunal is whether as a licensee THG, as proposed in its business model, can authorise its credit representatives to provide credit under a credit contract in their own names and not as agents acting for and in the name of THG. ASIC contends that if THG’s credit representatives were to act in such a way, they would be ‘credit providers’ engaging in ‘credit activity’ who, pursuant to s 29(1), would each require a credit licence and without such a licence they would be contravening the Act.
ASIC’s Submissions
11.ASIC’s first contention is that under THG’s proposed business model, its credit representatives would themselves be providing credit under a credit contract and are therefore ‘credit providers’ engaging in ‘credit activity’ who, pursuant to s 29(1), require a credit licence. Section 31 of the Act states:
(1) A licensee must not:
(a) engage in a credit activity; and
(b) in the course of engaging in that activity, conduct business with another person who is engaging in a credit activity;
if, by engaging in the credit activity, the other person contravenes section 29 (which deals with the requirement to be licensed).
12.Thus, if THG engages in credit activity, and in the course of engaging in that activity, conducts business with another person who is engaging in credit activity in breach of s 29, THG is contravening s 31(1) and is liable for a civil penalty.
13.ASIC also relies on s 169 of the Act, which states: “A person who is involved in a contravention of a civil penalty is taken to have contravened that provision.” ASIC contends that THG is “involved in” a contravention of s 29(1) because, through its proposed business model, it will be aiding, abetting, counselling or procuring the contravention of s 29(1) through its appointing credit representatives who will be acting on their own behalf as the credit provider under the credit contracts.
14.ASIC’s second contention is with reference to s 64(1) of the Act, which, as stated above, permits a licensee to authorise credit representatives to engage in specified credit activities on behalf of the licensee. ASIC submits that the context of the Act makes plain that the words ‘on behalf of’ indicate a relationship of principal and agent. Ms Avenell, for ASIC, took the Tribunal to the provisions of the Act dealing with responsible lending conduct set out in Chapter 3, Part 3-2, Division 3, where it is the obligations of licensees as credit providers that is referred to. Division 3 imposes an obligation on licensees to assess the suitability of the credit contract for the particular consumer and sets out when the credit contract will be unsuitable. In Chapter 3, Part 3-5, Division 2, s 158 requires a credit representative of a licensee to give a consumer both the licensee’s credit guide and the credit representative’s credit guide. Moreover, s 158(2) does not countenance the credit representative paying the licensee a fee, as proposed in THG’s business model.
15.ASIC contends that, pursuant to s 64(4)(a) and s 64(5)(a), a licensee’s authorisation is of no effect if it purports to authorise “a person to engage in a credit activity that is not authorised by the licensee’s licence”. ASIC contends that THG’s proposed authorisation of its representatives does not accord with the Act because this would permit its credit representatives to enter into credit contracts as credit providers on their own account and in their own name and not as agents of THG. Thus, the authorisation would be of no effect. Section 69(1) provides that a person must not purport to authorise a credit representative if the authorisation is of no effect.
THG’s Submissions
16.THG contends that its representatives will be acting ‘on behalf of’ THG when entering into credit contracts and security arrangements. THG submits that the words ‘on behalf of’ in s 64(1) do not have a strict legal meaning but “may be used in conjunction with a wide range of relationships”: Industry Research and Development Board v Phai See Investments Pty Ltd (2001) 112 FCR 24 (per Hely J at [19]); Baycorp Advantage Ltd v Royal and Sun Alliance Insurance Australia Ltd [2003] NSWSC 941 (per Einstein J at [21]; R v Toohey; Ex parte Attorney –General (NT) (1980) 145 CLR 374 at 386. Mr O’Sullivan, for THG, submitted that in the context in which the words are used in the Act, it is clear that the relationships encompassed are not restricted to the relationship between principal and agent.
17.Mr O’Sullivan referred to the definition of ‘credit activity’ in s 6 of the Act which includes the provision of credit. He said s 64(3) permits a licensee to authorise a credit representative to engage in all credit activities authorised by the licensee’s licence including entering into credit contracts. He referred to s 75 which, where a credit representative is the representative of only one licensee, imposes responsibility on the licensee, as between the licensee and the client, for the conduct of the representative whether or not the representative’s conduct is within the authority of the licence. Section 77 states that the responsibility extends to any loss or damage suffered by the client as a result of the representative’s conduct. Mr O’Sullivan said the scheme of the Act regulates licensees and has an inbuilt incentive for licensees to ensure their representatives are compliant with the requirements of the Act.
18.Mr O’Sullivan referred the Tribunal to the Explanatory Memorandum for the National Consumer Credit Protection Bill. Paragraph 2.158 states: “In order to allow flexibility in the market a registered person or licensee may authorise third parties to engage in credit activities on its behalf.” Paragraph 2.161 states: “For the avoidance of doubt, it is expressly stated in this explanatory memorandum that the Credit Bill does not seek to set out prescriptive rules …”. This suggests that the categories of relationship between licensee and representative is very broad and is not limited to the relationship between principal and agent. Mr O’Sullivan said, essentially, the regulatory function is delegated by ASIC to the licensee who must oversee and are responsible for the conduct of their authorised representatives. So, for example, the client has the same remedies against the licensee as against the authorised representative.
19.Mr O’Sullivan said the Act does not require that the licensee should engage in any particular activity it has been authorised to undertake. The definition of ‘credit activity’ is broad and it is sufficient if the licensee is involved in credit activities, for example, providing credit services, even if it is not involved in providing credit. THG’s model is for the licensee to ensure that its representatives, who come under the umbrella of its licence, meet the compliance requirements of the Act.
Discussion
20.The Act establishes the key components of a national consumer credit regime which include a comprehensive licensing regime for those engaging in credit activities, industry-wide responsible lending conduct requirements, improved sanctions and enforcement powers, and enhanced consumer protection through dispute resolution and court remedies. The regime also replicates the Uniform Consumer Credit Code and expands the scope of regulation to cover credit for residential investment properties (Revised Supplementary Explanatory Memorandum, p3). ASIC is the regulator of the national consumer credit regime.
21.The scheme under the Act provides that a person must not engage in credit activity unless they hold a licence authorising them to engage in the credit activity (s 29). A ‘credit activity’ includes acting as a credit provider or providing credit services (ss 6 and 7).
22.THG’s proposal is “to engage in ensuring the compliance of private lenders by providing them with credit representative status, necessary documentation, training and assistance to ensure they comply with the regulations” (THG’s “Summary business description”). As we understand what is proposed, THG will provide administrative services and compliance training to lenders and will bring lenders and potential borrowers together, perhaps, in the future, through an internet portal. There is no evidence of how THG will ensure compliance by the lenders.
23.At the ASIC hearing (transcript p 31), Mr Iacono described THG’s model in the following terms:
… what I’m trying to do is put together a facility … [to] put together enough licensed lenders that a broker can make an application and that application can be seen by 600 or 700 or 800 different lenders through a portal of some sort. … so that rather than the borrower going and saying, “Well, what price will I pay?” the borrower can go and say, “I’m willing to pay this. Who will lend me the money?”
THG proposes that where a lender enters into a credit contract with a borrower, THG takes a percentage of the interest charged by the lender.
24.THG is not proposing, at this stage, to itself conduct business as a credit provider. It is common ground that the lenders - the credit providers - will be THG’s credit representatives. THG contends it is not necessary for a licensee to provide credit to engage in ‘credit activities’ but merely to be licensed to do so. It contends that once it is licensed to engage in credit activities as a credit provider, it may authorise credit representatives to engage in those credit activities under s 64, and the credit representatives may then enter into credit contracts on their own behalf. In other words, it is not necessary that the credit representatives enter into credit contracts as agents for THG or that THG be a party to the credit contracts. THG’s contentions are based on a broad interpretation of the words ‘on behalf of’ in s 64(1) that is not limited to the relationship of principal and agent.
25.The consequence of THG’s submissions would be that there will be no obligations on THG under the credit contract or by way of agency. The only way that obligations are imposed on THG in respect of a credit contract will be through s 75 of the Act, which states:
If the representative is the representative of only one licensee, the licensee is responsible, as between the licensee and the client, for the conduct of the representative, whether or not the representative’s conduct is within the authority of the licence.
Section 77 specifically extends liability to any loss or damage suffered by the client as a result of the representative’s conduct. The conduct in question is that under the Act and is not conduct or liability in respect of the credit contract.
26.ASIC’s argument (and the basis for the refusal) is based on its interpretation of the relevant provisions of the Act pursuant to which it asserts that the business model proposed by THG will necessarily contravene ss 69 and 31 of the Act. Under s 69, a licensee “must not purport to authorise a credit representative if, at the time the person purports to give the authorisation, it is of no effect”. ASIC contends THG is not able to give an effective authorisation under s 64 because THG is purporting to authorise its credit representatives to enter into credit contracts as credit providers on their own account and in their own name and not as agents for THG. If a person is not properly authorised as a credit representative, they will also contravene s 29 and will be unable to rely on the defence under s 29(3)(a)(ii). Moreover, THG would be aiding and abetting the breach under s 31. ASIC submitted that its interpretation was consistent with the scheme and should be read in the context of other provisions in the Act and, in particular, the responsible lending conduct requirements, which are a key component of the national consumer credit regime.
27.With regard to the interpretation of the words ‘on behalf of’ in s 64(1), the view expressed by Hely J in Industry Research and Development Board v Phai (2001) 112 FCR 24, at [19], appears to represent the accepted view:
The phrase “on behalf of” is not an expression which has a strict legal meaning. It may be used in conjunction with a wide range of relationships, “all however in some way concerned with the standing of one person as auxiliary to or representative of another person or thing”: R v Toohey; Ex parte Attorney-General (NT) (1980) 145 CLR 374 at 386. It is necessary to have regard to the context in which the expression “on behalf of” is used in order to determine the scope of the relationships to which it applies: R v Portus; Ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 438.
Thus, the context in which the words are used must be examined in order to determine the range of relationships to which the relevant provisions apply.
28.In addition to the licensing provisions, the Act establishes new responsible lending conduct requirements for the benefit of the consumer. These obligations are set out in Chapter 3 and apply to licensees, credit representatives and debt collectors. The only obligations in the Act in respect of ‘credit providers’ are those imposed on licensees under Part 3-2. The terms ‘licensee’ and ‘credit provider’ are used interchangeably in this Part and it is implicit that the licensee is intended to be a party to the credit contract. For example, ss 128 and 129 impose an obligation on the licensee not to enter into a credit contract with a consumer unless an assessment has been made as to whether the proposed terms of the contract are unsuitable for the consumer. There is no such obligation on credit representatives. Their only obligation under Chapter 3 is to provide information to consumers about themselves and about their fees and charges.
29.If the interpretation for which THG contends is correct, there would be no responsible lending obligations on credit representatives when they lend to consumers (other than the limited obligations referred to above) and those consumers would have none of the protections established under Part 3-2 of the Act. That this would undermine the operation of the national consumer credit regime and supports the interpretation propounded by ASIC, namely, that any authorisation of a credit representative by THG must be as agent for THG and not as a credit provider on their own account and in their own name. In other words, for the responsible lending obligations to have full force and effect, where a credit representative is entering into a credit contract, the representative must do so as an agent of the licensee. In our view, this argument is compelling.
30.It is also relevant to note that in the s 29(3) defence for a person who engages in credit activity on behalf of another person, the other person is referred to as the ‘principal’, but that otherwise the words ‘licensee’ and ‘credit representative’ are used in the Act to describe those persons and refer to their obligations. The Explanatory Memorandum refers to the authorisation provisions in the Bill and states (at 2.159) that “the registered person or licensee who appoints a credit representative is referred to as the principal”. These consistent references to the licensee as a ‘principal’ of the credit representative lends weight to the interpretation for which ASIC contends.
31.In conclusion, the Tribunal is satisfied that Parliament intended the words ‘on behalf of’ in s 64(1) should be interpreted so that the authorisation given by a licensee to a credit representative in relation to specified credit activities means that when entering into a credit contract pursuant to the authorisation, the representative is acting as an agent of the licensee. Thus, the provisions of the Act do not permit a credit representative who does not have an Australian credit licence to enter into a credit contract on their own account and in their own name.
32.It also follows that pursuant to THG’s proposed business model, if it were to purport to authorise its credit representatives to enter into a credit contract on their own account and in their own names, this would result in a breach of s 29(1) with corresponding liability for THG for the contravention of s 31(1). THG would also be liable under s 69 by reason of its purported authorisation under s 64(1) being of no effect (pursuant to s 64(5)).
33.Section 37(1) of the Act requires that ASIC must not grant a licence if (s 37(1)(b)) it has reason to believe that an applicant is likely to contravene its obligations under s 47 of the Act if the licence is granted. Section 47 sets out the general conduct obligations of licensees, including in s 47(1)(d) that it comply with the credit legislation and in s 47(1)(e) that it take reasonable steps to ensure that its representatives comply with the credit legislation. Thus, ASIC, having formed the view that THG was likely to contravene its obligations under s 47, was required to refuse THG’s application for a licence.
34.The Tribunal is therefore satisfied that for the reasons stated above, ASIC’s decision to refuse THG’s application for a licence was correct and should be affirmed.
Decision
35.The decision under review is affirmed.
I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R P Handley, Deputy President, and Ms J L Redfern, Senior Member.
Signed:...............[sgd]................................................................
C. Taylor, AssociateDate of Hearing 15 December 2011
Date of Decision 10 January 2012
Counsel for the Applicant J O’SullivanSolicitor for the Applicant D Iacono, THG Developments Pty Limited
Counsel for the Respondent M Avenell
Solicitor for the Respondent N Goodstone, Australian Securities and Investments Commission
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