ASIC CREDIT (AMENDMENT) Instrument 2016/632
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
National Credit Code
The Australian Securities and Investments Commission (ASIC) makes ASIC Credit (Amendment) Instrument 2016/632 under subsection 6(17) of the National Credit Code (the Code), which is found in Schedule 1 to the National Consumer Credit Protection Act 2009 (the Credit Act).
Subsection 6(17) the Code provides that ASIC may exclude from the application of the Code the provision of credit of a specified class.
1. Background
The High Court of Australia held in International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) [2012] HCA 45 that the litigation funding agreement in that matter was a “credit facility” within the meaning of regulation 7.1.06 of the Corporations Regulations 2001 (the Regulations) and specifically excluded from the definition of a “financial product” under subparagraph 765A(1)(h)(i) of the Corporations Act 2001 (the Act).
Accordingly, the litigation funder was exempt from the requirement to hold an Australian financial services licence. The High Court considered the definition of “credit” in subregulation 7.1.06(3) of the Regulations and held that this litigation funding agreement was “credit” because it was a form of financial accommodation provided by the litigation funder to the litigant and its provision “for any period” will be a “credit facility”. Under the litigation funding agreement, the litigation funder had agreed to pay the litigant’s legal bills within 28 days of receiving written notification. The litigant in turn agreed to reimburse the litigation funder if the proceedings were resolved in its favour.
The decision of the High Court has highlighted that, depending on the terms of a litigation funding agreement, a litigation funding arrangement or a proof of debt funding arrangement may amount to the provision of “credit” to which the Credit Act and Code applies.
On 9 January 2013, ASIC made Class Order [CO 13/18] to enable the temporary operation of a litigation funding arrangement and a proof of debt funding arrangement without compliance with the requirements of the Credit Act and Code until 12 July 2013. This was to allow time for the Government to consider its policy position on the regulation of litigation funding arrangements and proof of debt funding arrangements.
On 11 July 2013 ASIC made Class Order [CO 13/897] to extend the operation of [CO 13/18] to 12 July 2014 to enable the Government more time to consider its position on litigation funding.
On 1 July 2014 ASIC made Class Order [CO 14/569] to extend the operation of [CO 13/18] to 12 July 2016 to enable the Government more time to consider its position on litigation funding.
2. Purpose of the class order
ASIC Credit (Amendment) Instrument 2016/632 will extend the relief in Class Order [CO 13/18] to further enable the temporary operation of a litigation funding arrangement and a proof of debt funding arrangement without compliance with the requirements of the Credit Act and Code until 12 July 2017. This is to allow further time for the Government to consider its position to exempt litigation funding arrangements and proof of debt funding arrangements from the Credit Act.
3. Operation of the class order
ASIC Credit (Amendment) Instrument 2016/632 amends [CO 13/18] by replacing "12 July 2016." in paragraph 5 with "12 July 2017.".
4. Consultation
ASIC consulted with Treasury in relation to making this instrument. ASIC did not undertake wider consultation with respect to ASIC Credit (Amendment) Instrument 2016/632 as it is minor and machinery in nature and provides relief only for a short period pending the Government's decision.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
ASIC Credit (Amendment) Instrument 2016/632
This class order is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the class order
ASIC Credit (Amendment) Instrument 2016/632 will extend the temporary operation of a litigation funding arrangement and a proof of debt funding arrangement without compliance with the requirements of the Credit Act and Code until 12 July 2017. The objective of ASIC Credit (Amendment) Instrument 2016/632 is to allow time for the Government to consider its policy position on the regulation of litigation funding arrangements and proof of debt funding arrangements under the Credit Act and Code.
Human rights implications
This class order does not engage any of the applicable rights or freedoms.
Conclusion
This class order is compatible with human rights as it does not raise any human rights issues.
Overview
The ASIC Credit (Amendment) Instrument 2016/632 was enacted by the Australian Securities and Investments Commission (ASIC) under the National Consumer Credit Protection Act 2009. This legislative amendment was introduced to address the legal ambiguity surrounding litigation funding agreements and proof of debt funding arrangements, which were previously deemed to fall under the definition of "credit" as per the National Credit Code. The High Court's decision in International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) [2012] HCA 45 underscored the necessity for clarification regarding these arrangements, which led to the creation of temporary relief measures by ASIC to allow the government time to deliberate on the regulatory framework for such funding agreements. The policy objective of this amendment is to provide an additional period for the government to consider exempting these specific funding arrangements from the requirements of the Credit Act.
Scope and Application
ASIC Credit (Amendment) Instrument 2016/632 applies to the temporary operation of litigation funding arrangements and proof of debt funding arrangements, allowing these to operate without compliance with the requirements of the National Consumer Credit Protection Act 2009 (Credit Act) and the National Credit Code (Code) until 12 July 2017. This temporary relief was introduced following the High Court's decision in International Litigation Partners Pte Ltd v Chameleon Mining NL, which classified certain litigation funding agreements as "credit facilities" under the Credit Act. The amendment extends the relief initially provided by Class Order [CO 13/18], subsequently extended by Class Orders [CO 13/897] and [CO 14/569], thereby allowing more time for the government to determine its policy on exempting these arrangements from the Credit Act. The amendment affects entities engaged in litigation funding and proof of debt funding activities, which include financial institutions, law firms, and individuals involved in these arrangements within the Australian jurisdiction. The exemption does not apply to other forms of credit facilities or financial products outside the scope of litigation and proof of debt funding. The class order does not specify exclusions, exemptions, or thresholds but provides a temporary regulatory reprieve until the government decides on a permanent policy.
Key Provisions
The primary operative sections of the ASIC Credit (Amendment) Instrument 2016/632 (paragraph 4) extend the temporary operation of litigation funding arrangements and proof of debt funding arrangements without compliance with the requirements of the National Consumer Credit Protection Act 2009 (the Credit Act) and the National Credit Code (the Code). This extension, through the replacement of "12 July 2016" with "12 July 2017" in paragraph 5 of Class Order [CO 13/18], is intended to allow the Government additional time to deliberate on the regulation of these specific types of arrangements. This legislative adjustment is designed to bridge the gap until a definitive policy decision is made, thereby ensuring that the financial sector remains adaptable to evolving regulatory landscapes.
The obligations imposed by the ASIC Credit (Amendment) Instrument 2016/632 (paragraph 3) are minimal but critical, focusing on the temporary suspension of regulatory compliance for certain financial arrangements. Specifically, litigation funders and proof of debt funders are temporarily exempt from adhering to the stringent requirements of the Credit Act and the Code. This exemption is purely operational, aimed at facilitating the Government's review process without imposing any long-term structural changes or obligations on the parties involved. The temporary nature of this relief ensures that the financial activities remain under scrutiny and subject to eventual regulatory oversight once the Government's policy decision is finalised.
Under the ASIC Credit (Amendment) Instrument 2016/632, there are no immediate penalties or civil/criminal consequences for breaches during the period of temporary exemption. However, the implications of non-compliance once the exemption period concludes could be significant. Should the arrangements continue beyond 12 July 2017 without the requisite compliance with the Credit Act and Code, parties could face stringent penalties. These could include substantial fines, legal action, and potential criminal charges, as outlined in the Credit Act. The maximum penalties for non-compliance with the Act are not explicitly stated in the Explanatory Statement but are typically severe, reflecting the importance of consumer credit protection.
In conclusion, the ASIC Credit (Amendment) Instrument 2016/632 serves a pivotal role in providing a temporary reprieve from the Credit Act and Code for litigation funding and proof of debt funding arrangements. This legislative measure is designed to facilitate a thorough policy review by the Government, ensuring that any future regulations are well-considered and beneficial. The obligations are straightforward, focusing on the temporary suspension of compliance, while the potential consequences for non-compliance post-exemption period underscore the importance of adhering to the eventual regulatory framework.