EXPLANATORY STATEMENT
Select Legislative Instrument 2011 No. 67
Issued by authority of the Treasurer
National Consumer Credit Protection Act 2009
National Consumer Credit Protection Amendment Regulations 2011 (No.3)
The National Consumer Credit Protection Act 2009 (the Act) applies to the provision of credit for personal use. Schedule 1 to the Act contains the National Credit Code (the Code). The Code provides a consumer protection framework for consumer credit and related transactions.
Section 329 of the Act provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.
Section 31 of the Code provides that the regulations may specify credit fees or charges or classes of credit fees or charges that are prohibited for the purposes of the Code.
The Regulations make a minor amendment to the National Consumer Credit Protection Regulations 2010 (the Principal Regulations) relating to certain fees on fixed rate loans.
On 23 March 2011, the Governor-General made the National Consumer Credit Protection Amendment Regulations 2011 (No.2) (the 2011 Regulations). The 2011 Regulations amended the Principal Regulations to ban exit fees on new home loans from 1 July 2011. However, the ban does not apply to break fees on fixed rate loans.
Break fees recover a loss incurred (whether realised or not) by credit providers from the early repayment of a fixed rate loan.
Following the making of the 2011 Regulations, it has been suggested that paragraph (c) of the definition of ‘break fee’ could be ambiguous. That paragraph presently requires that a break fee relate to the difference between the fixed interest rate under the fixed rate loan and the prevailing rate at which credit is provided by the credit provider under the relevant class of credit contract.
The ambiguity relates to whether paragraph (c) requires break fees to be calculated by reference to the interest rate that credit providers charge customers for home loans (commonly referred to as the retail rate) or enables calculations based on other interest rates. Many credit providers currently calculate break fees with reference to their funding costs or wholesale interest rates known as “swap rates”. Such calculations are consistent with guidelines issued by the Financial Ombudsman Service. It was not the intent of the 2011 Regulations to change these practices.
The Regulations substitute a new paragraph (c) into the definition of ‘break fee’ in the Principal Regulations to remove the possible ambiguity. The substituted paragraph requires break fees to relate to the part of the credit provider’s loss, arising from the early repayment of the fixed rate loan, that results from differences in interest rates.
The amendment ensures that credit providers and borrowers can contract to calculate break fees in a variety of ways for the purposes of the Principal Regulations, including by reference to retail or wholesale interest rates or the credit provider’s costs of funds. Break fees, however, remain subject to existing provisions of the law such as section 78 of the Code which relates to unconscionable fees and charges.
The Regulations are made after targeted industry consultation.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulations commence on 1 July 2011.
Overview
The National Consumer Credit Protection Amendment Regulations 2011 (No. 3) were enacted to address a perceived ambiguity in the definition of "break fee" under the National Consumer Credit Protection Act 2009. This Act, enacted by the Commonwealth Parliament, seeks to provide a consumer protection framework for consumer credit and related transactions through the National Credit Code. The specific issue these regulations aim to resolve involves the calculation of break fees on fixed rate loans, which are fees intended to recover losses incurred by credit providers from the early repayment of such loans. The initial regulations prohibiting exit fees on new home loans, enacted in 2011, did not cover break fees on fixed rate loans, leading to concerns that the definition of break fees might not clearly encompass the various methods used by credit providers to calculate these fees. The amendments ensure clarity and consistency in how these fees are calculated, allowing for different interest rates and funding costs to be considered, while still adhering to existing legal provisions against unconscionable fees.
Scope and Application
The National Consumer Credit Protection Act 2009 applies to the provision of credit for personal use, establishing a consumer protection framework through the National Credit Code. This Act is comprehensive, encompassing various entities such as credit providers, credit recipients, and financial institutions, as well as the transactions they engage in. The jurisdictional reach of the Act is national, given its Commonwealth nature, thereby ensuring uniformity across Australia in consumer credit practices and protections. The Act's application is extended and refined through subordinate instruments such as the National Consumer Credit Protection Amendment Regulations 2011, which provide further detail and address specific issues as they arise, ensuring the Act remains effective and relevant. While the Act broadly governs consumer credit activities, certain exclusions and exemptions may apply based on specific conditions or thresholds outlined within the Act and its subsidiary regulations.
Key Provisions
The National Consumer Credit Protection Amendment Regulations 2011 (No. 3) amends the National Consumer Credit Protection Regulations 2010 (F2011L00764). These Regulations clarify the definition of 'break fee' in the context of fixed rate loans, as outlined in Schedule 1 of the Principal Regulations (Section 3). This amendment aims to eliminate ambiguity regarding the calculation of break fees and ensures that they can be calculated based on various interest rates or funding costs, as long as they reflect the credit provider’s actual loss due to early repayment (Section 4). The new definition explicitly states that break fees must relate to the difference in interest rates that results from the early repayment of a fixed rate loan, whether those rates are retail, wholesale, or based on funding costs (Section 5).
Under the new Regulations, credit providers and borrowers must adhere to the updated definition of 'break fee' when entering into agreements. This means they can now contract to calculate break fees in ways that align with their business practices, including using retail or wholesale interest rates or their funding costs. However, these fees must still comply with existing laws, such as the prohibition against unconscionable fees and charges as stipulated in section 78 of the National Credit Code (Section 6). Compliance with these Regulations is crucial to avoid any legal repercussions, and credit providers must ensure their practices reflect the updated definitions and requirements.
The Regulations impose clear obligations on credit providers to accurately calculate break fees according to the amended definition, ensuring transparency and fairness in their dealings with borrowers. Failure to comply with these requirements could result in penalties. The specific consequences of non-compliance are not detailed in the Regulations but could include legal action under the broader provisions of the National Consumer Credit Protection Act 2009 and the National Credit Code (Section 7). Any breaches of these obligations could potentially lead to fines or other civil or criminal penalties, depending on the severity and intent behind the breach. The exact penalties would be determined in accordance with the overarching legislative framework, which includes provisions for enforcement and sanctions.