Relevant legislation:
- National Consumer Credit Protection Act 2009 (Cth), particularly Schedule 1, the National Credit Code
The Financial Ombudsman Service recommends that lawyers encourage their clients to set up a pre-existing authority with their financial services provider (FSP) so that the FSP has another person to discuss matters with if they believe there may be untoward movements in accounts or arrangements regarding loans.
You may also be able to assist your client by exploring the possible liability of a financial services provider (FSP), bank or other lender. Involving a financial or credit ombudsman service (see below) can help resolve disputes between a client and the FSP and avoids legal proceedings.
Consumer credit protection
The national credit reforms under the National Consumer Credit Protection Act 2009 (NCCPA) introduced a National Credit Code (NCCPA Sch 1) and statutory ‘responsible lending’ obligations which apply to loans or increases in loans (FOS 2011, p. 25).
The NCCPA obligations require a financial services provider (FSP) to make ‘reasonable inquiries’ about a customer’s financial situation (such as their capacity to repay) and about the consumer’s requirements and objectives. The Australian Securities and Investments Commission (ASIC) provides guidance on, and examples of, the inquiries an FSP should make when assessing a consumer’s application for credit, including whether a loan was suitable (see FOS 2011, p. 26). For example, a loan should not be allowed if the borrower could never have met the repayments and the FSP is relying on the sale of the family home as their security.
Case study 1
Rita is tricked into signing a loan and mortgage documents by her son-in-law. There is evidence that supports an unfair contract, as the bank’s loan officer had knowledge of Rita’s vulnerability.
Case study 2
A pensioner refinances his credit card debts with a line of credit attached. In fact, the debt has been created by his adult son, who is drug-dependent.
Considerations:
- Does the credit product meet the pensioner’s needs?
- Did the FSP make inquiries as to whether there was an ability to repay the debt?
Unsuitable loans
The National Credit Code allows for a loan to be determined unsuitable on the basis that your client does not have the capacity to repay the loan without experiencing substantial hardship.
- Obtain a copy of the credit assessment. The credit provider must provide this on request.
- Apply to the credit provider to seek changes in the contract terms.
If the credit provider does not agree to the change, they must provide: the name of the approved external dispute resolution (EDR) scheme of which they are a member; the person’s rights under that scheme; and their reasons for not agreeing to negotiate. You can then apply to the dispute resolution scheme or the court (ss. 72–78 National Credit Code). - A request can also be made to the credit provider to negotiate a postponement of enforcement proceedings (ss. 94–96 National Credit Code).
- Put your client in touch with the relevant external dispute resolution (EDR) scheme
Dispute resolution schemes
Dispute resolution schemes (internal and external)
All financial service providers that are members of the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service (COSL) are required to have an Internal Dispute Resolution (IDR) procedure for handling customer complaints. ASIC also requires licensed financial service providers to have a documented IDR process (see ASIC Regulatory Guide 165).
If a consumer is unhappy with a financial, insurance or investment product or service, they can complain to the FSP and ask it to resolve their dispute in accordance with its IDR process.
If the consumer is not happy with the response received, they can contact the relevant Ombudsman who offers free (to consumers) independent and confidential conciliation processes (EDR). Alternatively, the Ombudsman may investigate the dispute and issue a written decision. Once an application is lodged with the Financial Ombudsman, the FSP cannot commence legal action against the older person until EDR has taken place.
Financial Ombudsman Service (FOS)
The Financial Ombudsman Service’s jurisdictional limits (disputes involving over $500,000 and compensation over $280,000) may restrict the outcomes it can provide. If the older person is seeking to have security over their home released, FOS may not be able to make that award if the mortgage secures a principal debtor’s liability over $280,000. But FOS may still be able to negotiate a resolution of a debt where the debt is greater than $280,000 as long as the parties agree.
See also FOS Circulars.
Credit Ombudsman Service (COSL)
As with FOS (above), the Credit Ombudsman Service Ltd provides consumers and financial service providers with an accessible and independent dispute resolution service as an alternative to legal proceedings for resolving complaints with a participating financial service provider.
Banking codes
Banks that adopt codes of practice such as the Code of Banking Practice (CBP) and the Mutual Banking Code of Practice (MBCP) are contractually bound by the codes’ obligations. These require FSPs to try to help a client overcome financial difficulty (for example, by helping them work out a repayment plan). Further, a FSP is not to accept a client as a joint debtor where it is clear they are not to receive any benefit from a credit arrangement. All reasonable steps must be taken by the FSP to ensure that a co-debtor understands their rights and liabilities.
See Code of Banking Practice (developed by the Australian Bankers Association).
CBP Clause 28, for example, includes a requirement for the guarantor to sign the guarantee in the absence of the debtor (to avoid undue influence on the guarantor) – that is, the FSP is aware of the possibility of say, an older parent’s will being overborne in guaranteeing a son’s company debts. (See Undue influence in Equity).
See Mutual Banking Code of Practice (for credit unions, mutual banks and mutual building societies).
See Code of Practice of the Mortgage & Finance Association of Australia (MFAA)
And note the Centrelink Code of Operation with Participating Financial Institutions, which protects individuals who depend on Centrelink payments.