Treasury is currently considering options for regulation of business and investment lending. Did you know that to a large extent it is already regulated?

Most credit businesses are Australian credit licensees or credit representatives, and so are members of an external dispute resolution (EDR) scheme.

The jurisdiction of EDRs extends to credit provided to individuals (ie natural persons) and small businesses irrespective of whether the credit is regulated by the National Credit Code. Accordingly, loans to individuals and small businesses for investment purposes (eg to buy shares, buy art work, general business finance) can be the subject of disputes at EDR. (Loans to individuals to purchase or refinance residential investment properties are already subject to the National Credit Code and margin loans are financial products so these borrowers already have access to EDR.)

This means that there is a big difference for borrowers when they deal with a credit business which is not a licensee or credit representative. These borrowers will not have access to EDR schemes.

Treasury concerns include:

  • many small business borrowers are not aware of their ability to complain to EDR schemes even when their lender or broker is a member of an EDR scheme.
  • ASIC has very little power to deal with unlicensed lenders and brokers;
  • people who guarantee these loans have no recourse to EDR.

I am a strong believer that we should have a 'regulation break'. We should let the dust settle to see what happens from the major changes introduced over the last two years. Despite this, there is a strong argument that there is a major imbalance for borrowers depending on whether the lender or broker is a member of an EDR scheme.

If all 'business' lenders and brokers are required to be registered or licensed with ASIC and be members of EDR schemes, a key question is whether this would significantly reduce the availability of credit or increase costs? The objective of getting rid of 'dodgy' businesses may have the unintended effect of making it even harder to arrange finance.

Another question is if these lenders and brokers are required to join an EDR, should responsible lending practices require them to implement a process of enquiring into objectives and requirements, financial situation, verification, and then make an assessment? Possibly, responsible lending should only apply where the borrower's primary residence is being used as security.

If this initiative is pursued, we anticipate it will be several months before there is any proposed legislation.

For more information, please contact:

Sydney



Jon Denovan

P +61 2 9931 4927

e jdenovan@nsw.gadens.com.au

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.