New law reform proposals for online credit contracts in Australia

By Mark Sneddon and David Kreltszheim.

Key Points:
Draft amendments to the Uniform Consumer Credit Code have been released, which will allow consumer credit contracts to be created electronically.

In July 2004, draft amendments to the Uniform Consumer Credit Code were released which will permit formation of credit contracts and the communication with borrowers by electronic communication including online. These proposed amendments will enable credit providers to make full use of the internet for their consumer credit business across the country, and are open for comment until 3September 2004.

Background

The reform proposals have been on the agenda for the last five years, as stakeholders have debated whether regulated consumer credit contracts could or should be made online to facilitate sales of credit cards, personal loans and even home loans. Under the Code which applies almost uniformly in all Australian States and Territories, a credit contract must be in the form of a "written contract document", "signed" by the credit provider and, in most cases, by the consumer as well.

Over the course of this five year period, Australian States and Territories have all introduced Electronic Transactions Acts ("ET Laws") to ensure that the validity of a transaction is not affected simply because it involves the use of electronic communications or electronic signatures. The ET Laws generally adopt the same form in all of the States and Territories, but each State and Territory has introduced regulations which create differences in the scope of application of a State or Territory's ET Law. Four Australian States (NSW, Qld, WA and SA) have excluded the Code from the scope of the ET Laws that apply in their jurisdiction (in Queensland this applies until November 2004).

The reform proposals: What is permitted?

The reform proposals are in the form of amendments to the Code and the applicable regulations, and are based on the view that the ET Laws should be the main vehicle by which equivalence of electronic communications with paper communications is achieved.

To ensure that this aim is achieved, the reform proposals declare that any contract referred to in the Code as it applies in an Australian State or Territory may be made in accordance with the ET Law applicable in that State or Territory. (These changes to each State and Territory's version of the Code will override the regulations under the ET Laws in the four States that exclude the UCCC from the ET Law. But, for consistency, those ET Law regulations should also be repealed.)

Although the reform proposals would cover regulated credit contracts, guarantees and mortgages, their principal application in practice will be to permit the creation of electronic credit contracts and some electronic mortgages. The possibility of electronic guarantees will be excluded by proposed regulations. The feasibility of electronic mortgages over real property will need to be considered in light of existing conveyancing practice, Titles Office practice and real property legislation in the relevant State or Territory. (For example, the South Australian ET Law does not permit electronic communications to satisfy writing requirements in relation to the creation, disposition or dealing with any interest in land.)

The reform proposals also provide that any requirement or permission by or under the Code:

• to give information in writing;
• to give a written notice or statement;
• to give or provide a copy of any document;
• that a document be signed;
• to produce a document;
• to record information in writing; or
• to retain a document;

may be met in accordance with the relevant ET Law.

To avoid doubt it would also be helpful for the reform proposals to explicitly address the requirements in sections12, 38 and 50 of the Code that a credit contract, mortgage and guarantee (respectively) be in the form of a written document signed by a relevant party.

Certain provisions in the Code and the regulations which are paper-specific, for example, regulations which require certain credit provider disclosures to appear "immediately above and on the same page as" a consumer's signature have also been supplemented by provisions that electronic disclosures have to be "prominently displayed when (but not after) the [consumer] signs."

Exclusions

The reform proposals also contemplate that regulations may be made under the Code to exclude electronic communications from being used for certain transactions, documents or the giving of certain information. The proposed regulations provide that the following transactions, documents or information must not be made, given or provided by means of an electronic communication:

• a guarantee to which the Code applies;
• default notices for the enforcement of credit contracts or mortgages against debtors;
• certain demands made on suppliers by a debtor, where the debtor has obtained credit from a credit provider and the credit provider is linked to the applicable supply; and
• a notice of repossession by a lessor under a consumer lease.

Collection of messages from a credit provider's server

One important reform proposal would permit a credit provider who is required or permitted to give a notice or other document to a debtor under the Code, with the written consent of the debtor, to give the notice or other document by making it available on the credit provider's server for retrieval by the debtor. To use this procedure, the credit provider must ensure that the debtor is promptly notified by electronic communication of the nature of the information and the fact that the information is available for retrieval on the relevant server. The notice or other document communicated electronically must be in a form that enables it to be printed and saved to an electronic file and it should be reasonable to expect that the intended recipient will readily be able to do so. Whether or not this expectation is reasonable must be judged at the time the communication is sent.

Other consumer protection measures in the reforms

Other consumer protection measures which apply if a credit contract, guarantee or a notice given by a credit provider under the Code is made or given by electronic communication include the following:

• the writing in the credit contract, guarantee or notice must be legible when viewed;
• the electronic communication must not incorporate any image, message, advertisement or other feature that distracts the debtor or reduces the debtor's ability to understand the credit contract, guarantee or notice;
• if an image, message, advertisement or other feature accompanies or is associated with the electronic communication, the debtor must be readily able to distinguish the image, message, advertisement or other feature from the credit contract, guarantee or notice;
• the debtor must be readily able to scroll through the whole of the credit contract, guarantee or notice; and
• the full address (not being a post office box) and telephone number at which the credit provider or lessor may be contacted must be included in the credit contract, guarantee or notice.

Suggested actions

Financiers should also be reviewing the proposed reforms closely to ensure that their interests are adequately protected and, to the extent that they are not, initiate or participate in submissions to the Uniform Consumer Credit Code Management Committee (we can assist in this process if you wish).

Consumer financiers, if they have not done so already, should be actively exploring opportunities for cost savings arising out of the proposed reforms. For example, it may be that as a precursor to making the technological and business process changes needed to form credit contracts online, "quick wins" can be achieved by transitioning other aspects of financiers' consumer credit operations to the online environment. This would include reliance on the new provisions enabling statements to be "delivered" by sending consumers an email notifying them that a statement is available for collection on the financier's server.

As financiers begin considering entering into credit contracts online, they will need to determine:

• how they will present the credit contract and required disclosures consistent with the restrictions in the reforms and obtain privacy consents and business purpose declarations online;
• how they will obtain electronic signatures of borrowers and mortgagors so as to meet the standards of ET Laws (and how they will take multiple signatures for joint borrowers);
• how much of the identity authentication process of borrowers and mortgagors they will undertake online and how much they will perform through back-end operations.

For further information, please contact David Kreltszheim.