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01 Nov 2013

Conducting credit activities “efficiently, honestly and fairly”: the role of responsible managers

by Samantha Carroll, Damien Cooling

The minimum requirements apply equally to responsible managers for both credit activities and financial services.

The role of responsible managers is an essential part of compliance with the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and is integral to demonstrating that credit licensees have complied with the “organisational competence” obligation under the NCCP Act. By virtue of their position, the conduct of responsible managers is also a reflection of whether the credit licensee is complying with their broader obligation to do all things necessary to ensure that its credit activities “are engaged in efficiently, honestly and fairly”.

The role of responsible managers is an essential part of compliance with the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and is integral to demonstrating that credit licensees have complied with the “organisational competence” obligation under the NCCP Act. By virtue of their position, the conduct of responsible managers is also a reflection of whether the credit licensee is complying with their broader obligation to do all things necessary to ensure that its credit activities “are engaged in efficiently, honestly and fairly”.

A key issue for credit licensees therefore is what steps must responsible managers take in order to ensure that their broader obligations under the NCCP Act are satisfied. While some of these general obligations under the NCCP Act are relatively new, similar obligations have long existed for financial services licensees under the Corporations Act 2001 (Cth). It is important to compare and contrast the requirements on responsible managers under both regimes to ensure that the specific obligations under the NCCP Act are not overlooked.

This article specifically examines this issue in light of the Australian Securities and Investments Commission’s (ASIC’s) Regulatory Guide 206: Credit licensing: Competence and training (RG 206). It also considers how the courts have interpreted the obligations of organisational competence and the need to act efficiently, honestly and fairly under the Corporations Act, as well as providing a comparison between RG 206 (in relation to credit licensees) and Regulatory Guide 105: Licensing: Organisation competence (RG 105) (in relation to financial services licensees).

What are the key obligations placed on credit licensees under the NCCP Act?

A person engaging in a “credit activity” must hold a credit licence under the NCCP Act.[1] “Credit activity” is defined broadly under the NCCP Act and includes activities in relation to credit contracts, consumer leases, mortgages and guarantees, as well as providing “credit assistance” as an intermediary for the purposes of securing credit for the consumer under a credit contract.[2]

A person typically provides credit assistance if, during the course of their business, they suggest that a consumer apply for a particular credit contract with a particular credit provider, or they assist in doing so.[3]

Two broad categories of persons must therefore hold a licence under the NCCP Act:

  • lenders under a credit contract and lessors under a consumer lease; and 
  • finance brokers, credit intermediaries and mortgage managers.

The general obligations on credit licensees are found in s 47 of the NCCP Act and include (a) that a licensee must do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly;[4] and (b) that a licensee must maintain the competence to engage in the credit activities authorised by the licence.[5] Both of these obligations are potentially wide-ranging in effect, but compliance with them may, in practice, depend on the conduct of the credit licensee’s responsible manager.

How have similar obligations under the Corporations Act been interpreted?

Under the Corporations Act, financial services licensees have obligations similar to those outlined above in relation to credit licensees.[6] In interpreting the obligation to act “efficiently, honestly and fairly”, the court in Australian Securities and Investments Commission (ASIC) v Camelot Derivatives Pty Ltd (in liq)[7] found that those words incorporate a requirement of competence in providing financial advice and compliance with the relevant statutory obligations.[8] It also found that the obligation includes an element of sound ethical values and judgment in relation to client affairs.[9]

In that case, the court held that a financial product adviser did not engage in financial advice activities efficiently, honestly and fairly because his overriding consideration was to procure clients to trade in as many short-term investments as possible in order to derive “excessive brokerage fees”.[10] It is expected — and this case potentially illustrates — that courts may hold financial advisers to a higher standard than credit representatives (who are required to comply with a similar obligation) because of the level of trust placed in financial advisers by clients seeking to invest their own funds with third parties.

The relationship between lender and customer is different from the relationship between advisers and their customers because under the former relationship, both parties place a level of trust in each other — the lender places trust in the customer to repay the loan, and the customer places trust in the lender to offer reasonable terms. In the case of a financial adviser and their client, trust is primarily focused on the adviser to advise on the most appropriate investment for the client’s goals, needs and objectives. The relationship between mortgage broker and client may arguably be more akin to the relationship between financial adviser and client, because both are third-party intermediaries. Despite these differences, elements of “sound ethical judgment” and “competence” would also apply to credit licensees.

What requirements are placed on credit licensees under RG 206?

RG 206 states that the measures that credit licensees must take in order to comply with the organisational competence obligation under the NCCP Act will depend on the nature, scale and complexity of the business. Credit licensees must have responsible managers who are adequately responsible for the quality of credit activities of the licensee. The conduct of responsible managers is therefore determinative of whether a credit licensee is “competent” and acting “efficiently, fairly and honestly”.

In terms of identifying appropriate responsible managers, RG 206 provides that responsible managers should be directly involved in managing the business’s credit activities.[11] For example, non-executive directors, company secretaries or employees with a specialist business support role are not considered appropriate responsible managers. At a minimum, responsible managers must have at least two years of “problem-free” experience and either credit industry qualifications to the Certificate IV level or a diploma or degree.

If the credit licensee provides home loan credit assistance as a third-party intermediary, the responsible manager must have a Certificate IV in Finance and Mortgage Broking.[12] RG 206 states that it is appropriate to distinguish between third-party mortgage brokers and other types of credit licensees because “poor advice can jeopardise ownership of the family home”.[13] It is perhaps also indicative of the similarities between third-party mortgage brokers and financial advisers.

RG 206 also sets out a number of minimum measures that credit licensees should implement in order to comply with the organisational competence obligation under the NCCP Act.[14] These include:

  • review organisational competence on a regular basis and whenever the responsible managers or business activities change;
  • maintain and update the qualifications and experience of responsible managers and ensure that responsible managers undertake at least 20 hours of continuing professional development per year; and
  • keep records showing that a review of organisational competence has occurred and the steps taken to maintain organisational competence.

What requirements are placed on financial services licensees under RG 105?

RG 105 provides that, at a minimum, financial services licensees must nominate responsible managers who

(a) are directly responsible for significant day-to-day decisions about the provision of financial services;

(b) collectively have appropriate knowledge and skills for all of the licensee’s financial services; and

(c) individually meet one of five options for demonstrating appropriate knowledge and skills.[15]

Each option is arguably more rigorous than the training requirements for responsible managers under RG 206.

For example, option 2 requires the responsible manager to have five years of experience and knowledge equivalent to a diploma, and option 3 requires the responsible manager to have three years of experience and hold a university degree in the discipline and complete a short industry course.[16] There is also a requirement under RG 105 that responsible managers of all financial services licensees have availability on a day-to-day level.[17] Under RG 206, this requirement only applies to small businesses.

At a minimum, in our experience, a responsible manager should do the following:

  • Know the obligations relating to licensed activities. In a credit context, this involves a working knowledge of relevant legal obligations under the NCCP Act, such as responsible lending obligations. This would also include ensuring that the responsible manager keeps informed of any changes to these obligations.
  • Know the conditions of the relevant licence. A responsible manager should understand the activities that the organisation is licensed to undertake and which activities they are responsible for overseeing (for larger organisations). Additionally, the responsible manager should be aware of any special conditions on the licence, such as key person requirements.
  • Know the governance, risk and compliance. A responsible manager should have an overall understanding and knowledge of the arrangements that are in place to ensure compliance with their obligations and licence conditions.

It may be especially challenging in circumstances where a responsible manager is responsible for overseeing both credit activities and financial services. In these circumstances, a responsible manager would need to be particularly diligent in ensuring that they are competent in the above areas and understand the differences in the nature of the relationships they might have with a customer, depending on the nature of services they are providing.

It would also be expected that a responsible manager is capable of demonstrating competency in the above areas, has turned their mind to the relevant obligations for which they are the guardian, and can show that they actively take a role in ensuring compliance with the relevant obligations, licence conditions and governance, and risk and compliance arrangements of their organisation.

Conclusion: understanding the nature of obligations under the NCCP Act

It is apparent that the requirements placed on financial services licensees under RG 105 are more rigorous than the requirements placed on credit licensees under RG 206. This is so even in relation to third-party mortgage brokers, which, broadly, conduct a similar business to financial advisers in that they provide advice to customers about the financial products of third parties. These differences in Regulatory Guidance, along with the court’s interpretation of the relevant obligations under the Corporations Act and the differences in the nature of the relationships between the different service providers and their customers, may suggest that the nature of obligations under the NCCP Act, on the face of it, appear to be construed less strictly than the corresponding obligations for financial services licensees under the Corporations Act.

However, in our opinion, responsible managers for credit activities should not be lulled into a false sense of security. The minimum requirements discussed above apply equally to responsible managers for both credit activities and financial services. A responsible manager is the shepherd of the financial field and accordingly plays an integral role in the competency and ongoing regulatory health of an organisation. While there may be some differences in application of this obligation, competency is essential to maintaining either an Australian credit licence or an Australian financial services licence.

With ever-expanding obligations under the NCCP Act, we consider that the responsible manager role for credit will continue to evolve and will hold the same level of importance as its predecessors in financial services.

 

This article was first published in The Australian Banking and Finance Law Bulletin, Vol 29 Pt 5, November 2013


[1] NCCP Act, s 29.Back to article

[2] Above, n 1, ss 6–10.Back to article

[3] Above, n 1, s 8.Back to article

[4] Above, n 1, s 47(1)(a).Back to article

[5] Above, n 1, s 47(1)(f).Back to article

[6] See Corporations Act, s 912A(1)(a).Back to article

[7] (2012) 88 ACSR 206; [2012] FCA 414Back to article

[8] Above, n 7, at [69].Back to article

[9] Above, n 7, at [69].Back to article

[10] Above, n 7, at [71].Back to article

[11] RG 206 at [38], [39].Back to article

[12] Above, n 11, at [8], [9]. Note that disclosure obligations are placed on the credit licensee to provide details about significant noncompliance issues of the proposed nominated manager.Back to article

[13] Above, n 11, at [82].Back to article

[14] Above, n 11, at [13].Back to article

[15] RG 105 at [5].Back to article

[16] Above, n 15, at [44].Back to article

[17] Above, n 15, at [28].Back to article

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.