Posted: 09 Jun. 2020 5 min. read

Debt Management Services' new requirement to hold an Australian Credit Licence from 1 July 2021

As part of the government’s consumer credit reforms, Debt Management Services will now be categorised as a Credit Activity regulated under the National Credit Act and providers of these services will now be required to hold an Australian Credit Licence (‘ACL’). This new regulation aims to bring Debt Management Service Providers (‘Providers’) under same level of scrutiny as Credit providers to ensure consumers are protected throughout the entire credit lifecycle, including repayment of debt.

An increased number of consumers have had, continue to experience, financial stress throughout the pandemic. It is currently estimated that approximately 10% of consumers who enter hardship have sought assistance from such Providers.1

Under this new regulation, from 1 July 2021, Providers must hold an ACL with a Debt Management Authorisation or satisfy conditions of transitional arrangements to continue providing these services without a credit licence - until a licence is granted.

To meet transitional arrangement conditions, by 30 June 2021, Providers must:

  • Have applied for an ACL (or variation to an existing licence) with a Debt Management Authorisation; and 
  • Be a member of the Australian Financial Complaints Authority (AFCA).

From 1 July 2021, provision of these services without holding an ACL or satisfying the conditions of transitional arrangements will breach Section 29 of the National Consumer Credit Protection Act 2009 (National Credit Act) leading to a civil penalty of up to 5000 Units ($1.11M).

General Conduct obligations must be demonstrated

In their application for an ACL, Providers will need to demonstrate to ASIC that they can satisfy the General Conduct obligations applicable to an ACL holder once the licence is granted.

These obligations include having systems in place to ensure:

  • Appropriate management of risks, conflicts and disputes;
  • Adequacy of financial, technological and human resources which will in effect enable an efficient discharge of services; and
  • Appropriate training arrangements for all staff so they can meet compliance with regulations as they perform their duties.

As it reviews applications, ASIC will have a keen focus on Providers’ organisational competence and whether they can run their business efficiently, honestly and fairly. In their application, Providers will need to satisfy ASIC that:

  • People responsible for making significant decisions regarding the day to day running of the business have the necessary competence to do so in addition to having a problem-free past in similar roles.
  • The relevant services will be provided in a timely and efficient manner, have tangible benefits and be tailored to the specific needs of the consumer. This stems from the significant level of vulnerability attached to consumers seeking debt management services.

What does this mean for Debt Management Services Providers?

Immediate focus required on ACL readiness

Providers, whether needing to apply for a new credit licence or vary an existing one, will need to immediately consider their readiness in making a successful ACL application. Their application will need to demonstrate the appropriate level of compliance maturity underpinned by a robust Compliance Framework that will engender fair consumer outcomes.

Providers also need to consider whether their existing pool of talent has the expertise to develop new or update their existing, Compliance and Risk Management Frameworks. Having adequate frameworks will enable appropriate management and mitigation of all relevant risks, especially the risk of non-compliance with the General Conduct obligations outlined above.

Key considerations for Providers in preparing their ACL application

To meet ASIC’s expectations, Providers need to consider the following key factors:

  • Understand the regulatory requirements and framing the approach in applying for an ACL.
  • Design, develop and review the overall Compliance and Risk Management Frameworks to demonstrate readiness for an ACL.
  • Benchmark current state compliance maturity against the requirements of consumer credit regulatory regime to identify and resolve gaps.
  • Uplift the control environment to proactively comply with ACL obligations. e.g. Having a robust monitoring and assurance framework to:
    • Ensure services are provided in line with ASIC’s General Conduct obligations; and
    • Clear Terms of Reference are defined to ensure people responsible for making significant business decisions comply with ASIC’s organisational competence requirements.
  • Have the right capability and materials to train staff and ensure that they understand licensing obligations.
  • Explore the use of technology such as Data and Voice Analytics to efficiently and accurately record communication, monitor compliance and exchange of data between consumers and the firm.

Long term focus required on consumer outcomes

To ensure business sustainability and additional value for stakeholders, internal and external, Providers’ regulatory change management programs should strive for long term positive consumer and commercial outcomes rather than just achieve the minimum required level of compliance in the short term.

Reference:
[1] www.legislation.gov.au (2021), National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021, Explanatory Statement <https://www.legislation.gov.au/Details/F2021L00521/Explanatory%20Statement/Text >; Page 13 of 31.

More about the authors

Carolyn Morris

Carolyn Morris

Partner, Audit & Assurance

Carolyn is a Regulatory Conduct partner with over 14 years in Financial Services at National Australia Bank including the Retail Bank, Wealth Management and Financial Advice. She has a proven track record in Customer Remediation, Regulatory Change Implementation, Business Transformation and Portfolio Management. She is commercially focused whilst still ensuring business solutions meet regulatory risk appetite. Carolyn is a strategic thinker with significant experience in creating teams and frameworks to address regulatory expectations and responses.

Kris Glaveski

Kris Glaveski

Principal, Financial Risk

Kris is a Principal in Deloitte’s Financial Risk practice within Risk Advisory, with extensive experience spanning Credit Risk Management, Business Improvement, Data and Analytics, and Financial Services Operations – with a particular focus on Credit and Collections. With 15 years of in-industry experience, he has led strategic priorities and organisational change within the Financial Services sector, demonstrating an ability to solve complex business problems deliver significant business value through the effective use of data, analytics, people, process and technology. Kris is also an experienced Lean Six Sigma practitioner, having spent two years as a Black Belt leading strategic business transformation, process improvement, optimisation, and digitisation programs across Operations, Credit, Legal, HR and IT functions.