What type of licence is required for a private lender - An Australian Credit Licence or an Australian Financial Services Licence?
We previously published the article: “Becoming a private lender – What do you need to know to set up a new business”. This is Part Two to that article which gives insight into the type of licence required for a private lender.
As a private lender, do you need a credit licence?
If your business is engaging in “credit activities”, you will need an Australian Credit Licence (ACL). Credit activities as defined by the National Consumer Credit Protection Act 2009 (NCC) include:
- providing credit under a credit contract;
- benefiting from mortgages or guarantees relating to a credit contract;
- suggesting or assisting for a particular credit contract;
- acting as an intermediary between a credit provider and a consumer for a credit contract.
What is a credit contract?
A credit contract is an agreement under which credit is, or may be, provided. The credit must be credit that is covered by the National Consumer Credit Protection Act 2009. Common types of credit contracts include personal loans, credit cards, small-amount loans, housing loans (including for residential investment property) and contracts for the sale of goods or land by instalments.
Understanding the purpose of the loan when you’re a private lender
If the loan is given predominantly to a borrower for personal, domestic or household purposes, including residential property investment (and not business or commercial purposes), it will be governed by the NCC, which has elevated protections offered to the borrower when compared to a business or commercial loan.
What are the requirements to obtain an Australian Credit Licence?
The ACL licence is issued by the Australian Securities and Investments Commission (ASIC). ASIC regulates all ACL holders and assesses the application for an ACL. In its assessment, ASIC requires an individual or company to demonstrate that it is competent and capable of carrying out credit activities in a responsible manner.
This includes:
- meeting the necessary educational and training requirements
- having appropriate systems and processes in place
- meeting the responsible lending requirements (ascertaining and verifying the borrower’s financial situation and assessing whether the credit contract is suitable)
- meeting the requirements in the NCC dealing with precontractual disclosure and conduct in relation to the terms of credit contracts
- complying with the legal and regulatory requirements of ASIC such as, one must:
- have general conduct obligations to act honestly and fairly
- be competent to engage in credit activities
- be able to ensure that their clients are not disadvantaged by conflicts of interest
- comply with the credit legislation
- have appropriate dispute resolution systems, compensation arrangements, resources and risk management systems, and maintain trust accounts (if you hold money on behalf of another person while providing a credit service).
When are you exempt from holding an Australian Credit Licence?
In certain circumstances, you do not need to hold an ACL such as where:
- you are a representative of another person who holds a licence, and you engage in credit activities on their behalf. You may be able to act as representative if:
- you are authorised as a credit representative to engage in credit activities on behalf of a credit licensee; or
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- you are an employee or director of a credit licensee or one of its related bodies corporate;
- you, or the type of credit activity you engage in, are exempt from the credit licensing requirements, or
- ASIC grants you relief from the requirement to hold the ACL.
When do you need an Australian Financial Services Licence?
Another type of licence to consider when you are a private lender is the Australian Financial Services Licence (AFSL). If your business is providing “financial services”, you will need an Australian Financial Services Licence. The licencing regime of the AFSL is established under the Corporations Act 2001 (Cth) and aims to promote investor protection and to maintain the integrity of the financial system.
What are considered to be “providing financial services” when you’re a private lender?
You will be providing financial services when you:
- provide financial product advice to clients;
- deal in (issue and/or arrange) a financial product on behalf of a client;
- make a market for a financial product;
- operate a registered managed investment scheme;
- provide a custodial or depository service;
- provide traditional trustee company services;
- provide a crowd funding service;
- provide a superannuation trustee service;
- provide a claims handling and settling service; or
- operate the business and conduct the affairs of a corporate collective investment vehicle.
What are financial products when you are a private lender?
Financial products include the following:
- shares
- bonds
- superannuation
- interests in managed investment schemes
- life insurance
- general insurance
- derivatives
- margin lending facilities.
Eligibility to obtain an Australian Financial Services Licence?
To obtain an AFSL, an applicant must:
- meet approved qualification and competency standards and/or have practical experience in the finance service industry
- have sufficient financial resources to carry on the proposed business, such as having sufficient capital and insurance
- meet certain obligations as a licensee relating to:
- conduct and disclosure
- competence, knowledge and skills
- training and compliance
- competence of financial advisers and authorised representatives
- conflicts of interest and risk management
- financial, technological and human resources
- dispute resolution and compensation arrangements and retail clients
- training, compliance and dispute resolution
- comply with the regulatory requirements of ASIC, and Australian Financial Services Law including the Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth).
What are the key differences between an Australian Credit Licence and an Australian Financial Services Licence?
If you are considering engaging in credit activities and/or providing financial services, you must hold two separate licences: an Australian Credit Licence AND an Australian Financial Services Licence. However, an AFSL allows the holder to provide financial services, including credit services, while an ACL allows the holder to engage in credit activities only.
When are you exempt from holding an Australian Financial Services Licence?
You will be exempt from holding an AFSL if you are:
- an authorised representative of an AFSL holder;
- a foreign business which is regulated by foreign law substantially similar to the Australian law; or
- in the business of providing financial counselling agencies.
Can I become a private lender without a licence?
The legislation regulatory these licences imposes significant civil and criminal penalties for carrying on credit activities or financial services without the appropriate licence. It is imperative that you understand the governing criteria and obtain the correct licence for your business circumstances.
How can Burke Lawyers help private lenders?
If you’re a private lender and unsure of your position or your next course of action in regard to applying for a licence we can assist you. Two of our senior lawyers and firm principals Meghan Warren and Kristy Muhlhan have over 23 years of experience between them in banking, finance, commercial and construction industries. For tailored legal advice and guidance on all of your banking and finance requirements please contact either Meghan or Kristy via phone on +61 3 9833 8588 or email our team here.
