Introduction
The introduction of the National Consumer Credit Protection Act 2009 (Cth) on 1 July 2010 created a unified national framework for consumer credit, significantly altering the regulatory landscape. A key part of this transition involved arrangements for credit contracts made before this date, which are now defined as a “carried over instrument” and are subject to the new laws.
As a result, any lender who continues to manage these older loans is classified as a carried over instrument lender and faces specific regulatory requirements to maintain compliance. This guide explains the essential obligations and the distinct pathways available, whether that involves holding a full Australian Credit Licence (ACL) or operating as an unlicensed lender under a modified statutory scheme.
What Is a Carried Over Instrument
The term “carried over instrument” refers to credit contracts or consumer leases that were established and active before 1 July 2010. These financial agreements were originally governed by the previous state-based Uniform Consumer Credit Code (UCCC).
The introduction of a national credit regime brought these existing loans under federal legislation through transitional arrangements established by the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth). This legislation ensures that if a credit contract entered into before 1 July 2010 qualifies as a “carried over instrument,” it is subject to the National Credit Code (NCC), which is contained in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth).
This transition is significant for any lender holding these older agreements for several reasons:
- Loans created under the former UCCC are now regulated by the current national framework
- Compliance obligations for these instruments fall under the authority of the Australian Securities and Investments Commission (ASIC)
- It impacts how a lender manages this portfolio, regardless of whether they hold an ACL
Identifying a Carried Over Instrument Lender
A lender with a carried over instrument is a credit provider or lessor who manages credit contracts or consumer leases that were established before 1 July 2010. A key characteristic of this type of lender is that they have not offered or been assigned any new credit contracts since 30 June 2010, but they continue to collect payments under these pre-existing agreements. This distinction is important for determining the specific compliance obligations under the national credit regime.
To clarify their regulatory standing, it is helpful to understand how lenders are categorised based on their activities after the introduction of the National Credit Act. The primary distinction lies in whether a lender is managing a closed portfolio of old loans or is also active in the current credit market.
Lenders are generally categorised as follows:
| Lender Category | Description |
|---|---|
| Carried Over Instrument (COI) Lenders | Lenders who exclusively manage a closed pool of carried over instruments that were in force on 1 July 2010. They do not offer any new credit contracts or consumer leases after this date, and their activities are confined to administering these older agreements. |
| Lenders with Ongoing Credit Activities | Lenders who, in addition to managing their existing carried over instruments, also continue to offer new credit contracts and consumer leases. They must hold a full ACL, which covers both their old and new loan portfolios. |
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Regulatory Pathways for Carried Over Instrument Lenders
Holding an Australian Credit Licence
A lender with a carried over instrument can choose to obtain and hold a full ACL. Opting for this pathway means the lender must adhere to all standard obligations under the National Consumer Credit Protection Act 2009 (Cth), subjecting them to the same unmodified compliance requirements as any other credit licensee.
This option is suitable for COI lenders who:
- wish to continue offering new credit products, or
- prefer to operate under the comprehensive framework of a full ACL.
By doing so, their compliance obligations for both old and new loans are consolidated under a single regulatory structure.
Operating as an Unlicensed Carried Over Instrument Lender
Alternatively, a lender that only manages a closed pool of carried over instruments and does not offer new credit can operate without an ACL. These entities are referred to as “unlicensed carried over instrument lenders” (UCOI lenders), and to use this pathway, the lender must formally notify ASIC that they are acting as an unlicensed lender.
Choosing this option does not mean an absence of regulation. Instead, the UCOI lender is subject to a modified statutory scheme outlined in the National Consumer Credit Protection Regulations 2010 (Cth). This creates a distinct set of compliance obligations tailored for lenders who no longer write new business but still manage pre-existing credit contracts.
Key Obligations for an Unlicensed Carried Over Instrument Lender
General Conduct & Competence Obligations
A UCOI lender must adhere to many of the same general conduct obligations that apply to holders of an ACL. These obligations ensure that credit activities are managed professionally and ethically, with the nature and scale of the business influencing how they are met.
According to section 47 of the National Consumer Credit Protection Act 2009 (Cth), as modified by the National Consumer Credit Protection Regulations 2010 (Cth), a UCOI lender is required to:
- Ensure all credit activities are conducted efficiently, honestly, and fairly
- Implement adequate arrangements to manage any conflicts of interest
- Maintain the organisational competence required for credit activities
- Ensure all representatives are adequately trained and competent
- Have an internal dispute resolution procedure to handle client issues
- Maintain adequate resources (financial, technological, and human) alongside robust risk management systems, unless regulated by the Australian Prudential Regulation Authority (APRA)
ASIC’s Regulatory Guide 206 clarifies that these obligations for an unlicensed lender are broadly similar to those for a licensed one (RG 206.31).
To demonstrate competence, a lender must have responsible managers with:
- At least two years of relevant, problem-free experience
- Appropriate qualifications, such as a Certificate IV level qualification in the credit industry or a relevant university degree (RG 206.7)
This framework ensures that even without a full ACL, the lender operates to a high standard.
Record-Keeping & Reporting Requirements for Your Compliance
In addition to general conduct standards, a UCOI lender has specific administrative duties to ensure ongoing compliance. Unlike entities with an ACL, UCOI lenders are not required to be members of an external dispute resolution scheme like the Australian Financial Complaints Authority (AFCA).
However, choosing not to join such a scheme imposes additional record-keeping responsibilities. If a UCOI lender is not a member of an approved scheme, it must maintain registers for:
- Complaints made in relation to any carried over instrument
- Applications from debtors for hardship variations to their credit contracts
- Requests from debtors to postpone enforcement proceedings
Furthermore, all UCOI lenders must lodge an annual compliance certificate with ASIC. They are also obligated to report any significant actual or likely contraventions of credit legislation to ASIC within 10 business days of becoming aware of the issue.
Under the National Consumer Credit Protection Regulations 2010 (Cth), specific notification requirements also apply. A lender must inform ASIC of certain events within strict timeframes, including:
- Any change to the lender’s details on the credit register within 10 business days
- A change in control of the lender within 10 business days
- If not regulated by APRA, notification of any event that could cause a material adverse change to the lender’s financial position within three business days
Understanding Prescribed Unlicensed Carried Over Instrument Lenders
An unlicensed COI lender who fails to meet certain probity requirements under the National Consumer Credit Protection Regulations 2010 (Cth) is known as a ‘prescribed unlicensed carried over instrument lender’. This classification applies to any lender subject to specific orders, judgments, or disqualifications that make them unfit to manage a carried over instrument portfolio.
A lender becomes a prescribed unlicensed COI lender if they, or one of their officeholders:
- Have been convicted of serious fraud within the last 10 years
- Are disqualified from managing a corporation
These probity requirements ensure that only suitable individuals and entities manage consumer credit, even within a closed portfolio.
Significant restrictions are placed on prescribed unlicensed COI lenders. They are prohibited from engaging directly in credit activities, such as contacting a consumer to collect debts. While they may continue to receive payments owed under the carried over instrument, all active management must be handled by a third party.
To maintain compliance, a prescribed lender must:
- Appoint a holder of an ACL to act as their representative
- Ensure this representative engages in all credit activities on their behalf
- Notify ASIC of their status and the details of their appointed representative
Additionally, the appointed licensee must formally notify ASIC of their appointment, ensuring regulatory oversight is maintained.
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Conclusion
Lenders managing a carried over instrument portfolio are subject to specific regulatory obligations under the national Australian credit framework introduced on 1 July 2010. These COI lenders must ensure compliance by either obtaining a full ACL or operating as an unlicensed lender under a modified scheme with its own set of rules and obligations.
To ensure you meet your specific obligations and maintain full compliance, contact the experts at AFSL House. Our specialised ACL services are tailored to help your lender business navigate the requirements for managing a carried over instrument, providing trusted guidance and peace of mind.
