Significant amendments to the Credit Contract and Consumer Finance Act 2003 ("CCCFA"), come into force on 1 October 2021 which sees among other things the imposition of a new duty of due diligence on directors and senior managers of a "lender" (including some mobile traders).
The new duty of due diligence under Section 59B creates an obligation and an incentive on directors and senior managers to drive a culture of compliance with the CCCFA within the lender organisation.
Who does the new due diligence duty apply to?
The amendments apply directors and senior managers of lenders. Under Section 9B of the CCCFA a "lender" means:
1. A creditor under a consumer credit contract.
2. A transferee under a buy back transaction.
The due diligence duty does not apply to directors or senior managers of pawnbrokers.
What is the due diligence duty?
Essentially, if a corporate officer is responsible for managing or directing or supervising the management of a lender, or has significant influence over the management or administration of a lender, he/she must exercise the care, diligence and skill that a reasonable director or senior manager would exercise to ensure that the business of the lender complies with its duties and obligations under the CCCFA.
The due diligence duty means that directors and senior managers will be required to take reasonable steps to ensure that the lender complies with its duties and obligations under the CCCFA and the regulations. The duty includes, but is not limited to:
1. Section 59B(3)(a): Ensuring employees and agents follow procedures that are designed to ensure compliance with the CCCFA and the regulations or ensuring that the business of the lender has automated procedures in place that are designed to ensure compliance;
2. Section 59B(3)(b): Having methods in place to identify deficiencies in the operation and particularly the effectiveness of these procedures; and
3. Section 59B(3)(c): Promptly remedy any deficiencies which are discovered.
What are the consequences of failing to exercise the required level of care, diligence and skill?
Directors and/or senior managers may be held personally liable for a breach of the due diligence duty and may be ordered to pay a pecuniary penalty up to $200,000.00 (Section 107A).
Further, under Section 107D and E:
1. Companies are unable to indemnify directors and/or senior managers in respect of any pecuniary penalty imposed under the CCCFA or costs that are incurred in defending any civil proceedings in which the pecuniary penalty is sought to be imposed. Importantly this applies even if the director and senior manager has stopped working for the lender; and
2. Insurance cannot be used to indemnify a director or senior manager in respect of the pecuniary penalty or any costs involved with defending any civil claim in which the pecuniary penalty is sought to be imposed any such contracts that claim to offer this protection are void. However, a director or senior manager is not restricted from obtaining insurance to cover the payment of statutory damages.
If a Court finds that the lender has breached the CCCFA, that the directors and/or senior managers have breached their duty of due diligence and that borrowers are entitled to recover statutory damages or compensation or exemplary damages from the lender, the directors and/or senior managers may be ordered to pay them too. This is a joint and several liability.
A breach of the due diligence duty does not automatically follow the breach by a lender of its obligations under the CCCFA.
Lenders that are required to be certified need to identify their directors and senior managers when they register on the Financial Service Providers Register ("FSPR").
Importantly, if there are changes to personnel or to the organization and other individuals become directors and senior managers, they will assume the due diligence duty.
Who is a "director"?
The role of a director, for purposes of the due diligence duty is not confined to lenders registered as companies. A director is a person who bears responsibility for the managing or directing or supervising the management of a lender's business and affairs.
A lender may be a sole trader, partnership, a trust, a charity, a statutory entity, an unincorporated joint venture or any other type of trading entity, whether incorporated or unincorporated. Consequently, anyone with a governance role comparable with that of a director of a registered company is classed as a director for the purposes of the due diligence duty (see Section 5, CCCFA). A director includes:
1. Any person in the position of a director of a company regardless of his or her title;
2. A partner in a partnership (other than a limited partnership);
3. A general partner in a limited partnership; and
4. A person in relation to an incorporated or unincorporated body occupying a position comparable with that of a director of a company.
"Silent" directors or individuals who are registered as directors but who take no direct role in the management or supervision of the company are also subject to the due diligence duty.
Who is a "senior manager"?
A senior manager is a person whose position allows him or her to exercise a significant influence over the management or administration of an entity (Section 5, CCCFA). A senior manager for the purposes of the CCCFA depends on the size and structure of the organisation, the nature of the credit organisation provides and how his/her responsibilities are allocated. The amount of influence a person has over the entity determines whether he/she is a senior manager.
Senior managers are not restricted to employees of a lender. The question as to whether a person is a senior manager or not depends on what influence that person has on a lender rather than the status of his or her employment and he/she cannot avoid the due diligence duty by structuring his/her relationship with the lender in a particular way so as to avoid it.
External advisors acting in their professional capacity (eg accountants) are unlikely to be considered senior managers.
What is due diligence?
Whether a director or senior manager has exercised due diligence will be assessed objectively. The test is whether the particular director or senior manager has exercised the care, diligence and skill that a reasonable director or senior manager of a lender of the type and size of the respective lender and with his/her responsibilities, would have exercised (Section 59B(2)).
Compliance by another person within the lender's business does not justify the avoidance of a director or senior manager's responsibility for the due diligence duty under the CCCFA.
Due diligence requires a director or senior manager to take reasonable steps to ensure the ways in which the lender undertakes its lending procedures are designed to ensure compliance with the CCCFA and the regulations.
The due diligence duty also requires supervision to ensure that the lender's procedures are implemented properly and maintained so as to ensure compliance with the CCCFA and the regulations.
Supervision to ensure the lender's proper implementation to ensure compliance requires taking reasonable steps to ensure that the lender:
1. Establishes and maintains procedures, which may or may not be automated, that are designed to result in compliance with the CCCFA and the regulations;
2. Requires staff (employees or agents) to follow those procedures;
3. Undertakes reasonable checks on whether the procedures do what they are designed to do and are being used correctly;
4. Implements reasonable methods to identify any deficiencies; and
5. Promptly remedies deficiencies that it finds.
Directors and senior managers will need to take reasonable steps to ensure the lender has procedures in place to clearly and appropriately communicate the systems and procedures within the organization which may involve:
1. Ensuring staff and agents are regularly trained in how to use them;
2. Having procedures accessible in written form; and
3. Encouraging staff to follow them.
Directors and senior managers will be required to take reasonable steps to ensure the lender requires regular checks to ensure that procedures are being used appropriately and that results of those checks, including any remedial steps are reported to, and considered by the directors or senior management.
Performing the duty of due diligence is an ongoing obligation and requires identification of deficiencies in systems and procedures and rectifying any deficiencies which are identified. Directors or senior managers will need to take steps to ensure that the systems and procedures work as intended, resulting in the necessary compliance.
The due diligence duty also requires that a director and senior manager promptly remedy deficiencies discovered.
The due diligence duty may require a director or senior manager to take other reasonable steps to ensure that the lender complies with its obligations and duties under the CCCFA and the regulations. The other steps that will be required depend on factors such as the nature of the vendor's business.
Understanding your Obligations
In order to adequately perform due diligence, a director or senior manager needs to understand the lender's obligations under the CCCFA and the regulations. The obligations include compliance with:
1. The lender responsibility principles;
2. Obligations to provide initial, continuing, variation, guarantor, transfer, standing and request disclosure;
3. Obligations relating to the charging of interest;
4. Obligations not to charge unreasonable credit or default fees;
5. Obligations relating to:
(a) High cost consumer contracts;
(d) Credit related insurance;
(e) Repossession; and
Is there anything you should do?
If you are a director or senior manager of a lender you should be taking steps to understand your due diligence duty. You should also be thinking about implementing mechanisms, procedures and training and ensuring you keep records about how you meet your due diligence duty.
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© McVeagh Fleming 2021
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.