The Financial Sector Reform Bill 2022 received Royal Assent on Monday, giving payday lenders and consumer leasing companies six months to get ready before a range of changes to their sectors take effect. 

Small amount credit contracts are loans of up to A$2000, where the term of the contract is between 16 days and 12 months. They are covered by the general consumer protections in the Credit Act, including responsible lending obligations.

But providers of SACCs are not subject to the 48 per cent annual interest rate that applies more broadly. 

Reflecting the short-term nature of the loans, SACC lenders can charge a maximum establishment fee of 20 per cent and a maximum monthly fee of 4 per cent of the value of the loan. In the event of default, a consumer cannot be charged more than twice the adjusted credit amount, including the amount already repaid.

Consumer leases for household goods are currently not classified as credit contracts and the obligations in the Credit Act that cover credit contracts do not automatically apply to them. The new law brings consumer leases under the Credit Act.

The key reform deals with protected earnings. Under the old law the protected earnings amount rule says that if a consumer receives at least 50 per cent of their gross income from social security payments, 80 per cent of their income is protected and cannot be used to repay a SACC.

The new law extends the protected earnings amount to all consumers. It prohibits licensees from entering into a SACC if the repayments under the contract would not meet the requirements prescribed by regulations.

The government envisages that the regulation-making power can be used to ensure all consumers are covered by a protected earnings amount and that different amounts may apply to different consumers.

According to the information memorandum accompanying the bill: “It is expected that the regulations will provide a protected earnings amount of 10 per cent of a person’s net income for all consumers, meaning that a licensee cannot enter into a contract if the total repayments would exceed 10 per cent of the consumer’s net income.”

This rule will also apply to consumer leases for household goods.

Another key change is the repeal of the rebuttable presumption provision, which rules that a SACC is unsuitable if the consumer has entered into two or more small amount credit contracts in the past 90 days or the consumer is in default under a SACC.

The government accepted the 2017 SACC Review’s view that the rebuttable presumption provision has been ineffective in addressing the harm caused by repeat borrowing and should be replaced by an updated protected earnings provision.

The new law makes several other changes to the rules covering small amount credit contracts, including:•    requiring SACCs to have equal payments and equal repayment intervals over the life of the loan;•    prohibiting the lender from charging monthly fees in respect of the residual term of a loan where it is repaid early;•    prohibiting licensees from making unsolicited communications to consumers;•    requiring licensees