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 NCC. 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
Depending on the purpose of the loan, the loan may or may not be governed by the NCC. The NCC has elevated protections offered to the borrower when compared to a business or commercial loan and it is important that the purpose of the loan is correctly reflected so that each party understands their rights and obligations.
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.
In certain circumstances, you do not need to hold an ACL for example, ASIC may grant relief from the requirement to hold the ACL, amongst other things.
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 the eligibility criteria including being appropriately qualified, having sufficient financial resources to carry on the business and meeting other regulatory requirements..
You may 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.
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.
Can I become a private lender without a licence?
The legislation regulating these licences imposes significant civil and criminal penalties for carrying on credit activities and/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? <h3>
If you’re a private lender or intending to become a private lender, we can assist by:
- Advising you on your eligibility to obtain an ACL or whether you may be eligible for an exemption;
- Assisting in making your application to ASIC and preparing supporting documentation to obtain an ACL;
- Advising you on your eligibility to obtain an AFSL or whether you may be exempt from such requirement;
- Advising you on the process of obtaining an ACL and/or AFSL;
- Drafting suite of loan and ancillary documents required to commence your private lending business.
Two of our senior lawyers and firm principals Meghan Warren and Kristy Muhlhan have over 20 years of experience between them. For tailored legal advice and guidance on all of your banking and finance requirements please contact Kristy or Meghan via phone on +61 3 9833 8588 or email HERE.
