Regulatory threats

The brouhaha about extensions to regulatory control impacting TGA is misplaced, because it relates to “consumer leases” as defined by the National Consumer Credit Protection Act, and this is not relevant to TGA. On Sunday I found the often cited Credit Suisse report on this topic at https://doc.research-and-analytics....=NNmZeTS8v2IoV8CRaH92nBhyw6SyJ394f5YSDhlqHWI=. This prompted me to revisit this topic in a more researched way, although I repeat most of what I wrote a few weeks ago.

The report authors' conclusion that TGA was exposed to significant regulatory risks is predicated on the view that TGA is materially a “consumer leasing”, or “goods renting”, company – it is not – TGA is substantially a finance leasing company. In FY2015 77% of the leases originated by Radio Rentals/Rentlo (Consumer Leasing division) were classified as finance leases, which ASIC regulates pursuant to the NCCP Act. Even in earlier years when TGA pretended to originate so-called operating leases, the right-to-buy provisions of many of those leases nugated that pretence.

On access to Centrepay, Centrelink has recently restated that it has no intention to duplicate ASIC's role as the national regulator of the NCCP Act. Centrelink's focus in this area is on the leases that are not covered by the Act.

The source of the confusion seems to be semantic elasticity of the term “consumer lease” and its grammatical variations. TGA uses the term to cover leasing (including finance leasing) to customers who are not business or government entities. The NCCP Act uses the term in a specific way (see below) that has led to the brouhaha still raging. Senator Doug Cameron, the Credit Suisse Report and some commentators seem to stretch the narrow NCCP definition to cover the activities of TGA's Consumer Leasing division, and err in their conclusions as a consequence.

In general terms, the word “lease” on its own implies a rental agreement, if the agreement satisfies certain criteria, it is classified as a “finance lease”. An “operating lease” is generally defined as any lease that is not a finance lease. A pure goods rental agreement is an example of an operating lease, but having an option to buy does not preclude the classification if the consideration is non-trivial, and the assets are not close to the end of their useful life. To emphasise the distinction from a “finance lease”, the term “true lease”, rather than “lease” on its own is helpful.

The most significant criteria defining a finance lease are that the lessee :

1. is committed to substantially pay the time-value of the product; and
2. has a right to obtain ownership at the end of the lease at a nominal price.

However, if the lessor substantially depreciates the asset over the life of the lease, that is a relevant determining factor that the lease is a finance lease, even if there is no right to buy the goods.

Regulatory arbitrage, to use the much-plagiarised terminology on this matter, can occur because the National Consumer Credit Protection Act is only concerned with regulating credit contracts, and not rental goods contracts. Contracts that do not have a right-to-own provision are regarded as rental goods contracts. In essence, the Act defines “consumer lease” to mean a lease:

1. where the amount committed must exceed the cash value of the leased goods; but
2. where the lessee has no right to eventual gain ownership of the leased goods.

Point 1 suggests the contract meets the criterion of a finance lease, and it goes against the general character of a pure lease. Point 2 ensures that a lease that could be classified as a finance lease is not regulated by the NCCP as a “credit contract” if it does not have a transfer-of-ownership right. The terms “operating lease” and “finance lease” are not used in the NCCP Act, it uses “credit contract” and “consumer lease”. An argument is mooted in a paper at http://law.unimelb.edu.au/files/dmfile/201417.pdf that the NCCP Act should distinguish between “true leases” and “credit contracts”, and thus so-called “consumer leases” should be regulated as “credit contracts”. TGA would have no problem agreeing to this suggestion.