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Economics References Committee - 27/08/2015 - Matters relating to credit card interest rates

MAGUIRE, Ms Fiona, Senior Specialist, Australian Securities and Investments Commission

SAADAT, Mr Michael, Senior Executive Leader, Australian Securities and Investments Commission

[11:19]

CHAIR: I now welcome representatives from the Australian Securities and Investments Commission, Mr Michael Saadat and Ms Fiona Maguire. I have a fair few questions. Before we go to them, do you have any opening statements or opening remarks?

Mr Saadat : I do have a short opening statement. Thank you for the opportunity to address the committee today. As the committee is aware, ASIC is Australia's primary conduct regulator for markets, financial services and credit. As part of our responsibility for regulating credit we administer responsible lending obligations which apply to all forms of regulated credit, including credit cards, and a number of obligations that apply specifically to credit cards.

In my introductory comments I want to focus on a key issue of concern that has been identified in our submission: the likely detriment suffered by some consumer segments that overborrow and under-repay large amounts of credit card debt to which high interest is applied. We know a number of submissions to this inquiry also touch on this concern. The example of balance transfers and introductory offers demonstrates the nature of the issues raised. Choice's submission to this inquiry reports from research it commissioned that consumers with three or more cards were more likely to choose a card because of a balance transfer deal. These promotional deals often offer zero per cent for an introductory period but then revert back to a high interest rate, on average around 20 per cent.

Optimistic present biased consumers may take up these offers because they believe they will take advantage of the introductory period to pay off their existing balances, when in fact their financial situation and imperfect self-control makes it likely that they will continue to borrow at a much higher interest rate. Behavioural biases such as overconfidence and present bias are known to influence how consumers make decisions about financial offers. In our submission we note that we do not yet know the extent of the issues identified or who they impact. Other submissions to the inquiry provide further information in relation to both these questions. In considering this additional information it is important to note that where the data is self-reported by consumers it can be unreliable because consumers generally underreport.

On the take-up rate for low-rate credit cards, from the data provided by the Australian Bankers' Association and the Reserve Bank we understand that only one-quarter of credit cardholders currently hold a low-rate card, although this rate is increasing with just under 40 per cent of new credit cards issued being low-rate credit cards, and cardholders on lower incomes are proportionally more likely to hold a low-rate card then cardholders on higher incomes. On the other hand, 75 per cent of cardholders on lower incomes do not hold low-rate credit cards. With regard to repayment patterns, data provided by Treasury, the Reserve Bank and Choice tells us that approximately two-thirds of cardholders do not pay off their balances in full each month, three-quarters of cardholders who do not pay off their balances each the month do not hold a low-rate card and cardholders on lower incomes are more likely then cardholders on higher incomes to have more credit card debt relative to their income, pay more in credit card interest relative to their income and never pay off their full credit card balance.

ASIC will work with all of these stakeholders and others to continue to build our understanding of the consumer protection and behavioural biases in the Australian credit card market in order to inform our response. Mr Chairman, thank you for your time this afternoon. I am here with my colleague Fiona Maguire. ASIC's Deputy Chair, Peter Kell, sends his apologies. We are happy to take questions.

CHAIR: In fairness to ASIC in regard to this problem, you obviously regulate what the law allows you to regulate. Is that correct?

Mr Saadat : Yes.

CHAIR: The big issue that we are going to be talking about is regulatory guide 209, which is titled Credit licensing: Responsible lending conduct, which regulates responsible lending. Can you explain to us in layman's terms what the regulation actually says?

Mr Saadat : The responsible lending obligations apply to all consumer credit that is regulated under the National Consumer Credit Protection Act. It is a principles based obligation and it requires that a lender make inquiries into the financial situation of the borrower and verify the information about the financial situation of the borrower. But it also requires a lender to make inquiries about the requirements and objectives of the borrower, and in making those inquiries the lender must ensure that it does not provide a loan product that is unsuitable for the borrower.

CHAIR: Who determines suitability?

Mr Saadat : It is the lenders' obligation to determine whether the loan contract is unsuitable. It will be unsuitable if the borrower cannot repay the loan contract in circumstances other than with substantial hardship or where the loan contract does not meet the requirements and objectives of the borrower.

CHAIR: The concern I would raise is that that seems like a very subjective test that is in the hands of the person lending the money. Is that correct?

Mr Saadat : We would say that the test is scalable, so it depends on the situation of the borrower; it depends on the type of loan contract that you are looking to provide the borrower; it depends on the information you already have about the borrower. So there are a range of considerations that inform to what extent the lender has to make inquiries and conduct verification.

CHAIR: This morning—and she is still here—we heard from Kat Lane from the Financial Legal Rights Centre, and she will tell you that a lot of the people she deals with are people who have already fallen through the cracks, pre reforms that have taken place in the past five or six years. By the time you end up in those kinds of situations, it has to do with much earlier debt. As Ms Lane put it this morning, the people she deals with no longer have credit cards; they have credit card debt. But the observation that she made is that it is still going on now. Yes, there have been some reforms. Yes, things are a bit better. But there is still a situation going on now where there are questionable lending practices, where there are people getting $5,000, $10,000, $15,000, $20,000 or $30,000 worth of credit card debt who, in her objective assessment, are completely incapable of repaying that. But it is not an objective test; it is a subjective test that is conducted simply by the institution, under regulation 209. Is that correct?

Mr Saadat : The lender needs to make an assessment, at the time it provides the credit to the borrower, that it is meeting the obligations in the law.

CHAIR: The point is that it is the lender's obligation. The lender does the test.

Mr Saadat : That is right. The lender has to make sure it complies with the requirements.

CHAIR: There have been three examples in the past few years where ASIC has taken action against licensees in relation to the activities in obtaining consumer credit card limit increases, which is effectively irresponsible lending. There are three instances—is that correct?

Mr Saadat : There are—and we refer to them in our submission—three examples where we have taken action against credit card issuers. That is right.

CHAIR: That is GE Money in 2014, CBA in 2012 and Westpac in 2012. Is that correct?

Mr Saadat : That is right.

CHAIR: Are there currently any other institutions under investigation?

Mr Saadat : For credit cards and responsible lending?

CHAIR: Yes.

Mr Saadat : There are.

CHAIR: How many are we talking here?

Mr Saadat : I can think of at least one that I am quite familiar with, but there may be others, because ASIC does receive complaints from the general public. To what extent they are under review at the moment, I could not tell for certain.

CHAIR: So it is fair to say that you know of one that is under review or investigation, and there may be others and you can take that on notice as to how many there are.

Mr Saadat : Yes. I am happy to do that.

CHAIR: Thank you. There was an issue that we were dealing with this morning that we are hearing stories about, and that is the concern around things like debt-free periods that are provided on credit cards. I will use an example. Say I walk into a retail outlet and I want to buy a laptop or a couch or a fridge. I do not want to name particular companies, but there are financial providers like GE finance—which is the most renowned for this—and others who will then offer me an interest-free period of, say, two years. The moment I default on that, the compound impact of that is quite dramatic. It is not just that I am going to pay interest from the point at which I have defaulted; it is retrospective for the entire period, and we heard some evidence this morning that that can very quickly spiral people into debt traps. Again, from a policymaking perspective, I want to check this is right: under the law as it stands, those arrangements are legal. Is that correct?

Mr Saadat : If a consumer does not meet the terms of an interest-free offer, depending on how the contract is structured, yes, quite high levels of interest can apply to the debt that remains unpaid.

CHAIR: If that were to change—I do not want to put words in your mouth, here—if policymakers wanted to change that, we would have to legislate for a change to that. With the current law, as it stands, that is completely allowed. If we want to change that, it is affecting the amount of—

Mr Saadat : That is right. If you wanted to prescribe what lenders could do in that situation, you would need to do that.

CHAIR: Do you think that is something that warrants having a look at?

Mr Saadat : I am not aware that we get many complaints about that issue at ASIC, about people who take up interest-free offers—through department stores, for instance—and then, having not made the required repayments during the interest-free period, fall into trouble or find themselves facing very high levels of interest.

CHAIR: But you would not, would you, because it is legal? It is not really for ASIC. If someone came to you with that concern you would say, 'That's the law. We can't …'.

Mr Saadat : That is true. I guess we do get complaints about lots of things that are legal at ASIC. Sometimes, even though something might be legal we would work with the industry to raise standards and improve practice. With those offers, typically, the consumer is told what repayment is required in order to pay off the debt within the interest-free period. They are informed about that on their monthly statement. But it is also true that when you sign up for an offer, like that, you are not just signing up for an interest-free loan contract you are actually getting a credit card that can be used for other purposes. You might sign up to buy a TV or fridge for a few thousand dollars, but the credit provider—and it could be GE, in this case—could provide you with a credit card with a higher limit that you could use for other things.

CHAIR: One of the things that strikes me as a bit stretched on all this is that you have this situation where—let us be clear about what ASIC's mandate is. Your mandate is you regulate the responsible-lending provisions, when it comes to credit cards. That is it. Correct?

Mr Saadat : With responsible lending there are a number of disclosure requirements that apply, and the credit code as well, and complaints handling—all the conduct related issues.

CHAIR: So you do conduct, APRA does the overall capitalisation and the bank is the front line for the institution of the bank. The RBA does payments, the ACCC does competition and Treasury does bits and pieces of policy. You can understand the complication for us as policymakers. There is, clearly, community concern about this issue and there may be an opportunity for consumers—and obviously ASIC is in focus. Working through this minefield of competing responsibilities, while there is no direct overlap, because everyone has a different responsibility, there seems to be no one agency that has any kind of responsibility for the credit-card market.

Mr Saadat : I guess that is true, but it is probably also true for a range of other financial services. We do have a model in Australia where different agencies are responsible for different areas. We would say that we work quite closely with these other agencies, on a range of issues. On the question of credit card interest rates per se, though, because there are no laws that regulate how credit card interest needs to respond to changes in cash rates maintained by the Reserve Bank, it is not an issue that has been a focus for us, in particular.

CHAIR: It cannot be a focus for you, can it?

Mr Saadat : We have no mandate.

CHAIR: I just want to clarify this. You have no mandate and nobody has any mandate over credit-card-level settings? Correct?

Mr Saadat : The interest rates?

CHAIR: The interest rates.

Mr Saadat : You might ask questions about whether the competition is operating effectively within the credit-card market. That could be a question. In our submission we note that there seems to be quite a bit of competition happening, and there are many lower-rate options available to consumers, but, for a range of reasons, consumers do not seem to take up those lower-rate options.

CHAIR: Let us go through that range of reasons, because that is a really good point. This is what the RBA effectively touched on. Just before we get to that, I have one slight issue with this idea of competition. I would hold a view that is not that dissimilar to yours, Mr Saadat, but what I would put to you is that, if you are going to define 'competition' as there being lots of different cards offering the same product perhaps at varying rates within a band of 13 to 20, I think that is a separate issue from whether there is competition in terms of a diversity of products themselves and whether there are other forms of lending within the market. But when you are talking about competition I assume you are saying there are plenty of different card options. I would argue that, when we talk about competition, we should also be talking about what other types of products there are, but that is a bigger question. I just wanted to put that on the record.

Let's go through why people are not switching. Firstly, there is concern that a lot of these options are not available to those with differing levels of credit history. What I mean by that is that the selection of options available to someone who is on perfect or really good credit is very different from the selection for someone who is on lower credit, which affects the ability to take the option to switch. At this stage—correct me if I am wrong—whether or not an institution wants to provide other options to people is completely up to the institution. Is that correct?

Mr Saadat : That is right. Different lenders will have different policies around what credit criteria somebody needs to meet in order to qualify for a particular product. More recently, we have seen examples of some lenders using risk based pricing, where they charge borrowers with better credit quality a lower interest rate than borrowers with lower credit quality.

CHAIR: So the first thing is about eligibility. The point I wanted to make is again that we come at it from a slightly different perspective. Our question is: where are the bits of the law or regulations that we as policymakers can make recommendations to change at the end of this if we want to address this? Part of what you are saying is that, frankly, the question of who they choose to lend to and what products they choose to offer them is up to the institution, within a framework that they cannot be responsible.

Mr Saadat : That is right.

CHAIR: The second thing is the unreasonable obstacles to switching—that is, how difficult switching actually is in a practical sense. I want to put the idea to you that, while there are many different products available within the market, if we are going to be purists here, from a true competition perspective you have to ask yourself what are the barriers to actually being able to switch from one card to another. In your consumer mandate of ASIC, is that something you guys have looked at?

Mr Saadat : No, we have not. We have looked at switching in relation to transaction accounts, and we were working with the government and Treasury on the account-switching service that was implemented under the former government, but that did not extend to credit cards.

CHAIR: Can I ask a question: why? I guess you could ask me that question, but I think that is a legitimate question. Correct me if I am wrong: in the mobile phone market about a decade ago, from a perspective of creating more competition, a decision was made that we were going to allow a lot more portability of mobile phone numbers, and it was done as a consumer measure which, as I understand, ASIC or your predecessors supported on the principle of more competition and more flexibility. That was something that was extended to accounts, allowing people to switch accounts, and that is something the last government was looking at. There was never a discussion about extending that to the credit card market, and I am wondering if you know a reason. Again, you have not been asked to do that, and there is not a law saying you have to do that, but do you know a reason why that has not happened?

Mr Saadat : My understanding is that, when the concerns around account switching were raised, they were primarily about the ability for people to get a better deal on their mortgage as a result of interest rates not moving in line with RBA movements in the cash rate. There was a concern that the reason people did not shop around for a better mortgage was that it was difficult to switch your transaction account and move your direct debits and credits across to a different institution, so that was very much the focus at the time. At the same time, there was a view—I do not know how well developed this view was—that there seemed to be a lot of switching happening in the credit card market, that there did not seem to be significant barriers to people moving around from one credit card provider to another and, in fact, that a lot of people seemed to hold more than one credit card across different institutions.

Senator EDWARDS: As the offers came on board, they just got more credit cards and got more credit.

Mr Saadat : That could be one of the issues.

Senator EDWARDS: They did not cut up the cards.

Mr Saadat : People do move balances around to take advantage of lower-rate offers.

Senator EDWARDS: But they do not cancel the card that they transferred the balance from.

CHAIR: To back in your figure with some numbers, Senator Edwards, the RBA's submission says that there has been a 47.3 per cent increase in balances over the last 10 years. It is effectively one and a half times what it was 10 years ago. People have taken on the extra credit without any cancellation—that is the growth of the market.

Senator EDWARDS: New accounts are being opened, but old accounts are not being shut and credit provision is still there.

Mr Saadat : That could well be the case. If a consumer is wanting to take advantage of a balance transfer, depending on how much credit they have taken out, they may need to think about cancelling some of their accounts so that a new lender is willing to lend to them. We do not have any information on the extent to which people are cancelling cards when taking out a new card.

Senator EDWARDS: You did some earlier work on loyalty programs and insurance. I know that with one or two of my credit cards that if I book travel I get travel insurance. I have no idea what the cover is or what it covers me for. I do not really know how I get it. Is that common?

Mr Saadat : It is quite common.

Senator EDWARDS: Thank God for that.

Mr Saadat : To clarify, the question I was answering was: is it common for credit cards to provide insurance?

Senator EDWARDS: Is it common for people not to know what they are getting?

Mr Saadat : We were concerned about that issue recently and we put out a media release to let the public know that we had been working with credit card issuers and insurers to improve the disclosure of how those features operate, including how consumers qualify for the insurance—what you need to do to get the insurance when you go on holiday and how you go about finding out what the terms of the insurance are. We have done some work in that space, and all the issuers have agreed to make improvements to that.

Senator EDWARDS: Was it an area where there was a dearth of information and irresponsibly so?

Mr Saadat : We found that there were a number of complaints going to the Ombudsman on this issue—people not knowing what they needed to do to qualify for the insurance or being surprised at some of the terms of cover provided by the insurance. As a result of that, we worked with the industry to improve things. I think your experience of not knowing where to look was a common experience. As a result of our work issuers are making that more prominent.

Senator EDWARDS: It is one of their selling points. Is your work in this area of clarifying what information is given to consumers ongoing? The banks are saying that we create too much paperwork and regulation and that has propped up the high rate of credit card interest rates. Is that something that can be supported?

Mr Saadat : I do not think we have done the work to test whether that is the case. There have been a number of reforms over the years, but there are other reforms which have been implemented in other countries which go much further than Australia.

CHAIR: Where should we be looking? Where are they doing it in an interesting way?

Ms Maguire : The United States and the United Kingdom are probably the two jurisdictions we have looked most closely at. The United States regulates interest fees much more directly than Australia. In the United Kingdom they do a lot more personalised disclosure and regulation of repayments. The United Kingdom has a minimum floor on repayments and has personalised disclosure so that annual statements are provided with the usage of the card and the fees.

Senator EDWARDS: They are much more interventionist in relation to the advice that they give people and the requirement to repay in a shorter time frame?

Ms Maguire : The amount that they are required to repay has to take into consideration that the floor is set on the basis of covering interest fees and one per cent of the principal.

Senator EDWARDS: Right, as opposed to the Australian system—

Ms Maguire : Yes.

Senator EDWARDS: which is what?

Mr Saadat : Typically the minimum repayment is around two per cent of the outstanding balance, or 2½ per cent of the outstanding balance, each month. That might not necessarily cover all of what Fiona just described.

Senator EDWARDS: In the US and the UK, what is the range of low and high credit rates? Did you look at that as well?

Ms Maguire : We have not looked at that but it is interesting to note that both jurisdictions currently have a market study. They are currently undertaking market studies in relation to the credit card market.

Senator EDWARDS: Do you know what the terms of reference are for that study?

Ms Maguire : They are quite broad, but they certainly raise some of the issues that ASIC raised in our submission around overborrowing and under-repayment. In the United States they are required to do a market study under their legislation, which is part of the package of reforms that were introduced.

Senator EDWARDS: I raised this earlier with the Reserve Bank: do you see any parallels? This inquiry currently has an inquiry going into the standard of financial advice. If you want to go and buy some shares and your broker is a bank, or a subsidiary of a bank, there are very stringent guidelines and aspirational goals being set for the advice that people get when they spend their money. However, none of it seems to be apparent in how money is doled out and then spent by customers of the very same banks that we have heard from. Do you see some irony there?

Mr Saadat : I am not sure if it is related, but I suppose the responsible lending obligations are very much a point-in-time obligation; the obligation applies when the consumer applies for a credit card, and the lender has to make an assessment at that time as to whether the credit contract is not unsuitable. Once the consumer has the credit card they may well use the credit card in a way that they did not initially expect to use the credit card, so they might end up in a lot more debt than they expected, or their circumstances might change. The responsible lending obligations do not address anything that happens once the credit is provided.

Senator EDWARDS: How is that different from when somebody comes in and invests into a hectare of blue gums and that goes bad?

Mr Saadat : I suppose it depends on the extent to which the initial advice was appropriate in the circumstances at the time. In the financial advice situation, if you can establish—taking into account the circumstances of the investor at the time—that the advice was not appropriate then you might say that there is a problem that the legislation does address. Equally with credit cards, if you can say that a consumer was provided with a credit limit that was too high and one that they could not service when they applied for that credit card, then, again, the legislation would address that concern. But because the minimum repayments on credit cards are quite low, we are finding not that consumers are necessarily defaulting on their credit cards in large numbers—in fact, default rates are quite low and I think have been falling over the past few years—but that it is more a case of people ending up with large amounts of debt such that if they continue to make minimum repayments it will take them a very long time to pay off in full.

Senator EDWARDS: It is almost set for them not to default, really, so that they continue on the drip—providing very large returns on money which the institutions providing the money can borrow at very low single figures. And they lend it out at anywhere between 14 and 30 per cent, we heard this morning. Not a bad business to be in, so why would you want your credit addict to die? I mean that is the reality; you just want to keep them on the drip for as long as you can because they are a credit addict and they will continue to pay you 20-plus per cent interest on that money. The last thing you want to do is push them over the cliff.

Mr Saadat : On the one hand you might say that the very low repayments that you can make on credit cards also provide flexibility for borrowers. Depending on how you want to use the credit card, you can in some months make lower repayments and in other months make higher repayments. On the other hand, the trouble is that there is evidence to suggest a not insignificant number of consumers are not using it only for that flexibility but actually using it is an ongoing debt facility.

Senator EDWARDS: If you have a look at it, the RBAs says 70 per cent repay every month and take advantage of the 55 days credit so the banks do not get to clip the ticket there. They are actually relying on the other 30 per cent to pay for those very responsible 70 per cent—people that can afford to repay it every month. So now we have got a system which has embedded in it the ones that can least afford it are paying for the 70 per cent that can afford it. Now we have got a system which actually supports people being able to accrue debt for potentially 30 or 40 years, which is what is now coming out on their monthly statement if they only make the minimum repayments. If you went and bought a car, the bank would say 'okay you have to repay this in two years or three years' or there is a residual or whatever and they are quite high repayments. Are we not just addicting consumers to credit under this current system? I am not bashing the banks but those credit providers, under the current Australian regulatory regime, are dining out on this.

Mr Saadat : I suppose to some extent it is not a new practice. Minimum repayments on credit cards—

Senator EDWARDS: It is an evolved practice.

Mr Saadat : Minimum repayments on credit cards have been low for a very long time. That practice has not changed recently. But what could have changed though is consumer behaviour and consumer willingness to take on large amounts of credit card debt and maintain it.

Senator EDWARDS: But they are being beguiled by these offers of airline points and travel insurance and now you have got your platinum grade, which comes as metal and it looks flash—you can impress your girlfriend or your boyfriend. And then you get this aspiration to be in the biggest grade. It is all a fudge because behind it all is this really insidious high interest rate, which those in society who can least afford to repay it are now paying it.

Mr Saadat : I think we made the point in our submission that consumers who pay interest on credit cards are very unlikely to offset the cost of that interest with any of the benefits that are promoted with credit cards. The interest is going to be substantially more than any of those benefits.

Senator EDWARDS: It would be cheaper just buy the airline ticket or buy the wine or buy the whatever.

Senator McALLISTER: I like the toaster example. The flip side of this is the overall level of competitiveness in the market and it is interrelated with the consumer protection issues that Senator Edwards is raising. The Reserve Bank told us this morning that their calculation is that the interest rate margin may be more than 10 percentage points and that this is very high and higher than can be easily explained. Another one of the consumer organisations argued that there was a failure of competition in this market. Is it ASIC's view that there is a failure of competition that could explain these very high margins in this particular segment?

Mr Saadat : Because we are not responsible for regulating competition, it is not something that we have looked at closely. On one view, we have considered this issue and observed that perhaps more credit cards in the market would not necessarily address the underlying concern of people over-borrowing and under-repaying credit cards. I think, Chair, you made the point that there are many more credit cards than credit card providers and that is very much the case. But even though there are possibly not as many credit card providers as credit cards, there are still some credit cards that offer quite competitive rates of interest on the card. Whether or not they are accessible to low-income consumers and consumers with poor credit histories is something worth looking at.

Also the alternate credit products that could serve these consumers who end up taking on large amounts of debt, where it is really more in the nature of a personal loan than a credit card or a revolving credit facility. I think we would say that there are probably many fewer options for consumers looking for personal loans than there are for consumers looking for credit cards. There is a question about the competitive nature of the market and whether more competition could solve some of this. At the same time, we would say that, given the behavioural biases that consumers exhibit, competition is not going to be only solution to this problem.

Senator EDWARDS: Your comment is a substantive one but your final comment goes to the fact that the normal credit providers, which are the major banks, have an 80 per cent penetration footprint inside the households of these people anyway. People trust them. People trust their banks.

Senator McALLISTER: I suppose the point is, Senator Edwards, for our witnesses that there is an interplay between these behavioural biases and the effectiveness of the competition in the sector. But would you make the point you are only responsible for the consumer protection side, not for the overall effectiveness of competition in this market segment?

Ms Maguire : The other comment we would make is if you were to look at demand-side competition, you would have to take into consideration the behavioural biases. I think you mentioned switching before. One of the main barriers to that is inertia. Inertia is the fact that consumers have very low awareness of interest rates so whether or not they are high or low does not make all that much of an impact on their selection of the products. If you were to do some work in that area, you would have a very thorough understanding of the particular biases that are influencing consumers.

Senator McALLISTER: In your submission you have made the point that competition is not part of your mandate currently but that a recommendation emerging from the financial systems inquiry is that it become part of your mandate. Practically, what difference would that make to the way you would approach this issue?

Mr Saadat : If you look at regulators in other jurisdictions who have broadly our responsibilities but also have a competition mandate, what you see is the kind of work that, for example, the Financial Conduct Authority in the UK does, where it does do market studies looking at how well a particular market is working for consumers. In financial services, it will include things like: are people making the right choices? Is there sufficient supply-side competition? Does the demand-side work well to ensure that? ASIC, not having had a competition mandate until now, I suppose, has not done much work in that space. To answer your question, I do not think we have done a lot of thinking around how we would use a competition mandate because we do not have one at the moment and we are not short of other things to do.

Senator McALLISTER: You emphasise in your written submission some of the insights of behavioural economics. We talked a little bit today about two broad kinds of policy responses, one which provides greater specificity about the kind of information that might be provided to consumers and the form that would take and the other, which is simply about regulating the kind of product or having some flaw in the kind of product that is available and whether that is associated with minimum repayment amounts or other features of the product. Do you have a strong view about which of those two levers would be the most significant in developing a response to some of the problems we have heard about this morning in terms of very severe impacts on some users and consumers?

Mr Saadat : I do not think we have a well-developed view about that. There are two questions. The first is: what would be the most effective way to deal with the underlying concern? The second question is: what would the potential knock-on effects be if, for example, you raise the minimum repayment requirements for a credit card? Would that exclude certain consumers from being able to access credit cards?

Although credit cards can be expensive, there are more expensive lending options available to consumers. If you also decide to regulate what can be charged to consumers by way of interest or fees, consideration would need to be given to how credit card issuers would respond to that. To the extent that people who are paying high interest on ongoing balances are potentially subsidising those consumers who pay off their balance in full each month, the impact that changes to the ability of credit card issuers to charge interest would have on other consumers would need to be considered as well.

Ms Maguire : The other point is, if you look internationally, you do see regulators adopting a suite of interventions to address these complex issues.

Senator McALLISTER: We canvassed the interventions, in terms of the nature of the product that might be offered, on the informational side. One of the persistent themes is the complexity of features and how the different features within a product interact with one another—for example, points, balances, interest-free periods, triggers for high rates on default. Do you think consumers presently have information in the correct format to make good decisions when comparing products?

Mr Saadat : There have been improvements on that front with the establishment of the key fact sheet for consumers. When they apply for a credit card, they are given a key fact sheet which summarises the features and costs and benefits of a credit card. What we do not have is information about how consumers use credit cards and what happens after a year or two years use of credit cards: what have you paid in interest, in fees? What have you benefited from as result of the credit card? We do not know to what extent that would help consumers, because we have not seen examples of that operating within Australia.

Senator McALLISTER: Do you see it operating in other jurisdictions? You mentioned that the UK have some kind of informational requirements of that kind.

Mr Saadat : Yes. They introduced that relatively recently. I do not know if we know how well that is operating and to what extent that has had an impact on consumer behaviour. There are analogous reforms. If you look at the future financial advice context, there is the requirement to provide clients with a fee disclosure statement which summarises the fees that have been paid. Again, that is a form of tailored information for consumers so that they can make an assessment after they have acquired the services or products as to how that is going.

Ms Maguire : Again, I would point towards behavioural economics, because it informs this question about the complexity and the way that people make decisions. Information is a tool, but, if you look at the CHOICE research—and I am sure that they will draw your attention to that this afternoon—the disjunct between the reasons people think they are basing their decision on and what they actually are is a difficult thing to address.

CHAIR: Your submission touches on the behavioural economics quite well. It is that whole notion that people do not expect that they are going to be the ones that are going to be repaying the interest. It reminds of a statistic I love, which is that 75 per cent of university professors think they are the top 10 per cent of professors in the country.

Senator McALLISTER: There are some other entertaining gendered statistics around that as well!

CHAIR: Are there? That is for a separate inquiry!

Senator EDWARDS: It is not about me; it must be them!

CHAIR: There are a couple of things I want to touch on. I will tell you my major concern from the evidence that you have been given. Not concern with you, but the concern that gets raised with me. It is this issue: the person who or the entity under our current structure that makes the decision as to whether or not someone is able to repay or has the capacity to repay and whether lending is responsible is the institution. At the same time the institution has every perverse financial incentive to identify the ideal customer, from a profitability perspective, as somebody who is responsible enough to repay the interest but too indebted to pay the principal. The perfect customer is someone who will pay the credit and not pay the principal. On the one hand there is a perverse incentive for them to identify that type of customer, because you do not need to have an MBA in business to realise that that is the customer who is going to be the most profitable, but at the same time it is the same institution that makes the decisions around who it is and who it is not responsible to lend to.

I appreciate there is a current review going on in the UK and the US, so what I may be asking may change as are part of that review. At this point in time my understanding, in the Australian context, is that there is no minimum repayment that they have to take. They chose to do two per cent. Is that correct?

Mr Saadat : I cannot think of an obligation in the laws that we administer.

CHAIR: Take it on notice.

Mr Saadat : I wonder about whether APRA or the Reserve Bank would require—

CHAIR: Not that you are aware of?

Mr Saadat : We will take that on notice.

Senator EDWARDS: Certainly not APRA.

CHAIR: Ms Maguire, from what you said before, it seems that internationally there is a minimum repayment standard—in the American example.

Ms Maguire : In the UK.

CHAIR: I did not get a chance to write them down. Can you run through them again.

Ms Maguire : They set their floor on minimum repayments to cover interest, fees and one per cent of principal.

CHAIR: Interest, fees and one per cent of principal. Over what period of time at one per cent?

Ms Maguire : I would have to take that on notice.

CHAIR: If I have a floor, then when I am applying the test of whether or not someone is responsible to lend to, I am providing that test against something. At the moment the test is not against anything other than an institution's belief that it is responsible within a guideline framework that is not rigidly defined.

Senator EDWARDS: And I am sure there is modelling in their framework behind the scenes that would suggest that they are looking for the credit addict that we were talking about.

Mr Saadat : The institution will assess the borrower against the requirements in the credit contract. If the credit contract requires 2½ per cent repayments, that would be the starting point for the institution.

CHAIR: This morning we had Kat Lane from the Financial Rights Legal Centre. She was talking about the situation that perhaps when people make the determination of whether or not you should be eligible to a certain amount of credit—say $3,000 or $5,000 or a small amount. The amounts got to $30,000 or $50,000, and some of the people that they deal with have $50,000 or $60,000 worth of credit—they can make a determination over 30 years. If I am applying for an amount of money over a period of over 20 or 30 years, there is a situation where some people, who perhaps should not be getting it—for example, those on the disability support pension—end up having credit card debt and get driven to that as opposed to being driven to other forms of short-term lending. Is the role of credit cards meant to be short-term or is it just a different line of credit now?

Mr Saadat : It can operate as both because of the way that the products are structured. If a customer chooses to use a credit card as an ongoing debt facility, then there is nothing to stop them from doing that. If you want to avoid paying high interest, then the way to use a credit card is to pay it off in full every month.

CHAIR: Ms Maguire, you have gone through the UK example and how they set a floor. Again, this was not something we briefed you on, so you are now our international expert! Is there an American example of how they do things differently that you think we should be looking at as well?

Ms Maguire : I will need to take on notice, but from my understanding they do not have that system.

CHAIR: They do not have a floor. You said before there seems to be a move within like-minded nations towards a more regulated framework in this space. They are going through their own review processes to determine that. It seems like we are going through that process as well; not just this inquiry, but I think some of the work that this committee has done has probably triggered a bit of action at the Council of Financial Regulators, which I think is a good development. Is there anything else from the American example that you have that is worth us having a look at and not just in terms of law? You seem to have some notes about international examples, if you want to talk us through them.

Ms Maguire : Certainly their approach shows a strong commitment to the direct regulation of fees and interest rates. They ban increases on interest rates, fees and other charges in the first year of an account being opened. They set a minimum term for promotional rates of six months. They ban interest rate increases on outstanding amounts except at the end of an introductory rate period, if the rate is pegged to another rate that is not controlled by the provider or if the borrower is more than 60 days delinquent.

CHAIR: Who does that? Who regulates it? Is it the SEC?

Ms Maguire : Yes.

Mr Saadat : I think it is now the Consumer Financial Protection Bureau.

CHAIR: Who is it in the UK?

Mr Saadat : The Financial Conduct Authority.

CHAIR: This is a separate decision for the committee, but we may look at getting them to come and give us some evidence as part of this process. Thank you for that, Ms Maguire and Mr Saadat. I think that was very informative and useful. You have certainly given us some direction by looking at the British and American examples. You have given us some ideas there. Thank you for your submission.

Pr oceedings suspended from 12:11 to 13:05