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Tuesday, 14 August 2012
Page: 5194


Senator FEENEY ( Victoria Parliamentary Secretary for Defence ) ( 18:00 ): I present a revised explanatory memorandum for the bill and move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

Today I introduce the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. This Bill continues the Government’s commitment to ensuring that all Australians get a fair deal when they use credit.

This Government has already introduced the most important national reforms in the history of Australian credit regulation. We have introduced a national licensing scheme for lenders and brokers, responsible lending obligations that seek to prevent consumers entering into contracts where they cannot afford the repayments, and, new requirements in relation to the two most popular forms of credit, home loans and credit cards.

This Bill maintains our commitment to ensuring that the balance of fairness is not lost, particularly for the most vulnerable of consumers.

Since its introduction last year, the Enhancements Bill has been subject to reviews by the Parliamentary Joint Committee on Corporations and Financial Services, and by the Senate Economics Committee. The Government has also conducted lengthy and detailed consultations with stakeholders. Arising from these consultations, the Government introduced amendments to the Bill which improve its effectiveness.

The package of reforms introduced in this Bill address four main topics, relating to short-term lending, reverse mortgages, enhancements to the national credit legislation and closing the current regulatory gap in respect of consumer leases.

I will address each of these in turn.

Pay day lending

It is estimated that at least $500 million is lent annually in short term, small amount loans. At one end it can include small loans in which a person borrows $300 which must be repaid plus interest a week or two later, on the borrower’s next payday. It also covers larger loans up to $2000.

The vast majority of these loans are provided to low-paid workers or people on Centrelink benefits. It is estimated that nearly half of payday borrowers have incomes of less than $24,000 a year, and up to two-thirds earn less than $36,000. It is not acceptable to this Government that such consumers are left to fend for themselves.

Australians who use payday loans are usually unable to access other cheaper forms of credit. As a result they face two risks.

The first is the risk of excessively high costs, as consumers who can’t shop around can end up paying whatever the lender decides to charge. For example, there have been cases of lenders charging $1477 in interest and fees on a loan of $1000 for 26 weeks, or $2074 on a loan of $1000 for 52 weeks.

The second is the risk of a debt spiral, where an existing loan is extended or rolled over into a new loan. The consumer is then faced with using even more of their income to meet repayments, reducing their ability to meet other expenses from their own income.

Borrowing for the basics might seem like it helps in the short-term, but for many people it simply makes things worse.

Borrowing high-cost money leaves the underlying financial difficulties unresolved. When the direct debit payment comes out automatically at the next pay-day, it can leave the borrower with no cash for the next week’s basics, so they go get another loan, trapping them into a cycle of debt.

Most borrowers take out multiple loans and there is evidence that some lenders’ existing business models actually rely on this occurring. They need people to come back again and again, borrowing more and more, and paying bigger and bigger fees.

Take the example of a person on a fortnightly Centrelink benefit. They are caught short one week and take out a $300 loan, filling in a direct-debit form with the paperwork for the day their next payment hits their account. Typical fees on that loan will be at least $105, if not higher. So on their next payday $405 comes out of their account, leaving them short the next week as well. So they take out another loan - and the spiral of debt begins.

The responsible role of Government is to facilitate a competitive market, and to intervene when the market fails. Here there is a market failure: the price of borrowing money is too high. Borrowers who are desperate for cash will pay whatever it costs to get a loan quickly, whatever the consequences might be the next week.

What’s more, Australian payday lenders’ fees have grown substantially in the last decade and are now among some of the highest in the world.

In America, some states have adopted caps of between 16% and 35%. In Canada, rates are capped as low as 17% in some provinces. Interest rate caps apply in 14 European Union nations: France, Germany, Italy, Netherlands, Poland, Portugal, Slovakia, Spain, Slovenia, Greece, Ireland, Malta, Belgium, and Estonia.

So we are now implementing Australia's first national cap on costs for 'small amount' contracts - that is, contracts for $2,000 or less that run for less than one year. After extensive consultations with the small amount credit industry and consumer advocates since the introduction of the Bill, the level of the cap has been doubled so that lenders will be limited to charging an upfront fee of 20 per cent of the amount of credit the borrower receives, and then four per cent each month for the life of the loan.

The Government is satisfied that the new level of the cap on costs for these contracts will result in an ongoing viable small amount lending industry, but one in which exploitative or inefficient lenders will need to change their business models.

This cap delivers real outcomes for consumers. It ensures that borrowers who are in need of a small amount loan will not face relatively high costs, and will reduce the risk of an ongoing cycle of dependency through the continued use of this form of credit.

But providing for a cap on costs is only part of the protections under this package. The Bill addresses the risk of a debt spiral by introducing specific responsible lending obligations. These obligations replace prohibitions which were initially included in the Bill such as on a lender refinancing a small amount credit contract. They provide a more targeted and effective response by seeking to improve lending standards; whereas a prohibition may only encourage avoidance.

The responsible lending obligations will include a presumption that a small amount credit contract will be unsuitable where it would be the borrower’s third such loan in the last 3 months. This is an important change as repeated use of this type of credit within such a short period of time would be a likely indicator that the borrower is in financial hardship, and that a further loan would therefore not be suitable.

The implementation of this obligation as a presumption allows lenders to provide further credit where they can demonstrate facts that displace the presumption. This gives lenders additional flexibility relative to a prohibition.

Also, we think more could be done to encourage consumers to utilise other cheaper options. There are currently cheaper alternatives to small amount loans, such as Centrelink advances, utility hardship programs, and no-interest and low-interest microfinance schemes. Under these reforms small amount lenders will be required to disclose the availability of these options to their customers.

It is also proposed that small amount lenders who operate websites will be required to provide a link to the ASIC financial literacy website at moneysmart.com.au.

Given the likely impact of these reforms the Government has amended the Bill to introduce a requirement for a review of the operation of the cap after it has been in force for 2 years. This will enable the effect of the reforms to be considered, including matters such as the level of the cap and whether there is a need to address avoidance techniques that may be developed in response to the caps.

These measures will tackle the problem of long term debt dependence, and ensure that borrowers are aware of alternatives that may better meet their needs.

There is no doubt that over the course of the Government’s consultations regarding these reforms, strong views have been expressed on both sides, from lenders and consumer groups. The effects of payday lending on the welfare of Australian households have been strongly debated. But this Government thinks it’s time that the interests of consumers come first.

Reverse mortgages

The Bill also introduces new protections for seniors seeking to take out a reverse mortgage.

Many senior Australians have worked hard to own their own home before retirement. If they now need to access the equity in their home through a reverse mortgage then they deserve to be adequately protected.

This class of borrowers are particularly vulnerable for a number of reasons. First, they are unlikely to be able to recover financially if they enter into the wrong loan and exhaust their equity. Secondly, reverse mortgages are very different from other credit products and most borrowers will not be familiar with how they work.

The most significant risk to seniors is that they may end up with a debt greater than the value of their home, known as ‘negative equity’. That is why the Government is implementing Australia's first statutory protection against negative equity. This will ensure that older Australians are not caught short at a time in their life when financial stability is so important.

The other major risk is that consumers will make poor choices because they are unaware of, or do not appreciate, all the consequences of entering into a reverse mortgage. For example, they may borrow too much while still relatively young and unknowingly restrict their future choices if they later need to move into aged care accommodation.

Reverse mortgage lenders and brokers will therefore be required to meet specific disclosure requirements. They will need to show consumers different examples ofhow the equity in the home will reduce according to how much they borrow, and according to different movements in house prices and interest rates.

I am pleased to say this approach is supported by industry and will result in consumers making better choices in balancing their current and future needs.

Enhancements to the national credit regime

The Bill also introduces several important enhancements to the national consumer credit law.

Firstly, there are changes to reduce the risk that borrowers in genuine hardship will face enforcement action by lenders, including losing their homes. The Government considers it important that borrowers should have the best possible chance to come to an arrangement with the lender that avoids court action.

The procedures in relation to hardship variations will therefore be more flexible. And the restriction that means borrowers cannot apply for a variation because they borrowed more than $500,000 will be removed.

Since the introduction of the Bill, the Government has also taken into account the concerns of industry by introducing a requirement on consumers to provide information to their credit provider or licensee in regard to a hardship variation request.

Secondly, providers of credit services such as brokers will be made more accountable by introducing a remedy for conduct that is unfair or dishonest. Unfortunately there will always be some brokers who exploit the consumer’s trust in them for their own benefit - this remedy will require them to adopt high levels of conduct, consistent with the standard of fairness, or face action by consumers.

Thirdly, the Bill will restrict the use of the following words or phrases: “independent”, “financial counsellor” and “reverse mortgage”. These types of terms have an emotional or high impact resonance and have been used in ways which mislead or manipulate consumers. These words and phrases will now only be used where they strictly describe or relate to particular types of conduct or arrangements.

Consumer leases

This Bill also provides for regulatory balance between credit contracts and consumer leases. Currently, the National Credit Code imposes significantly different obligations according to whether or not the consumer has a right or obligation to purchase the hired goods at the end of a consumer lease.

The experience of over a decade with the old State and Territory Uniform Consumer Credit Code was that the technical nature of this distinction has resulted in regulatory arbitrage. Some providers elected to offer consumer leases because of the lower regulatory requirements, and not necessarily because the consumer does not want to own the goods at the end of the contract. This particularly affects low income consumers who may not have other finance options; they can end up paying for the use of goods such as fridges or computers without ever being able to own them.

Under the Bill, consumer leases will be largely regulated consistently with credit contracts, to reduce the incentives for providers to use leases in a way that can disadvantage consumers.

Conclusion

The Gillard Government is ensuring that fairness remains a feature of Australia’s credit markets. In particular, we are ensuring that the regulation of credit does not happen in a way that ignores the vulnerable - such as some seniors or those on low incomes or people who find themselves in financial hardship.

The Bill I am introducing today demonstrates our commitment to always stand firmly on the side of consumers.

I commend this Bill to the Senate.

Debate adjourned.