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Thursday, 20 August 2009
Page: 8492


Mrs MOYLAN (10:40 AM) —I am very grateful to have the opportunity to speak and contribute to this debate today on the National Consumer Credit Protection Bill 2009 and the related bills, because this process of bringing national unity to consumer credit provisions has long been desired. I think the community expects us to act and to amend the governing laws, the legislation, particularly as new products come onto the market. New products evolve and perhaps require a slightly different approach, and we have seen some very creative approaches to the provision of credit, probably in the last few years in particular, and a lot of people do not fully understand what they are getting into when they enter into some of these schemes.

That being said, the Australian credit regulations have been admired internationally and are attributed as the reason Australia has largely avoided the subprime lending trends that have plagued so many nations abroad. I think we in the coalition were fairly rigorous in ensuring strong consumer credit protection laws but, as I said, with new products and new, creative ways of packaging credit coming in, there is a need for government to constantly revisit these laws and make sure that they do what they are intended to do.

Whilst these regulations are currently strong and effective, they are not uniform across the states and territories of Australia, which results in some confusion and certainly increases compliance costs for everyone involved, both the providers of credit and those who seek to use those products. It is not so much a matter of having a nanny state mentality, trying to protect everyone to the ultimate degree, but I think the public expect that governments will make sure that people do not unwittingly enter into credit arrangements that are less than desirable. I do think there are situations where people can unwittingly do so, certainly where the details of those credit arrangements are not always obvious—and, more importantly, the end result of some of the detail is not immediately obvious. It is important to make sure that providers of credit do not offer shonky deals and that the unscrupulous are not allowed to continue to get away with packaging of credit that does real harm to people in our community.

The state and territory governments have traditionally had legislative power to determine consumer credit matters. Indeed, this is still the case. However, in 2008 a Council of Australian Governments agreement enabled the Commonwealth to share concurrent power, enabling the creation of the legislation before us today. At this point it is important also to note that this was not the first attempt to reach such an agreement at COAG level. The coalition government’s efforts to establish national uniform laws in this regard were hampered by disagreement among many of the Labor controlled state governments while we were in office federally.

The changes proposed in this legislation are substantial. For those involved in the provision of credit, they have the potential to massively overhaul many standard procedures. They also introduce the uniform threat of criminal sanctions, including jail terms, for lenders who engage in unscrupulous behaviour. The scope of these bills and the outlook for further reforms clearly indicate that there will be important changes to the law. It is not simply a case of the Commonwealth bringing together the unified state and territory laws without more.

The coalition supports this legislation as it seeks to protect consumers and also to promote certainty and reduce compliance for businesses. In general terms, this legislation will govern the activities of lenders, brokers, credit intermediaries and debt collectors. At this point, however, it will not apply to point-of-sale retailers. That came out of the consultations and the committee process and I am sure is very much welcomed by point-of-sale retailers. Under this new arrangement, credit providers, brokers and intermediaries will be required to register with the Australian Securities and Investments Commission between November 2009 and December 2009. I understand this registration process can be carried out online and that the system has been designed to make the process as simple as possible. Following registration, participants will need to apply for an Australian credit licence within six months from 1 January 2010.

Any individual or organisation that is licensed is expected to meet the standards of behaviour set out in the legislation when providing credit to a consumer. The responsible lending provisions are aimed at ensuring that borrowers are not provided with unsuitable credit facilities. Licensees will need to ensure that they carry out an individual assessment as to the borrower’s ability to repay the loan and to meet their financial obligations for each application they receive. In a recent article in the Australian Financial Review one commentator noted that:

… the bill seems aimed at reckless lending in the US and Europe rather than the less acute problems seen in Australia. This may result in even conscientious and responsible, low-income households being forced into the arms of loan sharks as mainstream lenders observe the law to the letter.

It is an interesting point to note and probably one that should be borne in mind, as well as the all-important regulations that have been devised and that accompany this bill. But there is always a tension between the need to regulate and the need to encourage people to take responsibility for their own financial dealings—indeed, any dealings. And I think there is a greater need to educate. Credit providers have been very creative about the way they package loans. We have not seen that to the degree that we have seen it in other countries but, nevertheless, things are changing constantly and many people out there in the community do not fully understand the detail and the implications of some of this packaging of credit.

As said before, Australia has a world-class banking system. Our big four banks make up a third of the world’s strongest, and our record of subprime lending has been limited to one per cent as opposed to the famous figure of 15 per cent in the United States market. The so-called NINJA loans, where mortgages were given to people with no income, no job and no assets, has not been a problem in Australia to anywhere near the extent that it is in the United States. These lending practices have occurred in many parts of the world and have widely been attributed as the cause behind the current global financial collapse.

It has been accepted by both sides of this House that Australia’s banking system is amongst the best regulated in the world. I do not think there is much disagreement on that point. Indeed, those opposite have often said when abroad that our lending practices have prevented a fallout of the magnitude being felt by the banks around the globe. It should, then, also be recognised by both sides of the House that such prudential regulations should duly be attributed to the hard work of the member for Higgins and the coalition financial team when we were in office.

It is important that we seek to find the right balance in the protection of consumers. In any of these situations that we are confronted with as lawmakers and legislators, I want to stress that it is usually a small minority that are spoiling it for the rest of the community. We have to balance that tension, as I said, between protecting consumers from this small number of unscrupulous lenders and the need to give sufficient flexibility so that Australian lenders can continue to provide a service to the Australian community.

The other key features of the responsible lending provisions relate to the full disclosure of relevant information through a credit guide. Licensees are required to tell borrowers about all credit related costs, commissions and the borrower’s right to redress under the legislation. It is fundamentally important that all available information is made accessible to the borrower so that all involved parties are in the best position possible to decide the suitability of the particular credit product. Where a licensee is providing refinancing for consumers facing current financial hardship, a presumption has been introduced that such a refinancing is unsuitable ‘if the consumer would have to sell their primary residence to meet the financial obligations of the new finance arrangements’.

The protection of the household has also been extended in the national credit code, which departs from the uniform consumer credit code in that licensees are now prohibited from taking security over essential household goods. Where a consumer does find themselves in a position where they cannot meet their financial obligations, there are now more remedies available. Previously, consumers with a loan of $312,400 or less were entitled to apply for a change to the terms of their credit contract. This figure is based on 110 per cent of the average loan size for a new dwelling in New South Wales. The formula has now been removed and set to a fixed amount of $500,000 which may be changed by regulation. This will allow many more people who are experiencing hardship through illness or loss of employment, for example, to seek changes to their contract. A lender is not automatically required to approve such changes to the credit contract if the changes are unlikely to result in the borrower meeting their obligations. I am sure this will be very welcome for many consumers who find themselves caught up in circumstances not really of their own making—and that can happen to any one of us. I think it is a good thing, and I notice some of the major banks are announcing a much more flexible approach to borrowers who find themselves in genuine difficulty.

A new dispute resolution system is being introduced as part of this change to ensure that consumers do not need to proceed through expensive and lengthy litigation. The licensee is to have an internal dispute resolution mechanism and must also be a member of an ASIC-approved external dispute resolution scheme. If a dispute remains unresolved then the court system will be the third option, where a streamlined procedure for small claims of less than $40,000 will ensure that the borrower will not require legal representation, and the hearing will be conducted with informal procedures. I think, again, this is a very good move because it does not matter how much black-letter law we introduce into this place; if there is not fair access to the law and legal remedies, it is debatable how much that black-letter law is really worth to the average person out in the community. This allows for a process that does not require people to have a massive amount of money to engage a legal representative to take their case.

This legislation creates an interesting interplay between state and Commonwealth legislative powers. While the state and territory uniform consumer credit codes will cease to operate, the state and territory governments retain power to legislate on consumer credit matters. I think that is important. If we have a federation, we have to respect that and we have to work together. That being said, having read through a number of the submissions to the Senate Standing Committee on Economics inquiry into this legislation, there are clearly many stakeholders who are still concerned about this overlap. One of the objectives in this legislation reform process is to reduce red tape and compliance issues for licensees. However, it is plain to see that this objective could be risked if a state government chose to enact separate and additional legislation. I would hope that this issue of clarity and certainty is resolved in future COAG discussions.

The commencement of the responsible lending provisions has been delayed until 1 January 2011. The Mortgage and Finance Association of Australia pointed out in its submission to the Senate inquiry that this delay has the potential to leave open a window where consumers become less protected. The MFAA noted:

… in those states and territories where there is already operative broker legislation, viz WA, NSW, Victoria and ACT, consumers will be in a worse position than they currently are, as it is proposed state jurisdictions will be ‘turned off’ on 31 October 2009.

Perhaps that needs to be examined more closely. I hope that the gap between the state provisions ending and the federal ones beginning has been or will be addressed, to ensure that businesses are at all times clear of their obligations and borrowers will not be caught in a limbo area where they have no redress to the law for unscrupulous practices or where they have not been fully advised of the detail of the contracts they are entering into or their consequences.

As I mentioned earlier, the protection of consumers starts with ensuring that they are fully informed about their choices. But I think that this process needs to start much earlier. We need to ensure that all young adults have access to financial education so that they are informed about the basics of credit and borrowing before they are ever in the situation where important decisions need to be made. We are seeing young people being targeted by advertising. The temptation to buy things on credit is probably increasing. Young people need to understand how to manage their financial affairs and to understand the consequences of what they are doing. The process of educating people about personal financial matters should start at school and be carried on throughout the community. This is a process that I would encourage banks and other financial institutions and institutional lenders to become involved in. After all, it is really in everybody’s interests that credit is not provided to those who clearly cannot afford to repay it.

Australia is already a world leader in terms of prudent financial regulations. As we seek to further strengthen this network of consumer protection through legislation and regulation, I believe that it is equally important that we empower consumers so that they may protect themselves. The old saying is that knowledge is power, and once borrowers become fully educated about financial matters they will also become empowered and will not need to rely on black-letter law or the legislative process in this parliament or others. While it is necessary that we have strong deterrents in place and consequences for unscrupulous lending, preventing such practices should be our primary aim. It is much harder for a lender to take advantage of educated borrowers, and with greater education the market for substandard credit products will be greatly reduced. I am sure that that will be very welcome throughout the community.

The coalition supports the legislative program aimed at protecting consumers but eagerly awaits the release of the all-important regulations which, according to the Australian Finance Conference, contain ‘crucial scope, exemptions and operational content’.

As we move ahead in this reform process it is important that we also make a secondary attempt to increase financial awareness within the community, especially with the younger population, who face a world of increasing reliance on credit. It is the borrower who will make the final decision as to what credit product best suits their need, and they are the ones who need to be empowered to take responsibility for this decision. The national consumer credit protection framework is an important first step in ensuring that the borrowers of the future cannot fall foul of unprincipled lending practices.

In closing, this debate gives me the opportunity to raise the issue of reverse mortgages. This is one of the creative products that have become available in recent years. It is not a bad product, but people need to fully understand how it works. Sadly, in my electorate, I have seen a couple of older Australians take up reverse mortgages without fully understanding them—and yet there are very strong prudential requirements around these loans. But they have not fully understood what they mean. In one case, if they broke their arrangement, a penalty of about $80,000 applied. It can be a very good product. It can be very helpful in some circumstances. But the reason for this legislation is to make sure that people fully understand the terms of these contracts and that they fully understand the consequences of entering into them, and I think that is the crux of such legislation. It is to be hoped that it assists the community in managing their financial arrangements better.