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Wednesday, 22 June 2011
Page: 6861

Mr MELHAM (Banks) (12:06): The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 is about protecting Australians from unfair treatment in relation to credit card debt and helping them deal effectively with the banking system. It fulfils an election commitment by the government to assist in empowering consumers. The bill, firstly, seeks to regulate the circumstances in which borrowers go over their credit card limit and to abolish fees when they do so, except where the consumer has provided informed consent to opt in. At the moment, credit card providers usually allow credit card holders to spend over their limit and charge the cardholder an over the limit fee, which currently stands at about $225 per annum. The proposed reforms will allow consumers to go 10 per cent over the limit at the discretion of the lender and abolish the fee when the consumer does so. This discretion is important so that the lender can honour a critical payment, such as for an electricity bill. Consumers will be able to opt out of this default buffer or ask the lender for a larger buffer, depending on their individual circumstances.

Second, the bill seeks to ban unsolicited invitations to extend credit limits on credit cards. Unsolicited credit card limit extension offers can result in consumers ending up with much higher credit limits where they may only be able to repay the credit debt over a long period of time. This legislation will ban unsolicited extension offers from being sent to credit card holders unless they have previously given the organisation permission to send them.

Third, the bill seeks to require credit card providers to allocate payments to higher interest-bearing debts first. Currently, when consumers make repayments on debt the lenders automatically apply that repayment to the part of the debt on which the lowest rate of interest is charged. This bill reverses that so the repayments are applied to the higher interest-bearing debt first.

Fourth, the bill seeks to ensure that credit card application forms include a clear summary of key account features. This will ensure that consumers have the information about the key features up-front and hopefully these will be easily understood. It is anticipated that the facts sheet will include the interest rate on purchases, cash advances, promotional offers and other relevant fees.

Fifth, the bill seeks to require home loan lenders to give potential home loan borrowers a key facts sheet in order for the borrower to compare various home loans. This measure means that lenders must set out the costs of their standard home loans in a consistent and clear manner on a single page. In consumer testing of this proposal consumers found it extremely helpful and, because it was standardised across lenders, that it provided an easy comparison of home loan products.

This bill was sent to the House Standing Committee on Economics on 11 May this year. The committee recommended that the bill be adopted with one amendment. That amendment relates to the commencement date for clause 2—the key facts sheet for home loans. The committee recommended that the commencement date be amended to 1 January 2012 to allow banks more time to implement the reforms. The original date for implementation was 1 September 2011. This was confirmed by Treasury at the public hearing. The committee report noted, on page 13:

As with many reforms, there may be some teething issues and the committee would like to see some flexibility with enforcement in the early weeks. This would be especially so, given the traditionally high volume of credit transactions at the end of each calendar year.

The committee chair, the member for Dobell, Craig Thomson, noted in his foreword to the report:

The most important reform concerns unsolicited credit limit increase offers to individuals. The committee heard consistent evidence during the inquiry that the aggressive marketing by banks of limit increases was a key reason why some consumers have credit problems

The transcript of the public hearing, held on 25 May, is very interesting reading. Of particular significance was the evidence given by National Legal Aid and the Consumer Credit Legal Centre on the amount of work they do in representing people who are in debt because of credit cards. Mr Andrew Crockett, the chair of National Legal Aid, stated on page 24 of the transcript:

There was research done by the Law and Justice Foundation of New South Wales in 2006 in a number of disadvantaged areas in New South Wales and they found a very high incidence of legal events in people's lives. And 55 per cent of the events reported by respondents to that survey concerned consumer credit and debt issues. Similarly, in a more recent survey of legal needs in Australia commissioned by National Legal Aid, while we are still awaiting the final report of that survey, in the preliminary results, for the ACT anyway, we find about 26 per cent of reported legal events in people's lives relate to consumer and credit debt issues.

In essence, of the participants in the survey referred to, 55 per cent of the events were about credit card debt issues. We are all aware in this House of constituents who come to us for assistance when they are simply overwhelmed by the situation in which they find themselves because of credit card debt. Mr Coorey, a solicitor with National Legal Aid, went on to say that credit card debt is one of the most significant issues facing their more disadvantaged clients. He stated that economically and socially disadvantaged clients are more likely to end up in debt because of unsolicited credit card limit increases.

Later on in the hearing, during an interchange between Mr Brading from Wesley Community Legal Service and the member for Moncrieff—page 28 of the transcript—Mr Ciobo posed the question:

Are you saying that the most profitable group for a lender are those people who cannot afford to pay back the full balance every month? Is that what I am hearing from you?

Mr Brading replied: 'Correct.'

It is those people who are desperate to use their credit card and then find themselves only able to pay back the interest who enter into an almost unwinnable cycle of debt. Many people are in a position to pay off their credit card monthly, so the banks receive no interest from them. As Mr Brading said, it is those in the community who are in the most difficult financial circumstances that the banks benefit from, as they pay interest.

Ms Bond from the Consumer Action Law Centre provided an example—on page 29 of the transcript—of how this would occur. She said:

It is not that people get in trouble and then go out and get a credit card, but they start to get into trouble and perhaps they get a limit increase offer. Their mortgage is overdue and they have the offer, and so sometimes they accept these limit increases when they are in trouble, but it really is a combination of life events and the ease of use of credit and of increases when they are in trouble already.

The legislation before the House today also delivers on the government's commitment to introducing a compulsory one-page facts sheet for new home loan customers. There is no doubt that a home loan borrower is now faced with a bewildering array of choices when it comes to deciding the most appropriate home loan package. This is hardly made easier by the complexity of the materials provided by home loan lenders. Through the introduction of the facts sheet, the borrower will be in a better position to make an informed decision based on a side-by-side comparison. We know that choosing the best package for a home loan is one of the most important decisions that any of us can make. A mistake of half of one per cent can cost thousands of dollars, even tens of thousands, over the period of the loan. It is crucial that we have the information we need to make an informed decision presented in a format that allows easy comparison.

The explanatory memorandum provides some detail of what this facts sheet will provide, in part 3-2A. The terms of a home loan and types of contracts are usually regulated by the National Consumer Credit Protection Act 2009. The proposed key facts sheet for standard home loans will contain information and will comply with the regulations under the act. It is proposed that the key facts sheet will be prescribed by the regulations.

Chapter 2, item 2.11 of the explanatory memorandum outlines the summary of information to be provided by the facts sheet: the interest rate; the all-in rate—that is, the total cost including interest plus fees; the total cost of the home loan; particular product features; fees; and an explanation of how monthly payments will be affected if interest rates increase. With this simple facts sheet, home loan borrowers will be able to make a simple, straightforward comparison of the various options available to them.

What I find particularly pleasing about this legislation is that it comes from a COAG agreement. This is what good governance is about—states and territories working together with the Commonwealth to ensure equitable outcomes for all Australians, regardless of which state or territory they live in. I commend the bill to the House.