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Wednesday, 22 June 2011
Page: 6866


Ms LIVERMORE (Capricornia) (12:30): The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill puts in place a series of measures that fulfil the government's election promise to deliver a fairer and simpler banking system, a banking system that works for borrowers and credit card holders and other bank customers rather than simply growing profits for the banks.

The measures in this bill include improvements to credit card contracts and banking practices such as banning unsolĀ­icited offers to borrowers to increase their credit limit, preventing banks from charging fees to customers who go over their credit limit and including a warning on monthly statements about the costs of only paying minimum repayments off credit card debt.

The bill builds on the substantial work we have done in the area of banking reform and consumer protection since coming to office in 2007. That work has been supported by the Council of Australian Governments and is motivated by the recognition by this government that the interests of consumers were not adequately protected against the enormous market power of the banks. Reforms since then have been designed to drive greater competition in the banking industry through providing customers with more information and more power to exercise their rights as consumers. Ultimately we want these reforms to reduce people's debt and save them money.

The bill amends the National Consumer Credit Protection Act 2009. That was landmark legislation which for the first time established a national consumer credit regime. Among other things that act provides for responsible lending conduct requirements on financial institutions. That means banks and other lenders are not allowed to provide credit products and services that are unsuitable for the consumer's needs and that the consumer does not have the capacity to repay. It also includes enhanced enforcement powers for ASIC and expanded consumer protection.

We always recognised that there would be more work needed to help consumers better manage their financial arrangements and to protect them from banking industry practices that relied on a lack of transparency and that risked creating debt traps for consumers. During the last election we announced our Fairer, Simpler Banking policy which takes our banking and consumer reforms further and particularly focuses on giving people a better deal on their credit cards. Credit cards have become a fact of life for most Australians. There are around 15 million credit card accounts in Australia today and many individuals and families have more than one card. Credit cards can be a convenient way for people to shop and are indispensable for many transactions, especially those carried out over the internet. They are also a source of enormous revenue for banks in both interest charges and fees. Both of these points are good reasons for the government to give special attention to credit cards and give consideration to appropriate regulation for that part of the lending sector.

There is also growing evidence that credit cards warrant such regulation going beyond the responsible lending obligations already in place. Credit cards have a number of unique features that can lead to problems for bank customers. They have high interest rates and holders are only required to repay a relatively small amount each month. Many customers can make that arrangement work for them but it can also mean that credit card debts can mount up very quickly and result in people paying interest month after month with little capacity to repay the principal. Credit cards are also the subject of particularly aggressive marketing by lenders, which often obscures the full financial implications of what is being offered to people. Given all of that, it is not surprising that financial counsellors and those working with struggling families—organisations like Wesley Mission—name credit card debt as the 'No. 1 cause of financial stress and consequent psychological problems'.

This government wants to make sure that Australian credit card holders can get the benefits of having a credit card without leaving themselves open to excessive fees and interest charges. That requires consumers to be fully informed about how their credit card operates and it requires lenders to provide information that can be easily understood and compared to other products in the market. The additional requirements on financial institutions contained in this bill were made plain during the election and since then there has been extensive consultation by Treasury with the banking sector and consumer representatives. There has also been an inquiry conducted by the House of Representatives Standing Committee on Economics which resulted in a unanimous report recommending support for the bill before us today.

During the course of the consultations, and in submissions put to the inquiry, there was a lot of resistance to the bill coming from banks and other lenders. It is easy to see why, when the Reserve Bank in its June quarter 2010 bulletin reported that fees charged to customers for exceeding credit card limits including late payments totalled $470 million for the year to 30 June 2009. That is just one example, but it gives the game away as far as the banking industry is concerned. They have a lot riding on this. They have a lot riding on the particular nature of credit card contracts and the business model built on that. But if the banks have a lot riding on this reform then it stands to reason that so have consumers: if banks are making a lot of money out of credit cards then consumers are losing a lot of money. That is why the government is determined to go ahead with this bill and the protections it will introduce.

In his second reading speech the Treasurer gave a number of examples of how credit card holders could save surprisingly large amounts of money by making small changes to the way they manage their credit cards based on the information that will be provided to them and the restrictions placed on lenders as a result of this bill. That might be increasing the amount they repay each month over and above the minimum monthly repayment. It might be by avoiding penalties for exceeding their credit limit by a small amount. Or it might be by putting card holders more firmly in control of how and when they increase their credit limit. We want to empower Australian consumers to better manage their credit card debts and avoid debt traps that are far too easy to fall into today. We also want banks and other lenders to embrace the opportunities that increased competition in the sector can bring.

I note that while other banks were making the case against these reforms, one bank—the National Australia Bank—was offering some of the same measures to its customers and selling them as a feature of its credit card products. For some time now the National Australia Bank has been aggressively marketing its cuts to fees and charges, two of which will come into effect across the industry under this bill. From January this year the NAB started applying repayments to the component of a cardholder's debt with the highest interest rate. This is in addition to an earlier decision by the NAB to abolish over-the-limit fees on all credit cards. I have seen reports where the National Australia Bank estimates these measures to save customers $170 a year. That is $170 of hard-earned money that previously customers were paying for no benefit to themselves and purely into the bottom line of the National Australia Bank. For its part the bank estimates that just the change to the debt repayment hierarchy will cost it $4 million. That just goes to show that what we are talking about in this bill is not some hypothetical wishful thinking. That is $4 million that will not come out of customers' pockets. These reforms will change the balance between banks and their customers—change it in the customers' favour and in ways that they will be able to measure in real dollars and cents.

I will turn now to the specific measures in the bill. They are all important changes but, according to the evidence before the parliamentary inquiry, the most significant one is the ban on unsolicited offers to borrowers to increase their credit limit. It has become common practice for lenders to send out material to their customers offering increases in their credit limit using words like 'preapproved' and making it as simple as signing a 'tick and flick' form. The submission to the House of Representatives Standing Committee on Economics from the Consumer Action Law Centre referred to a 2009 study in Victoria which showed that 84 per cent of credit card holders in that state had received an unsolicited credit card limit offer increase. That rate was consistent across demographic groups, including people who were unemployed or healthcare card holders.

In evidence before the committee the coordinator of the Consumer Credit Legal Centre talked of 'countless examples over the years of people on very low incomes who have accepted a series of credit limit increases'. The higher the credit limit the less likely it is that the full balance will be paid off each month. People end up on a debt treadmill, paying off a little each month while the interest on the outstanding amount grows to unmanageable and very stressful levels. They are not defaulting entirely, so the banks are happy, but these are the people who are finding themselves in a position where they can never get ahead either. We do not think that is fair and it should not continue. Under these changes people will be able to make considered decisions about whether it is necessary for them to increase their limit but they will not be bombarded with offers enticing them down a path that could result in higher levels of debt than they need or than they can manage to repay.

This bill will also require lenders to include on the monthly statements they send out to customers a clear warning about the consequences of making only minimum repayments. This will stop customers falling into the trap of paying the minimum repayment while the total continues to incur high rates of interest. The difference of paying even a slightly higher amount off the outstanding debt can add up to significant savings over time, and it is certainly better than giving that money to the bank as interest that could have been avoided. We want people to have the knowledge they need to make their money work as hard as it can for them, not the banks' shareholders.

For similar reasons the bill forces lenders to allocate the payments made by customers to higher interest debts first. The most obvious example is where a customer's bill includes an amount for cash advances and an amount for regular purchases. Previously the bank would credit the payment received against the regular transactions, which attract a lower interest rate, while the full amount of the cash advances would continue to accrue the higher rate of interest that applies to those transactions. This is the change the National Australia Bank estimates could save card holders $170 a year. Treasury puts the figure even higher. Whatever the amount is, it is better off in the pocket of the family who earned it than inflating the bank's profit result.

One of the largest sources of fees going to banks from credit cards comes from transactions that take customers over their card's debt limit. Currently lenders allow customers to exceed their limit, but the customer is then liable for an over-limit fee, usually around $20 to $25. This bank revenue is reported by the Reserve Bank as running into hundreds of millions of dollars annually. From now on lenders will be prevented from charging fees to customers who go over their credit limit unless they have expressly asked for this service. Lenders will have the discretion to allow transactions over the credit limit up to a default buffer of 10 per cent of the card's limit, but if they allow that to happen it cannot incur a fee back to the customer.

Finally, the bill seeks to provide customers with easy-to-use information about credit products like home loans and credit cards. Lenders will be required to produce a key facts sheet for standard home loans, setting out in a standardised format pricing and other information, allowing consumers to readily compare different home loans. A similar requirement will apply to credit cards so that credit card applications will include key information about the annual percentage rate and other contract terms. People will be able to compare the offerings of different institutions and work out what will cost them the least and what will work for them. That is exactly what we are trying to achieve in this bill. This bill is another way the government is helping Australians to get the most out of their hard-earned money. We want bank customers to have the knowledge and capacity to make sound financial decisions and informed choices so that they can access the financial products that they need. Above all, we want to make sure that people's hard-earned money can work for them.