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Economics References Committee
Matters relating to credit card interest rates

EDEY, Dr Malcolm, Assistant Governor, Financial System, Reserve Bank of Australia

FLOOD, Mr Darren, Deputy Head, Payments Policy Department, Reserve Bank of Australia

RICHARDS, Dr Anthony, Head, Payments Policy Department, Reserve Bank of Australia


CHAIR: Welcome. I want to begin by thanking you. A lot of this process began several months ago when we had an initial conversation with Dr Edey about the issues surrounding credit card interest rates. We went away and did a body of work, and I know the Reserve Bank has gone away and done a pretty fantastic body of work. I also want to thank you for the work you put into your submission. It was incredibly detailed. This whole process has come about, in part, because of your contribution. Dr Edey, did you want to make some opening remarks?

Dr Edey : Thanks very much. Thanks for the opportunity to appear here today. I know the committee is interested in a number of different aspects of credit card pricing and regulation. We have tried to address those aspects that come within our field of expertise, responsibility and mandate in our submission. As we explained in the submission, credit cards have both a payment and a credit function. The regulatory powers and mandate of the Reserve Bank Payments System Board relate to the payment function.

The board has a mandate to use its powers to promote efficiency and competition in payment systems consistent with overall stability of the financial system. To that end, the board has for a number of years regulated card payment systems by setting standards in relation to such matters as interchange fees, surcharging and access. As you know, the board is currently undertaking a comprehensive review of those aspects of card payment regulation. I will be happy to answer any questions that you might have about how that review is proceeding.

I know the committee is also very interested in the credit function and particularly in the interest rates on credit cards. That is not something that we regulate, but we have set out in our submission an overview of some of the key facts. I will make a few high-level observations about that before we go to questions. Credit card products vary a lot in the interest rates that they charge. Some of those rates are very high. Some are higher than, I think, can easily be explained. Interest rates in the order of 20 per cent on credit cards are not uncommon. The average rate for borrowers who incur interest on credit cards is currently about 17 per cent. Once you deduct from that banks' cost of funds and the cost of credit losses, that would equate to an interest margin of more than 10 percentage points.

My advice, if you are paying those sorts of rates, is to shop around. Despite the prevalence of high-rate cards, this is a market where there is some significant competition. There are a lot of card products out there that offer lower rates and special deals for balance transfers. In many cases, cardholders should be able to lower their interest rates by taking advantage of those offers if they are willing to shop around.

That, of course, raises questions about why more cardholders do not take advantage of the lower rates that are on offer, whether there are obstacles to competition and whether there might be some role for regulatory action. Some cardholders might be unable to switch, for example, if they have poor credit histories. That is something that can be looked into, along with the related question of whether there are unreasonable obstacles to switching. Other cardholders might not be aware of the options available or they might have other reasons for not pursuing them. We discussed some of those issues in our submission.

The answers to those questions are not necessarily straightforward. I think these are areas where the financial regulators can usefully do some more work. When I appeared before this committee in June, I indicated that the bank would consult with other regulators in this area, and we have begun doing that. We will be continuing those discussions at a more senior level at the next meeting of the Council of Financial Regulators, which will take place next month.

I do not want to pre-empt what might come out of those discussions, but some of the questions that might be considered are whether there is a case for improved disclosure in this area, whether there is a need for stronger risk assessment requirements for credit card lending and to what extent any action in these areas fall within the regulators' existing powers and mandates. Those are my initial comments. With that, my colleagues and I are happy to answer any questions.

CHAIR: I have some questions. I will try to get through them fairly quickly because I know there are a lot of questions for you. Again, it is a sensational submission, Dr Edey. There are some points I want to get on the record. I want to run a couple of statistics by you. These come from your submission. I think it is important to have the context. We have $51.5 billion worth of credit card debt, and $33.1 billion of that is accruing interest. There has been a 47 per cent increase in balances over the last 10 years, and there are 16 million credit cards out there. This is something, it is fair to say, touches everybody. Is that your take on it?

Dr Edey : Those are big numbers. The majority of households have credit cards, so this does affect a lot of people. We point out in our submission that a lot of cardholders do not incur any interest because they pay off their balances straight away. Roughly two-thirds of cardholders fall into that category. But many of the people who are incurring interest are paying very high rates.

CHAIR: This is the bit that concerns me in this. These are statistics. They are a matter of fact. This is what I am trying to get to the bottom of. Those people who are incurring debt are the ones paying the higher interest rates—that 17 per cent rate which sits at the higher end. I just want to put this on the record. The RBA calculate two different baskets of credit cards. You look at low-rate cards and you look at standard-rate cards. From the data you have presented to this inquiry in your evidence and have published through your other processes, such as the Payments System Board inquiry process, it is a matter of fact that the amount of interest being charged on credit cards for both low-rate cards and standard-rate cards are now at a record high. Is that correct?

Dr Edey : I do not know if the absolute rates are at a record high. The margins certainly are extremely high. I think those are at a record high. One of the most common rates on a card is about 20 per cent. If you are paying that kind of rate, you are not getting a good deal from your bank. I am not defending the banks on that. Those are high rates.

CHAIR: I think the banks are very good at defending themselves in these kind of inquiries! You talked about having discussions at a more senior level at the next meeting of the Council of Financial Regulators. The Council of Financial Regulators is the highest level meeting of financial regulators in the country; is that correct?

Dr Edey : Yes.

CHAIR: It is made up of the head of APRA, which is the prudential regulator, the head of the Reserve Bank, the head of ASIC, and the head of Treasury. Is that correct?

Dr Edey : Correct.

CHAIR: Who chairs the meeting? Is it the Treasurer?

Dr Edey : The Reserve Bank governor chairs the meeting and the Reserve Bank provides secretariat support for the body.

CHAIR: The last time we spoke in June this matter was being elevated—and I think it is a very, very good development, by the way—to the Council of Financial Regulators. You do not personally sit on the board, do you, Dr Edey? Do you attend meetings of the council?

Dr Edey : Yes.

CHAIR: Do you sit on the board or do you just attend meetings?

Dr Edey : I am a member of the council.

CHAIR: Oh, you are?

Dr Edey : Each agency is represented at a head-of-agency level with a second representative. I am the second representative for the RBA.

CHAIR: Again, I do not want you to divulge private board business, but when was this matter first put on the agenda of the Council of Financial Regulators?

Dr Edey : The council meets quarterly, so there would have been a meeting in June. I do not remember the date of that. From memory, it would have been too soon after the discussion that we had at this committee for it to have been substantively discussed at that meeting. The next opportunity is the September meeting.

CHAIR: How long have you been sitting on the board?

Dr Edey : Since—it is not the board; it is a council—2009.

CHAIR: In the past seven years that you have been there, is this the first time you have specifically looked at the issue—you had things like the global financial crisis, so it is not like you did not have things on your plate as a council—of credit cards and drawn the attention of the council to it?

Dr Edey : From memory, yes, but I cannot be entirely certain of that.

CHAIR: Very quickly, the Payments System Board regulates matters to do with interchange and, for want of a better term—I am trying to simplify this—the back-end processes of credit card issuance. Is that a fair assessment, Dr Richards? You are giving me that look that says not quite.

Dr Richards : I did not mean to give that look, but it is probably a good layman's description. The board has responsibility for competition and efficiency in the payments system.

CHAIR: But you don't look at the rates?

Dr Richards : That is right: we have responsibility for the payments function of cards and other means of payment but not the credit function.

CHAIR: Nobody looks at the rates—is that correct?

Dr Edey : We collect data on it.

CHAIR: You collect data, but nobody regulates the rates.

Dr Edey : Nobody is regulating the rates—that is correct.

CHAIR: I know you were here for part of—Dr Richards was here for all of it—the previous evidence when Ms Lane talked about what she feels is a real issue, which is the fact that when people default, if they fall out, there is a whole back pay period over a period. That would be part of the ASIC mandate of responsible lending. If there were going to be changes in that space, that would not be something that would go to the Payments System Board; that is more of an ASIC consumer issue—is that correct?

Dr Edey : Yes, that would be ASIC territory.

CHAIR: I thought so. Dr Edey, I did want to raise something with you. The Reserve Bank has two boards—correct?

Dr Edey : Yes.

CHAIR: Both of them are chaired by the Reserve Bank Governor. They operate completely separately—is that correct?

Dr Edey : Yes.

CHAIR: Does the Payments System Board report to the Reserve Bank Board?

Dr Edey : No. Under the Reserve Bank Act—I will start with the Payments System Board—the Payments System Board determines the policy of the Reserve Bank in relation to payments system matters as set out in the mandate; and the Reserve Bank Board determines policy on all other matters, which really we think about as being monetary policy. However, there is a provision in the act which also stipulates that: if there is some matter that overlaps between the two boards and there is a dispute between the two, the Reserve Bank Board would prevail in that situation. But that has never happened.

CHAIR: I have here the minutes of the monetary policy meeting of the Reserve Bank Board from 7 July. The Payments System Board met last Friday—is that correct?

Dr Edey : Yes.

CHAIR: Where are the minutes for that meeting?

Dr Edey : Those minutes have not been prepared yet, but I think what you are really getting is: should the minutes be published in the same way as the Reserve Bank Board minutes are published? That is not an issue that we have seriously considered in the PSB, because I think the subject matter that is being dealt with is very different. It would not be a straightforward matter to publish PSB minutes in the same way as we do for the Reserve Bank Board.

CHAIR: Sorry, I am going to take you to task on that: if the Reserve Bank monetary policy—and let's not kid ourselves: the minutes from the Reserve Bank policy meetings of the Reserve Bank Board do have an impact on markets. They obviously do. The market waits for them. They come out. It is a significant thing. If something at that level and of that significance can be shared publicly to help policymakers and to give guidance, I do not understand when, at one level, one of your boards—which has a mandate which some would argue is even more significant than the Payments System Board mandate—is able to publish its own minutes, why the Payments System Board does not operate with that same level of transparency?

Dr Edey : The Reserve Bank Board is mainly considering publicly available information, analysing it and coming to a decision about what it means.

CHAIR: It is a pretty significant board, though. It makes big decisions.

Dr Edey : But I think the board minutes are a vehicle for explaining how the board thinks through the process of analysing that information and coming to conclusions. What the PSB is doing, I think, is quite different from that, because it is a board that is exercising regulatory powers and it is often considering commercially sensitive information and then making deliberations that are going to have commercial impact on the institutions that are being regulated, and I do not think that that is a process that can be conducted in public in the same way that the Reserve Bank Board decisions can be made about monetary policy.

CHAIR: We will leave it on this point, because it is not really the focus of today, but I put it to you that I think the considerations that you are raising, while I do not think they are illegitimate, could easily be addressed by saying, 'What is some information that we could share publicly at the end of this?' If there is commercial-in-confidence information, I think people would understand if that is not information that is shared, but I think some transparency in this space is something that we should certainly be looking at. But that is not the focus, and I do not want to spend all our time doing this.

Dr Edey : Could I make a brief response to that.

CHAIR: Sure.

Dr Edey : We do a form of what you are asking for anyway, in the form of a media release that comes out after each PSB meeting, and that media release is a short summary of the issues that were discussed and the actions that were taken.

CHAIR: Do you have a copy of the media release from last Friday's meeting?

Dr Edey : That will be coming out in the next day or two.

CHAIR: I could not find it either. One thing I want to touch on is some statistics that you put in your report and that I found quite alarming. Non-performing loans on credit cards, in the past few years, had declined. There are some questions over the data and how well that data is collected, because you are getting that data second-hand from the banks, who may class their data differently—Dr Richards, I know, is an expert on this. But I just wanted to make that observation. Should something we look at be making sure of how good the data on non-performing loans is to allow policymakers in this space to have better information? Part of what you say in your submission, Dr Richards, is that effectively the data there is not very complete on non-performing loans. The argument effectively from financial institutions—and the banks in particular, who make up three-quarters of this space—is, 'We have to have these record levels of interest rates because there are record levels of defaults, and we are really just making the same amount of money we were making before; it has not gone up or increased, and we're still working on the same margins.' That seems to be contradicted by the information that the non-performing loans have actually declined in the past few years. I do not know, Dr Richards, if there is anything you can add to that.

Dr Richards : For many types of lending, non-performing loans are the right thing to look at, and the way one thinks about it is to say that some loans initially becoming non-performing and then they start performing again, so that the actual loss rates will be lower than the non-performing loan level. Also, even if a loan stays non-performing and actually has to be written off, you get some recovery rate on that, so that the actual loss rates that banks face on most types of lending are a fair bit below their non-performing loan rate. But what we are saying is that credit card lending is different. It is often written off at a very early stage, so that a loan, as soon as it becomes non-performing, might be written off. So a better indication of the losses that the banks are facing is not to look at the non-performing loan series but to go straight to the losses series.

CHAIR: What is the losses series? What is the percentage of losses on credit cards? I know it is in your submission.

Dr Richards : The most recent number we have on that is about 2½ per cent.

CHAIR: That strikes me as quite low for non-secured lending if only 2½ per cent gets written off.

Dr Edey : I do not know what the numbers are for other unsecured loans, but the overall loss rates on banks' loan portfolios are pretty low across the board, so I think that is not an untypical figure.

Senator McALLISTER: Can I ask a supplementary question on that point: to what extent is fraud a factor in that 2.5 per cent figure? Of course, the day-to-day perception of credit cards is that they are more than usually vulnerable to fraud.

Dr Richards : You are right that fraud rates on credit cards are much higher than fraud rates on some other types of payment, and fraud rates are especially high in cross-border transactions—so for Australian cards being used offshore or foreign cards being used in Australia—and some fraud data is published by APCA, the Australian Payments Clearing Association. My understanding is that those fraud rates—these are credit losses we are talking about here, and fraud is a separate issue I would expect.

Senator McALLISTER: It sits as a separate source of loss in that sector. I want to move to something different—that is, the governance arrangements and the policy framework for the managing of this segment of the market. We heard evidence this morning from the Financial Rights Legal Centre, and their written submission said:

… despite the wide range of products on offer, there has arguably been a failure of competition in Australia's credit card market. The four major banks account for around 80 per cent of total outstanding credit card balances, and are failing to compete on price, despite the cost for providing credit actually reducing.

Is that broad descriptor one that the bank shares?

Dr Edey : I think banks are competing for a certain type of customer. There are a lot of cards out there and there are actually a lot of cards that offer low rates if people are prepared to switch and are prepared to shop around.

CHAIR: Or able.

Dr Edey : Or are able to. But it is like any market: if you go and buy a new car or some other product, the person who pays the first price that is asked for is paying too much and the person who shows that they are prepared to shop around can often get a better deal. A lot of that goes on in bank products, so not just credit cards but across the board. If you know that you can get a discount on a home loan, you will do better than a customer who does not know that you can ask for that. It is the same with deposit rates: if you know you can shop around, you will do better. I think a lot of that happens in the card market. If you just take the default rate that is on offer, you might be paying 20 per cent, but if you know that you can shop around and get a lower rate card, you will do better. That is why I think it is important to publicise the fact that these lower rates are on offer and people really should be shopping around if they are concerned about the rate that they are paying.

Senator McALLISTER: Am I correct in understanding that your view is that if there is a failure of competition, it is simply a question of consumer behaviour rather than any other structural element in the way that the market is organised?

Dr Edey : I do not think I know enough about it to take a strong position on that. To some extent these sorts of questions really have to be up to the lawmakers as to how much protection you want to give to people in addition to the natural protections that come from competition and from the right to shop around. There will always be people who fall through the cracks in that process and end up paying unfavourable prices, and it is really a matter for the lawmakers how much protection you want to give to those people.

Senator McALLISTER: Speaking of lawmakers, which institution would be responsible for bringing recommendations to government around the state of competition in this segment of the finance market?

Dr Edey : I would say that it would be more ASIC's territory than anyone else because they really are the agency that is looking after financial consumer protection. But there are aspects to this whole issue that a number of agencies have an interest in, and that is why I have said it is important for the council to have a look at it. One of the questions that needs to be considered is: is this something where there is scope for action and a need for action within existing regulatory powers, or does the government itself need to do something about the legal framework? That is something we have not discussed yet but that I think should be discussed.

Senator McALLISTER: This was something that was considered in the financial system inquiry—that is, of the various regulatory and policy agencies, which body is scrutinising the level of competition in the financial system. The recommendation, as I understand it, and I do not pretend to be an expert, was that the ACCC would retain overarching responsibility for competition within this market, but that some of the regulatory agencies might have adjusted mandates to allow for them to explicitly consider competition in exercising their regulation-making powers. Have you got any views about that recommendation coming out of financial system inquiry?

Dr Edey : That is a sensible overall approach, but I think we really need to have the interagency discussion as to exactly how that could be made concrete. As you are probably aware, there is a process in the government at the moment of considering the FSI recommendations and the responses that the government will make to those. So we also need to see what might come out of that process.

Senator McALLISTER: As a relative newcomer to this policy area, it strikes me, looking through the lens of credit cards, it is not clear who is responsible for answering the question about whether there is adequate competition in this sector. There are assertions from some of the consumer groups that there is not, but where they would direct those views or complaints is unclear to me.

Dr Edey : I think that is something that can be clarified. One thing that I would want to make clear, though, is that the Reserve Bank is not a consumer protection regulator. We see it as our role to provide information that can be used in the policy discussion, and we have tried to do that, but we would not see ourselves as being the agency that goes in and regulates for that purpose.

Senator McALLISTER: But the question of whether or not there is adequate competition in the sector is broader than a consumer issue. It goes to the overall levels of productivity and efficiency in the economy.

Dr Edey : Almost anything could meet that description—

Senator McALLISTER: Of course.

Dr Edey : but the issue is whether it is big enough to have an economy wide impact or whether it is more about protecting the vulnerable.

Senator McALLISTER: Would that be the test for the Reserve, or are you suggesting that may be the test for the ACCC?

Dr Edey : The Reserve Bank has a mandate. It is mainly a macro-economic mandate. It is monetary policy, financial stability and efficiency of the payment system as a whole. So it is system wide. Unless something is big enough to have a system-wide impact, it is not really within our scope.

Senator McALLISTER: You concluded your opening statement this morning by saying that the discussions between the Council of Financial Regulators may consider to what extent any action in the areas of risk assessment or improved disclosure would fall within regulators' existing powers and mandates. Do you think the question of the adequacy of competition would also be something that you might consider in these conversations at the council?

Dr Edey : Yes, I am sure that is relevant to the discussion, so I expect that would come up.

Senator EDWARDS: Dr Edey, you have identified about $8½ billion worth of revenue, I think, that the banks derive through fees, interchange revenues and interest payments. That is revenue, isn't it? It is not what you consider to be a contribution to their profit, is it? Some 80 per cent of credit cards in Australia are with one of the major four banks. If you look at the major four, they announce annual average profits of, let's just say, $8 billion. So there is $32 billion worth of profit generated in this country every year by the big four, or thereabouts. I am using round figures.

CHAIR: What is a billion dollars amongst friends in the banking industry?

Senator EDWARDS: That is the profit they pay tax on. In your submission you have about $8.4 billion. That is actually revenue; it is not profit. You cannot say that that is $8.5 billion of the $32 billion that their pay tax on. It is just the contribution to revenue that those card systems make, isn't it?

Dr Edey : Yes, that is correct. We have not attempted to quantify operating costs. We would not have the information base to do that.

Senator EDWARDS: No. I just draw that distinction because a lot of people get revenue and profit confused. That is a revenue contribution. Then it has to be less operating costs and then there is gross profit, national profit and everything like that. So it is $8.4 billion to the big four. You say that 80 per cent of $8.5 billion is roundly the contribution it makes to their turnover. But in your earlier evidence you also said that there has never been a time before when the margin on credit cards was larger, by virtue of the cash rate—the cost of funds in. Even broadly speaking, or even at the shortest stretch, you could say that this area is a massive contributor to increased profits for the banks in this country. Given that your evidence is that 70 per cent of people pay their credit card in a timely manner and do not accrue interest, is it that the banks in this country are making significant contributions to their bottom lines—as we heard in earlier evidence from the previous witness—from people who can least afford it?

Dr Edey : It is hard to give a black-and-white answer to that. The credit card business for banks is highly profitable—I think there is no doubt about that. They gain revenues from a range of sources and you have just summarised those. I think there is a lot of cross-subsidisation going on in the credit card business, so different kinds of customers incur different fees and different levels of interest expense and so on.

The simple calculation that I referred to earlier I think shows you that, if you are a cardholder who is incurring interest, you are paying a higher rate on average. It is the rate that is likely to be very profitable for the banks, because we are talking about net interest margins that are into the double figures, even after you allow for the size of credit losses.

Senator EDWARDS: What does that look like when you benchmark it against other countries? Have you had a look at what the margins are in other countries in comparison to what banks here are charging? This is largely the big four here in Australia, because they have 80 per cent of the credit card market.

Dr Edey : High-rate cards are not uncommon in other countries as well, and there is some information on that in our submission. I suspect that some of the same forces are at work. I made some comments before about competition, about how active cardholders are in seeking out the lower rates. I think those same sorts of forces work in other markets as well.

Senator EDWARDS: But are we seen as a soft target, from a regulatory point of view, by big companies? There were companies mentioned earlier like GE which seem to think: 'Let's get all of our money across to Australia. They have a stable economy, a growing economy, but they have a subset of people who can provide a lot of money and a lot of profits. It's a safe haven.'

Dr Edey : I would not particularly single out a business like that, because all the banks—

Senator EDWARDS: They were mentioned before—that is all.

Dr Edey : I do not know enough about that specific case.

Senator EDWARDS: No, I do not want you to comment on that. But have we got a regulatory environment here that makes this a very attractive place for global lenders to come and dump their money?

Dr Edey : I do not think that is the main issue, myself. I think the issue is just that there are a range of rates on cards and the consumers who are not proactive enough end up paying rates that are very high.

Dr Richards : I think we are saying that in many ways it is quite a competitive market. But the CHOICE submission that you will be talking about later on today tells you that consumers do not always focus on the right things and bank marketing does not necessarily focus on interest rates. So you have a scenario where competition is playing out to give you funny outcomes.

CHAIR: Perhaps I could put an alternative view to you, which is that it depends on how you define competition. What I mean is this: there are plenty of different card options; there are not plenty of different products. And that is where I would want to ask you a question. Yes, I can go out there and get 100 different cards, at different rates, that are effectively the same product. Some would argue that the question is: do we have the regulatory settings right in this country to allow for innovative new products and different types of products, like peer-to-peer lending and so on? So, when I say that we should talk about competition in this space, I think we should not be talking about competition only in the sense that 100 people can offer you the same card with the same thing. But do we have the settings right for things like peer-to-peer lending? And is part of the work you are doing both through the Payments System Board inquiry and through the Council of Financial Regulators specifically looking at new forms of lending?

Dr Edey : It is not really something we are heavily focused on. My general impression is that there has not been a shortage of credit in Australia. The trend over the past 30 years or so has been more and more credit and rising debt ratios in relation to income, so people have plenty of capacity to borrow, and not just credit cards; housing lending is the obvious big one. I am not aware of any impediments to stop new entrants who want to lend more coming in. I was interested in comments made earlier about peer-to-peer lending. But for people who want to come into the unregulated space we need to be careful in the way we think about that to make sure there are adequate protections for the borrowers.

Dr Richards : But on the question of competition in the payments space, the bank has a mandate there, and we are always keen to hear about new means of payment and to make sure that they are not precluded by the rules of the incumbents or that there is anything in the regulatory framework that would stop new means of payment from emerging.

Senator EDWARDS: If you have a look at the grocery market there are two main players and two peripheral players in this country, and they are all regulated by the ACCC. By the very nature of our banking system and the four pillars, we actually protect a position where there are four. As a consequence, there is a natural tendency for market dominance by those big four. Therefore, invariably people have an interaction with a bank, which they inherently trust; they trust it to do the right thing. This committee is working on another inquiry, on the standard of financial advice. Do you see the irony here? I have had bosses of banks, between $5 million and $8 million a year, in the most unedifying poses apologising to people they have given poor financial advice to, yet we are sitting here talking about how people can ring up and, without any kind of credit check or anything like that, get money for nothing. I do find it somewhat ironic that we have an expectation of financial advice on one hand and a great rush to comply with community expectations at this point, yet when it comes to credit cards it is a free for all. We talk about a free market, but it is not a free market. By virtue of this country's policy settings we have a majority banking system, and people trust their banks. But the banks are making a lot of money, as we all see, from advice that people are not getting about how much they can actually put on their credit cards—or, we should call them their debt cards. Do you want to make a comment about that being somewhat ironic?

CHAIR: Do you support the four pillars, Dr Edey?

Dr Edey : I am not sure what comment to make about that. I really cannot comment on four pillars; that has been a longstanding—

Senator EDWARDS: No, I do not want you to comment on four pillars. We demand of our banks a standard of financial advice that we want to be world class so that people do not get into trouble. We demand of their advisers that they operate in an a scrupulous manner and give sound and proper advice. But you can walk into any branch of any bank or ring up any of 200 and just get a credit card and go and spend 30 grand, as we have heard from previous witnesses, without any advice, which leads to homelessness, in some cases, and suicide, we heard earlier. I do not know, but I can only present to you the evidence we have had—that there is absolutely unguarded provision of funds. Yet this committee, ironically, sits in another forum, waving our finger at big banks about the advice they should supply to people—the very same people who are in credit card debt.

Dr Richards : The issues you are raising are I think in many cases issues of consumer protection, investor protection and financial advice. I think a number of the recommendations you got in the submission this morning from the Consumer Action Law Centre and the Financial Rights Legal Centre and also in the submission from CHOICE, which you will discuss this afternoon, would be worthy of consideration.

Senator EDWARDS: Good answer. Did you want to say something, Dr Edey?

Dr Edey : I would just say that those two things you have described seem inconsistent. We do have responsible lending requirements, so I think one of the questions that needs to be asked is whether the existing extension of credit on credit cards is consistent with those requirements. If not, more should be done to enforce that. Or, are the requirements inadequate in some way? That is a question that we can legitimately ask.

Senator EDWARDS: It is a big issue. We will have all this corporate responsibility at this level but we will have none over here, because we are the cat licking the milk.

CHAIR: Following on from that, it strikes me, from what I gather from your evidence and from the evidence this morning, that the series of questions that need to be asked are these, for the process we are undergoing, and I would like to get you to comment. Firstly, what are the impediments to people being able to switch? In my opinion, there are two impediments. One is people with less than perfect credit not having the options that are available. We heard from some people this morning about if you do not have the option of switching and balanced transfers and so on. All of those products may be great for some people, but they are not accessible for everybody. Secondly, what are the other obstacles to switching? That is when we talk about things like portability and giving consumers more power in terms of being able to switch. The other thing to look at is the responsible lending laws about who is being lent to, who is being allowed to be lent to and how much they are being lent. As I understand, they fall more specifically into the ASIC space. Finally, there is the more specific space that you fall into, which is this idea of the interchange fees and the back end and the payments part of it. Perhaps the best way to address the broad issue, which is the credit card interest rate level, is by making it as competitive a market as possible so that, rather than have a debate about whether we are going to regulate or cap interest rates, make the competition within the system so strong—as strong as possible—that consumers can effectively drive that themselves.

The one point I did want to make is that it does alarm me that you have a situation—and this is by your own figures—where you are looking at only 2½ per cent; you are looking at declining non-performance loans; you are looking at a situation where interest accrual on credit cards has actually gone down from 75 per cent to 65 per cent. People are getting better and more responsible, and the figures are improving from the credit card companies' perspective, based on RBA data, yet the spread has gone up and up and up. For me that is a disconnect, and I think the answer perhaps is competition. It is about looking, Dr Richards, not just at competition and what exists now but how you can create a better and stronger market.

Dr Edey : I think all of that is a fair summary of what we have just been saying.

Senator McALLISTER: And my question is a follow-up. Earlier we talked a little bit about who is responsible for the policy function, and thinking about that bundle of problems on the credit side. I understand that that is not you, but you have made some observations about the fact that this is a competitive market. If it is a competitive market, yet we see what you say are difficult to explain spreads, I just wonder what other explanation could there be other than a lack of competition for that spread.

Dr Edey : To put it very simply, there are basically two possible explanations: either the market is not really competitive or people are not taking advantage of the competitive options that are on offer for various reasons to do with lack of information or their own inertia—they not paying attention or whatever.

Senator McALLISTER: And the transaction costs for acquiring that information are quite high because of the complexity of the products on offer.

Dr Edey : There may be some obstacles of that nature that make it hard for competition to be effective. I think it is worthwhile for the regulators to try to find out more about those things so that we know to what extent there is a case for any further regulatory intervention.

CHAIR: On the review process on the payment side of it—which is one smaller component; we are talking about bigger things with interest rates and that as well—and the payments component of it, which you directly regulate: was the meeting last Friday the regular board meeting or was it a specific meeting to address those issues to do with the review you are conducting?

Dr Edey : That was a regular quarterly meeting.

CHAIR: Where are you at with the review you are conducting?

Dr Edey : Submissions were finalised and received in April and then we went through a process of further follow-up consultations based on those submissions. We held a round-table with a wide cross-section of industry and public sector representatives a couple months ago. The PSB discussed its preliminary views on the submissions that came in at its May meeting and then the board had a more detailed discussion at its meeting last week. The next stage is that we will make an announcement probably today or tomorrow as to where the process is up to. That will set out what the next steps need to be. We have to follow due process in all of this. The law that we operate under requires us to do thorough consultation at every stage of the process. The next thing we will be announcing is what is the next stage of consultation the we are going to have to go through if we are looking at designating—

CHAIR: Is it fair to say, effectively, that the details of that will come out, but in the next day or two you are going to announce your consultation process over the payments review process you are undertaking?

Dr Edey : Yes, that is right.

Senator EDWARDS: I am being a bit mischievous here: you state that in Australia—for whatever reason—hotels, airlines and other people use the use of a credit card as a Trojan horse to charge you extra for that privilege. This morning, I checked out of a hotel: it was an extra 1.5 per cent on the room bill for the privilege of using a credit card. It is widespread across Australia; it is not around the world, but it is in Australia. Is that just a rort? Are you doing any work in this space? If you cannot comment from the Reserve Bank of Australia, surely you can comment as Joe Citizen and say that you hate it too, because I do.

Dr Edey : We have actually done a lot of work on this. In the consultation document that we released on this earlier in the year, we did put out some information that we collected on different surcharging practices. The PSB has taken a longstanding view that merchants should have the right to surcharge to recover their costs for the more expensive payment methods. We felt that it was an important part of the market process that if the payment system really is more expensive, then it should be possible to pass that costs on to consumer so that they can react to that. But we accepted arguments that came from the card schemes subsequently that said that there should be a countervailing right for the schemes to limit surcharging so that it only covers the reasonable cost of accepting a payment.

Senator EDWARDS: But Qantas—and I am going to single them out, because I can have not heard from them for a while; they are a very good airline—charges $7 a seat, no matter whether you buy three seats, one seat or whatever. They charge $7 a seat just as a surcharge for using a credit card. It is an impost. Let's not just deal with the banking system; it is actually some of the merchants out there having a crack as well on this whole thing, aren't they?

Dr Edey : That is something that we have had a close look at. I do not want to pre-empt what is going to come out of our announcements.

Senator EDWARDS: And I do not want you to.

Dr Edey : But we have looked at that.

CHAIR: Is this announcement today or tomorrow, or will there be a separate announcement?

Dr Edey : I do not want to say too much, but there will not be a lot of detail.

CHAIR: You have parliamentary privilege, so you can say whatever you want. No-one can use anything you say here against you.

Senator EDWARDS: Don't fall for it!

Dr Edey : There will not be a lot of detail in the announcement that we make this week, but it will tell you the direction that the process is going to go in.

Senator EDWARDS: That is good. I hope that Tourism Australia is listening to this, because the last message that people get when they leave Australia and when they pay the hotel bill is, 'We are going to gouge you for 1.5 per cent on the way out for the privilege of staying in Australia.' They do not get that in any other nation around the world. It is miserable, cheap and nasty; they have got to get rid of it. Tourism operators in this country should just—whatever their credit card fees are—put it in the cost of their operations. Do not tell somebody that they are not welcome to use what is a universally accepted payment method in this country.

CHAIR: On that note, thank you Dr Edey, Dr Richards and Mr Flood. This is going to be ongoing inquiry. We may see you again soon, at the next Senate estimates, now that you have fallen into our sphere of orbit.

Proceedings suspended from 10 : 47 to 10 : 58