The next round of changes to consumer credit laws is coming, with the release of draft legislation on credit card reforms. Treasury unveiled a package of documents on 14 August 2017 including a draft Bill, draft regulations and explanatory materials.
The key reforms introduced by the draft Bill are:
- tightening responsible lending obligations for credit card contracts;
- banning unsolicited credit limit offers for credit card contracts;
- simplifying interest charge calculations; and
- requiring online methods for reducing credit limits and terminating credit card contracts.
The reforms were announced in the 2017 Budget and follow from a 2015 Senate Economics References Committee report into interest rates and informed choice in the Australian credit card market. They will apply to consumer credit card contracts regulated by the National Credit Code.
According to the Treasurer, these reforms are to “protect vulnerable Australians from predatory behaviour which seeks to make a quick buck from people’s misfortune, and compound their financial hardship.”
To prepare for the changes, credit card providers will need to revise their credit card contract terms and conditions, responsible lending credit assessment processes, marketing processes, websites and IT systems.
Tightening responsible lending obligations for credit card contracts
Under the current law, a credit contract is unsuitable for the consumer if it is likely that the consumer would be unable to comply with their financial obligations under the contract, or only comply with substantial hardship.
The proposed reforms would provide a new test for “substantial hardship” in the case of a credit card contract: if a consumer could not comply with an obligation to repay the credit limit of a contract within the period determined by ASIC, then it will be deemed that the consumer could comply with their financial obligations under the credit card contract only with substantial hardship. For example, if ASIC determines that the period is three years and the consumer could not repay the credit limit within three years, then the credit card contract will be unsuitable.
ASIC will be given the power to set periods of time for this purpose and will be able to decide on different time periods for different classes of credit card contracts, different credit limits, and different rates of interest. When determining the period, ASIC will be required to have regard to ensuring that a reasonable balance is achieved between preventing consumers from being in unsuitable credit card contracts, and not preventing consumers from accessing credit.
This reform will commence on 1 January 2019 and will apply to existing credit card contracts, but only in relation to remaining in the credit card contract or increasing the credit limit of the contract.
Banning unsolicited credit limit offers for credit card contracts
Under the current legislation, credit limit increase invitations are banned, but there is an exception where the credit provider has the consent of the consumer. Under the amended law there will be no exceptions. The consumer’s right to consent to receiving credit limit increase invitations from the credit provider will be taken away. Credit providers will only be able to increase credit limits when they receive an uninvited request by the consumer.
This amendment will commence on 1 January 2018. Even if the credit provider has previously obtained the consent from the consumer to make credit limit increase invitations, from this date the credit provider will not be able to make credit limit increase invitations for any existing or new credit card contracts.
Simplifying interest charge calculations
Many credit cards have terms and conditions where there is an interest free period for purchases on the card, but when the balance is not paid in full by the payment due date, interest is then charged on every purchase made on the card from the date of the purchase to the date on which the repayments are made.
The proposed amendments will prohibit credit card providers from imposing a liability to pay interest retrospectively to the balance (or part of the balance) of a credit card contract. The effect of this prohibition will be that if some or all of a credit card balance is subject to an interest free period, the credit card provider will not be allowed to then later apply interest to that balance on the basis that the balance had not been paid off in full by the due date.
This amendment will commence on 1 January 2019 and will also apply to existing credit card contracts, but only in relation to transactions made on or after 1 January 2019.
Reducing credit limits and terminating credit card contracts
The amendments will also introduce provisions designed to make it easier for consumers to reduce their credit card limit or end their credit card contract.
There will be a new requirement that all credit card contracts must allow the consumer to reduce their credit limit to zero (or if there is a minimum credit limit, the amount of that limit), and to terminate the contract. This will apply from 1 January 2019 to all credit card contracts entered into on or after that date.
Where the contract includes these rights (even if it is a contract entered into before 1 January 2019), the credit card provider from 1 January 2019 will be required to establish and maintain a website that allows the consumer to make the request for a credit limit reduction or termination; and when such a request is made, the credit provider will not be allowed to make a suggestion that is contrary to the consumer’s request (such as retention techniques to persuade the consumer not to terminate the contract), and will be required to take reasonable steps to give effect to the request.
New penalties are being introduced for the requirements relating to interest charge calculation and consumer rights to request credit limit reductions or termination. Failure to comply will attract a civil penalty of up to $420,000 for individuals ($2.1 million for corporations) and will also be a criminal offence. ASIC will also be able to issue infringement notices for breaches.
What to do
Although all the details of the reforms have yet to be finalised, the general features of the proposed changes are now known and preparation for implementing the changes can begin. The banning of all credit limit increase invitations is the most time critical, as it is slated to commence on 1 January 2018.
Some of the things that credit providers may need to do for the commencement of the new requirements are set out below.
- Marketing practices:
- Cease credit limit increase invitations.
- Stop any form of retention marketing for consumers who exercise their right to request a credit limit reduction or termination.
- Credit assessment: Credit criteria will have to calculate whether the consumer can repay the proposed credit limit (or credit limit as increased) within the time periods specified by ASIC (there could be multiple time periods depending on factors such as interest rate).
- Terms and conditions:
- Include consumer rights to credit limit reduction and termination. (Setting a minimum credit limit could also be considered).
- Change description of interest calculation. (Abolishing interest free periods may also be an option).
- Send notices of variation to consumers.
- Websites: Implement online method of requesting credit limit reduction or termination of contract (and operational processes to implement such requests).
- Banking systems: Revise interest calculation method.
And more changes to come
The credit card reforms described in this article are the first phase of a range of new measures to regulate credit cards. In its response to the Senate Economics References Committee report released on 6 May 2016, the Government announced that there would be two phases of reforms. The first phase is now under way. For phase 2 of the reforms, the Government said that it intended to conduct behavioural testing with consumers to determine efficacy in the market and to ensure that the reforms are designed for maximum effect. The decision to implement the second phase measures will be subject to the results of consumer testing and to the extent to which the industry presents solutions itself.
The phase 2 proposals for consumer testing include requiring card issuers to:
- provide information on the annual cost of the consumer’s credit card use and prominently display annual fees;
- clearly disclose in advertising and marketing material the card’s interest rate and annual fee;
- provide information about potential savings from switching to a lower cost product;
- provide consumers with timely electronic notifications regarding the expiry of introductory offers; and
- provide consumers with alternative payment tools and proactively contact consumers who persistently make small repayments.
The plan to use behavioural testing for the phase 2 reforms indicates a level of frustration by regulators with how to regulate consumer conduct in the credit card market. Despite many attempts to control how consumers acquire and use credit card products, such as credit card “key facts sheets”, requiring disclosure of how long it will take to pay off the card with only minimum repayments, and restrictions on credit limit increase invitations, there seems to be a continuing concern that when it comes to credit cards, consumers do not act in their own best interests and regulation is not working.
Kathleen Harris and Patrick Dwyer
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