First credit card reform starts 1 July

From 1 July 2018, it will be illegal for a credit provider to make an invitation to increase the credit limit for a credit card contract, even if the customer has given informed consent to receive invitations.

This is the first of four credit card reforms that were legislated in the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 (Cth) (the “Act”), which amends the National Consumer Credit Protection Act 2009 (Cth) (the “NCCP Act”).

The other reforms in the Act will commence on 1 January 2019. They cover responsible lending obligations, simplifying the calculation of interest charges, and making it easier for consumers to reduce credit limits and terminate credit card contracts.

Below is a table which summarises the four reforms and how they apply to existing credit card contracts.

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Reform

Commences

Application to existing contracts at commencement

1

Credit card providers must not make any credit limit increase invitations in relation to credit card contracts. This covers all forms of communication with a consumer, and the informed consent exemption is removed.

1 July 2018

Applies to existing contracts, even if the credit provider has previously obtained consent from the consumer to make credit limit increase invitations.

2

The suitability of a credit card contract for a consumer must be assessed on the consumer’s ability to repay the credit limit of the contract within a certain period set by ASIC.

1 January 2019

Only in relation to remaining in the credit card contract or increasing the credit limit of the contract.

3

Credit card providers must not retrospectively charge interest on credit card balances.

1 January 2019

Applies to existing contracts, but only to transactions made on or after 1 January 2019.

4

Credit card contracts must allow consumers to reduce credit card limits and terminate credit card contracts. Credit card provider websites must allow consumers to request to exercise these rights online. When a request is made, the credit provider must not make a suggestion contrary to the consumer’s request, and must take reasonable steps to give effect to the request as soon as practicable.

1 January 2019

The requirement for credit card contracts to allow consumers to reduce their credit limit or terminate their credit card contract does not apply to existing credit card contracts. The other requirements apply to existing contracts if the consumer has those rights under the contract.

Here is some more information about the four credit card reforms.

Credit limit increase invitations

The definition of “credit limit increase invitation” has been amended by the Act so that it does not have to be in written form. A credit card provider will make a credit limit increase invitation if it gives any form of communication to the consumer about their credit card contract which offers to increase the credit limit of the contract, invites the consumer to apply for an increase of the credit limit of the contract, or has the purpose of encouraging the consumer to consider applying for an increase of the credit limit.

However, the Explanatory Memorandum for the Act (the “EM”) says that this reform is “not intended to limit the ability of credit card providers to provide general information to consumers about credit card features including credit limits or to provide the functionality for consumers to request a credit limit increase if they so choose (for example, through a website or call centre).”

The amendments in the Act also remove the exemption previously available to give consumers credit limit increase invitations where the consumer had given express consent.

Responsible lending obligations for credit card contracts

Under the amended NCCP Act, a consumer will be taken to be able to comply with their financial obligations under a credit card contract only with substantial hardship if the consumer could not comply with an obligation to repay an amount equivalent to the credit limit of the contract within a period determined by ASIC. ASIC has been given the power to determine the period. The EM says that the period may be a fixed period or a range of time, and there may be different periods in relation to different classes of credit card contracts, different credit limits, and different rates of interest.

Calculation of interest charges

The Act amends the NCCP Act to prohibit a liability to pay interest retrospectively to the balance or part of the balance of a credit card contract. This will be deemed to occur if the facts and circumstances that trigger the application of interest on a day (e.g. non-payment of some or all of the credit card balance) come into existence after the end of that day.  However, a credit card provider will still be able to apply a rate of interest to any unpaid balance on days that occur after the payment due date.

Reducing credit limits and terminating credit card contracts

The Act introduces a requirement that all credit card contracts give the debtor a “credit limit reduction entitlement” and a “credit card termination entitlement”.

A credit limit reduction entitlement means that for a contract that has a minimum credit limit, the consumer is entitled to reduce the credit limit to an amount that equals or exceeds that minimum. For a contract that does not have a minimum credit limit, it means that the consumer is entitled to reduce the credit limit to any amount. A credit card termination entitlement means that the consumer is entitled, under the contract, to terminate the contract.

Where a consumer has a credit limit reduction entitlement or a credit card termination entitlement, the credit card provider must have a website that allows the consumer to request a credit limit reduction or termination of the contract. The website must also tell the consumer that they can use the website to make these requests and detail the information that the consumer has to enter to request the reduction or termination. The website must be available when the consumer makes the request, but it will be a defence if the website is reasonably unavailable, for example because of scheduled maintenance.

A credit card provider will also be required to take reasonable steps to ensure that the request for a credit limit reduction or credit card contract termination is given effect to as soon as practicable. The EM states that reasonable steps “may include communicating any further actions that must be undertaken by the consumer for the credit provider to complete the request.” However, the credit card provider must not make suggestions to the consumer that are contrary to the consumer’s request. For a credit limit reduction, it would therefore be illegal for the credit provider to suggest that the consumer apply for a credit limit increase, or not reduce the credit limit, or reduce the credit limit by a smaller amount.

The EM states that this provision “is not intended to prevent credit card providers from requesting feedback from a consumer on why they have made the request (for example, to inform product development), or from suggesting alternative credit products that may better meet the consumer’s requirements.”

A consumer’s right to reduce their credit limit or terminate the contract will be subject to meeting their obligations under the credit contract, such as paying any outstanding balance before terminating the contract.

Patrick Dwyer and Kathleen Harris
Legal Directors