Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
THE NATIONAL CONSUMER CREDIT PROTECTION AMENDMENT (HOME
LOANS AND CREDIT CARDS) BILL 2011
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer,
the Hon Wayne Swan MP)
Contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Introduction .................................................................... 5
Chapter 2 Standard home loans..................................................... 9
Chapter 3 Credit card contracts .................................................... 15
Chapter 4 Application and Transitional provisions ....................... 29
Chapter 5 Regulation impact statement: requiring a home
loan `key facts' document and standard
terminology ................................................................. 31
Chapter 6 Regulation Impact Statement: Fairer, Simpler
Banking -- Credit Card Reforms ................................ 71
iii
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
Home Loans and Credit Cards The National Consumer Credit Protection
Bill Amendment (Home Loans and Credit Cards)
Bill 2011
NCCP Act National Consumer Credit Protection Act
2009
National Credit Code Schedule 1 of the National Consumer Credit
Protection Act 2009
Transitional Act National Consumer Credit Protection
(Transitional and Consequential Provisions)
Act 2009
1
General outline and financial impact
Outline
The National Consumer Credit Protection Amendment (Home Loans and
Credit Cards) Bill 2011 (Home Loans and Credit Cards Bill) amends the
National Consumer Credit Protection Act 2009 (NCCP Act). The NCCP
Act establishes a national consumer credit regime.
The Home Loans and Credit Cards Bill adds Part 3-2A and Part 3-2B to
the NCCP Act and makes consequential amendments to the NCCP Act
and the National Consumer Credit Protection (Transitional and
Consequential Provisions) Act 2009.
The provisions contained within Part 3-2A introduce a requirement for
lenders to provide a Key Facts Sheet for standard home loans.
The provisions contained within Part 3-2B:
· restrict approval of the use of credit cards above the credit
limit;
· specify an allocation hierarchy for payments made under
credit card contracts;
· restrict credit providers from making unsolicited invitations
to borrowers to increase the credit limit of their credit card;
and
· introduce a requirement for lenders to provide a Key Facts
Sheet for credit card contracts.
Summary of regulation impact statement
Impact: The Home Loans and Credit Cards Bill will affect consumers
who use credit cards; consumers of credit used to fund or refinance the
purchase of residential property; industry participants, particularly credit
card and home loan providers; the Government; and ASIC.
3
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
Main Points:
· These reforms will assist consumers by increasing their
capacity to select products or use their credit cards in a way
that reduces the level of fees and interest they are charged;
and reducing the risk of consumers being provided with
credit cards limits where they may be unable to pay the total
balance within a relatively short period of time.
· The costs imposed on credit card industry participants relate
to the development of adequate systems and resources to
meet the new requirements, including changes to ensure that
payments are allocated in the requisite way, credit card usage
is not approved above the credit limit except in certain
circumstances and Key Facts Sheets are provided to
consumers. There will also be associated record keeping
costs.
· Credit card industry participants are expected to face reduced
revenue from existing practices in relation to credit card
products. They will also be under greater pressure to be
competitive given that consumers can make more informed
choices upfront.
· The costs imposed on home loan providers primarily relate to
the development of adequate systems and resources to ensure
that Key Facts Sheets are provided to consumers, and can be
generated by them online. There will also be associated
record keeping costs.
Date of effect: Sections 1 to 3 and any other provisions that do not have a
specified commencement date come into effect on the day the Bill
receives the Royal Assent. Schedule 1, part 1 applies from
1 September 2011. Schedule 1, part 2 applies from 1 July 2012. Schedule
2 applies from 1 July 2012.
Proposal announced: These reforms form part of the Government's
`Fairer, Simpler Banking' and `Competitive and Sustainable Banking
System' announcements of 15 August 2010 and 12 December 2010
respectively.
4
Chapter 1 Introduction
Outline of chapter
1.1 Chapter 1 of this explanatory memorandum outlines the
arrangements for the commencement of the National Consumer Credit
Protection Amendment (Home Loans and Credit Cards) Bill 2011 (Home
Loans and Credit Cards Bill), definitions which are to be inserted into
section 5 of the National Consumer Credit Protection Act 2009 (NCCP
Act), and other key terms used throughout this explanatory memorandum.
Context of amendments
1.1 At its meetings on 3 July and 2 October 2008, the Council of
Australian Governments (COAG) agreed to implement a two-phase
implementation plan to transfer credit regulation to the Commonwealth
and introduce new Commonwealth regulation to enhance consumer
protection.
1.2 The NCCP Act implemented phase one of the implementation
plan by introducing a Commonwealth statutory framework for the
regulation of lenders and brokers. The Home Loans and Credit Cards Bill
supplements regulation in respect of two of the most common types of
credit, credit cards and standard home loans. This is part of phase two of
the COAG implementation plan.
Summary of new law
1.3 The Home Loans and Credit Cards Bill introduces major
changes to the relationship between credit providers and consumers in
respect of credit cards and home loans, as it:
· introduces a requirement for home loan lenders to display on
their website, and make available on request, a Key Facts
Sheet about the products they offer. The Key Facts Sheet
sets out, in a standardised format, pricing and other
information about their products (so that consumers can
readily compare different home loans, especially in respect of
their cost);
5
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
· makes it mandatory for credit providers to include, in credit
card application forms, key information about the annual
percentage rate and other terms which would apply to any
resulting contract;
· prohibits credit providers from making unsolicited invitations
that encourage consumers to increase their credit limits
(except where the consumer has consented to receive such
offers);
· regulates the circumstances in which borrowers can exceed
the credit limit on their card, and prohibit fees being charged
by the credit provider where they do so (except where the
consumer has specifically opted to have a higher buffer
where they can be charged fees); and
· requires credit providers to allocate repayments by the
borrower to that part of the balance of their credit card on
which they are charged the highest interest rate (subject to
the consumer specifically electing to have a different
payment arrangement).
1.4 Contravention of various provisions of this Bill attracts civil and
criminal penalties. Some offences attract strict liability penalties.
1.5 The Bill allows for the detail of various obligations to be
specified in the regulations, including in relation to:
· the form and content of Key Facts Sheets;
· a credit provider's record keeping requirements;
· circumstances in which liability will not attach to the credit
provider; and
· notifying the consumer of various issues, including when a
credit card is used in excess of its credit limit.
Detailed explanation of new law
Commencement
1.6 Sections 1 to 3 and any other provisions that do not have a
specified commencement date come into effect on the day the Bill
receives the Royal Assent.
6
Introduction
1.7 Schedule 1, part 1 applies from 1 September 2011. This part
introduces the requirement for credit providers to provide a Key Facts
Sheet for home loans.
1.8 Schedule 1, part 2 applies from 1 July 2012. This part contains
the amendments relating to credit cards.
1.9 Schedule 2 applies from 1 July 2012. This schedule applies
transitional arrangements to Divisions 4, 5 and 6.
Definitions
1.10 The Home Loans and Credit Cards Bill inserts into
subsection 5(1) of the NCCP Act a number of new definitions, or varies
existing definitions.
1.11 The phrase annual percentage rate is defined to have the same
meaning as in section 27 of the National Credit Code.
1.12 A credit card is one or more of the following:
· a card of a kind commonly known as a credit card; or
· a card of a kind that persons carrying on business commonly
issue to their customers, or prospective customers, for use in
obtaining goods or services from those persons on credit; or
· anything else that may be used as a card referred to above.
[Schedule 1, item 19, subsection 133BA(2)]
1.13 The reference to `a card of a kind that persons carrying on
business commonly issue to their customers for use in obtaining goods or
services on credit from that business' will include credit cards that may
only be used with the issuer.
1.14 For the purposes of the Home Loans and Credit Cards Bill,
`credit card' includes anything else that may be used as a card such as
`near-field communications' devices. `Near-field communication' is a
short range wireless communication technology emitted by devices such
as mobile phones to allow consumers to access their account in place of a
credit card.
1.15 Articles that can be used both as credit cards and in other ways,
for example as a debit card, are considered to be a credit card but the
provisions of this Act do not apply to the article in so far as it can be used
in those other ways. [Schedule 1, item 19, subsection 133BA(5)]
7
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
1.16 A credit card contract is a continuing credit contract (a credit
contract under which multiple advances of credit are contemplated and
where the amount of credit available ordinarily increases as the amount of
credit is reduced) under which credit is ordinarily obtained only by the use
of a credit card. [Schedule 1, item 19, subsection 133BA(1)]
1.17 A contract will only be subject to the requirements contained in
this Bill where credit regulated by the NCCP Act is provided under the
contract. For example, the requirements would not apply to a contract
under which a consumer can use a charge card to only access credit that is
not regulated by the NCCP Act, or to a debit card where the consumer
may be able to obtain both their own savings and amounts that are credit
(but again that is not regulated by the NCCP Act).
1.18 The existing definition of credit limit in subsection 5(1) of the
NCCP Act is varied by including the phrase `disregarding the default
buffer and any supplementary buffer (in the case of a credit card
contract)'. This ensures that the current meaning of credit limit, and the
responsible lending obligations that apply in relation to credit limits, are
unaffected by the introduction of the concepts of the default buffer and the
supplementary buffer (in Part 3-2B Division 5 of the Home Loans and
Credit Cards Bill). [Schedule 1, item 11, subsection 5(1)]
1.19 Residential property has the same meaning as in section 204 of
the National Credit Code. [Schedule 1, item 2, subsection 5(1)]
1.20 The Bill also introduces a number of other definitions that are
only relevant to particular provisions. These definitions are discussed in
the context of those specific requirements and obligations.
1.21 The Bill makes a consequential amendment to the note under
subsection 6(2) of the NCCP Act, to change the current wording to `credit
card contracts', to ensure internal consistency. [Schedule 1, item 18, subsection
6(2)]
8
Chapter 2 Standard home loans
Outline of chapter
2.1 The National Consumer Credit Protection Amendment (Home
Loans and Credit Cards) Bill 2011 (Home Loans and Credit Cards Bill)
implements a requirement for the credit provider to provide consumers
with a Key Facts Sheet for standard home loans.
2.2 The obligations only apply to credit providers who are licensees
as defined in the NCCP Act. In this chapter, the term credit provider
refers to a credit provider who is a licensee.
Context of amendments
2.3 At its meetings on 3 July and 2 October 2008, the Council of
Australian Governments (COAG) agreed that the Commonwealth would
implement a two-phase Implementation Plan to transfer credit regulation
to the Commonwealth and introduce new Commonwealth regulation to
enhance consumer protection.
2.4 The NCCP Act implemented phase one of the implementation
plan by introducing a Commonwealth statutory framework for the
regulation of lenders and brokers. The Home Loans and Credit Cards Bill
supplements regulation in respect of two of the most common types of
credit, credit cards and standard home loans. This is part of phase two of
the COAG implementation plan.
2.5 A standard home loan is defined in section 133AA of the Bill as
a loan used to finance the purchase of residential property (or refinance
such a loan). This is a significant asset from a social perspective. A
standard home loan is in many cases the largest loan that a person will
take out and they may spend much of their lifetime repaying it. There are
many home loan products on the market and innovations in product
design and features mean it can be difficult and time consuming for
consumers to understand and compare products, or to identify which
product is cheapest or can be most quickly repaid by the borrower. The
Home Loans and Credit Cards Bill assists consumers by improving
disclosure requirements through the introduction of a simplified and
standardised summary of the home loan product.
9
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
Summary of new law
2.6 The provisions contained within Part 3-2A introduce a
requirement for lenders to provide a Key Facts Sheet for standard home
loans.
2.7 The obligations only apply to credit providers who are licensees.
A licensee is a person who holds an Australian credit licence. In this
explanatory memorandum, the term credit provider is a reference to a
licensee who is a credit provider.
Comparison of key features of new law and current law
New Law Current law
Credit providers are required to There is no equivalent
provide a Key Facts Sheet to disclosure requirement for a
consumers in addition to their Key Facts Sheet to be made
existing disclosure requirements. available to consumers before
they have decided on a
particular product.
The existing disclosure
obligations in the National
Credit Code only apply once the
credit provider has decided to
accept an application by a
borrower. These obligations
require the credit provider to
disclose information in relation
to the terms of the proposed
contract, and to provide
borrowers with a summary of
their rights and obligations
under the contract (Sections 16
and 17 of the National Credit
Code).
10
Standard home loans
Detailed explanation of new law
Part 3-2A Additional rules relating to standard home loans
Division 2 -- Key Facts Sheets for standard home loans
2.8 The Home Loans and Credit Cards Bill inserts Part 3-2A into
the NCCP Act which imposes requirements that ensure a consumer can
obtain a Key Facts Sheet for standard home loans on a lender's website or
on request.
2.9 A standard home loan is defined as a standard form of credit
contract under which the credit provider provides credit either to purchase
residential property or to refinance credit that has been provided
predominantly to purchase residential property, including for investment
purposes. These types of contracts will usually be regulated by the NCCP
Act, although this cannot be determined until the terms of the contract and
the identities of the contracting parties are known. The regulations may
make provisions for determining whether a particular credit contract is a
standard form of credit contract. [Part 3-2A, division 2, section 133AA]
2.10 A Key Facts Sheet for standard home loans is a document which
contains the information and complies with the requirements prescribed
by the regulations. It is proposed that the form of the Key Facts Sheet will
be prescribed by regulations. [Schedule 1, item 5, section 133AB]
2.11 This document will summarise the key facts about a given home
loan, which may include:
· 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 repayments will be affected if
interest rates increase.
2.12 The regulations may require the Key Facts Sheet to be based on
information provided by the consumer as well as particular assumptions.
It is anticipated that the regulations will provide for the content of the Key
11
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
Facts Sheet to be specified in a way that ensures comparability between
similar products. [Schedule 1, item 5, subsection 133AB(2)]
Requirement for consumer to be able to generate Key Facts Sheet on
credit provider's website
2.13 If the credit provider has a website that allows the consumer to
apply for, or make an inquiry about a standard home loan, the website
must allow consumers to generate an up-to-date Key Facts Sheet.
[Schedule 1, item 5, section 133AC]
2.14 The credit provider must ensure that the website informs the
consumer that they can use the website to generate a Key Facts Sheet for
the loan and what information is needed in order to generate it. They
must also provide instructions on how to generate a Key Facts Sheet, and
ensure that the website complies with any requirements prescribed by the
regulations. [Schedule 1, item 5, section 133AC]
2.15 Breach of the requirements in section 133AC attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 50 penalty units. [Schedule 1, item 5, subsections 133AC(2) and (3)]
2.16 Strict liability also attaches to this section with a penalty of
10 penalty units, meaning that this penalty applies regardless of fault.
This reflects the importance of the objective of ensuring consumers can
readily compare different products through ready access to the
information in the Key Facts Sheets. [Schedule 1, item 5, subsections 133AC(4)
and (5)]
Key Facts Sheet to be provided on request
2.17 A credit provider must also provide a consumer with a Key
Facts Sheet in response to a request by a consumer, and in any other
circumstances that may be specified in the regulations. [Schedule 1, item 5,
section 133AD]
2.18 Where a credit provider is required by section 133AD to provide
a consumer with a Key Facts Sheet but needs more information from the
consumer in order to do so, the credit provider must tell the consumer
what information they need. The regulations may prescribe requirements
relating to this. [Schedule 1, item 5, section 133AE]
2.19 Breach of the requirements in section 133AD or 133AE attracts
a civil penalty of 2,000 penalty units and is an offence, attracting a
criminal penalty of 50 penalty units. [Schedule 1, item 5, subsections 133AC(2)
and (3) and 133AE(2) and (3)]
12
Standard home loans
2.20 If the credit provider has, in accordance with section 133AE,
told the consumer what information they need and the consumer has not
provided that information, the credit provider has a defence to liability for
which they bear the evidential burden. [Schedule 1, item 5, subsection
133AE(4)]
2.21 The provision casts the onus of proof on the credit provider as it
will be in a better position to address this issue, through the adoption of
appropriate compliance systems.
2.22 Other circumstances where a credit provider is not required to
provide a Key Facts Sheet are where:
· the credit provider has already provided the consumer with a
Key Facts Sheet for a particular standard home loan in
accordance with section 133AD, and the new Key Facts
Sheet would be the same (except for its date);
· the credit provider reasonably believes that another person
has already provided the consumer with a Key Facts Sheet,
and the new Key Facts Sheet would be the same (except for
its date);
· the credit provider reasonably believes that the consumer
would not be eligible for the standard home loan (in which
case provision of the Key Facts Sheet would not be
necessary); and
· any other circumstances prescribed by the regulations.
[Schedule 1, item 5, section 133AF]
2.23 The credit provider bears the evidentiary burden in relation to
these defences, as these are matters that are within their knowledge or
control. [Schedule 1, item 5, section 133AF]
13
Chapter 3 Credit card contracts
Outline of chapter
3.1 The National Consumer Credit Protection Amendment (Home
Loans and Credit Cards) Bill 2011 (Home Loans and Credit Cards Bill)
introduces a series of reforms to the way in which credit cards are offered
and used. The key elements of the reforms are that they:
· introduce a requirement for lenders to provide a Key Facts
Sheet for credit card contracts;
· restrict the circumstances in which credit providers can send
unsolicited written invitations to borrowers to increase the
credit limit on their credit card;
· restrict approval of the use of credit cards to obtain amounts
in excess of the credit limit and to prohibit credit providers
from charging a fee because a credit card is in excess of the
credit limit (unless a consumer has agreed to have the use of
a supplementary buffer); and
· provide for an order of application of payments made under
credit card contracts.
3.2 The obligations only apply to credit providers who are licensees
as defined in the National Consumer Credit Protection Act 2009 (NCCP
Act). In this chapter of the explanatory memorandum, the term credit
provider is a reference to a credit provider who is a licensee.
Context of amendments
3.3 At its meetings on 3 July and 2 October 2008, the Council of
Australian Governments (COAG) agreed to implement a two-phase
implementation plan to transfer credit regulation to the Commonwealth
and introduce new Commonwealth regulation to enhance consumer
protection.
3.4 The NCCP Act implemented phase one of the implementation
plan by introducing a Commonwealth statutory framework for the
regulation of lenders and brokers. The Home Loans and Credit Cards Bill
supplements regulation in respect of two of the most common types of
15
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
credit, credit cards and standard home loans. This is part of phase two of
the COAG implementation plan.
3.5 Credit card contracts require targeted regulation because they
differ from other credit contracts. Some of the main differences are that:
· consumers are commonly required to make repayments
calculated at a low percentage of the outstanding balance,
and credit card borrowers can therefore carry high balances
for significant periods of time at relatively high interest rates;
· there is low visibility of the impact of differences in features
between credit card products; and
· they are long term contracts in which the credit provider
may, over time, change the terms of the contract and the
obligations of the borrower resulting in significant changes to
the original terms, and which can impact on the matters
described above.
3.6 The Home Loans and Credit Cards Bill addresses these issues.
Summary of new law
3.7 The Credit Card and Home Loans Bill inserts Part 3-2B into the
NCCP Act which:
· restricts approval of the use of credit cards above the credit
limit;
· provides for an order of application of payments made under
credit card contracts;
· restricts the making of unsolicited offers to increase the
credit limit of a credit card; and
· introduces a requirement for lenders to provide a Key Facts
Sheet for credit card contracts.
3.8 The obligations only apply to credit providers who are licensees.
A licensee is a person who holds an Australian credit licence. [Chapter 1,
part 1-2, division 2, section 5 of the NCCP Act]
16
Credit card contracts
Comparison of key features of new law and current law
New Law Current law
The Bill: The NCCP Act currently
· restricts approval of the regulates credit contracts,
use of credit cards above including credit card contracts.
the credit limit; It does not include any
requirements that currently
· provides for an order of impose similar obligations to
application of payments those in this Bill.
made under credit card The terms of the contract
contracts; between the consumer and the
credit provider usually specify
· restricts the making of the consequences of a use of a
unsolicited offers to credit card to obtain funds in
increase the credit limit of excess of the credit limit, and
a credit card; and also provide for an order of
application of payments made
· introduces a requirement by the borrower under their
for credit providers to credit card.
provide a Key Facts Sheet
for credit card contracts.
Detailed explanation of new law
Part 3-2B: Rules relating to credit card contracts
Division 3 -- Key Facts Sheet for credit card contracts
3.9 The Home Loans and Credit Cards Bill inserts Division 3 of
Part 3-2B into the NCCP Act which imposes requirements aimed at
ensuring a consumer is provided with, or can access, a Key Facts Sheet
before entering into a credit card contract.
3.10 A Key Facts Sheet for credit cards is a document which contains
the information and complies with the requirements required by the
regulations. It is proposed that the form of the Key Facts Sheet will be
prescribed by regulations. [Schedule 1, item 19, section 133BB]
3.11 The Key Facts Sheet is intended to provide a clear summary of
the standard terms applicable to a credit card contract, containing
information on matters such as the:
· minimum repayments required to be made under the
contract;
17
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
· annual percentage rates (including different rates where these
may apply to particular liabilities); and
· fees.
3.12 The purpose of the Key Facts Sheet is to provide the consumer
with key information in an accessible form to assist them in deciding
whether to enter into a particular credit card contract with the particular
credit provider. The standardisation of the Key Facts Sheet will allow
consumers to both compare different credit card products more easily, and
to have a better understanding of how to use their credit cards more
efficiently, so as to minimise the amount they have to pay, in fees and
interest. It will be easier for consumers to either adapt their behaviour to
minimise costs, or move to other credit card products more suited to their
spending habits.
3.13 Credit providers must ensure that any application form for a
credit card contract that they make available to consumers includes an
up-to-date Key Facts Sheet. [Schedule 1, item 19, section 133BC]
3.14 Breach of the requirements in section 133BC attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BC(1) and (2)]
3.15 The regulations may prescribe circumstances in which it is
permissible for the credit provider to provide a Key Facts Sheet that is not
up-to-date (for example, where the annual percentage rate has changed
from the figure stated in the Key Facts Sheet). [Schedule 1, item 19, subsection
133BC(3)]
3.16 Credit providers must not enter into a credit card contract unless,
in accordance with any requirements prescribed by the regulations:
· the application is made using an application form that
includes an up-to-date Key Facts Sheet; or
· the application is made using an application form that
includes an outdated Key Facts Sheet but the consumer has
been provided with up-to-date information (to address the
situation where a consumer applies on a form that contained
superseded information); or
· the consumer has otherwise been provided with an up-to-date
Key Facts Sheet; or
· the consumer has been given details of how to access an
up-to-date Key Facts Sheet. [Schedule 1, item 19, section 133BD]
18
Credit card contracts
3.17 Under section 133BD, consumers who apply online or by phone
must receive a copy of the Key Facts Sheet, or given details of how to
access one.
3.18 Breach of the requirements in section 133BD attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 100 penalty units. [Schedule 1, item 19, subsections 133BD(1) and (2)]
3.19 Strict liability also attaches to section 133D with a penalty of
10 penalty units, meaning that credit providers are liable to this lower
penalty regardless of fault. This reflects the importance of the objective
of ensuring consumers have access to key information relevant to their
decision whether or not to obtain a particular credit card, and also reflects
the straightforward nature of the requirements contained in Division 3.
[Schedule 1, item 19, subsection 133BD(3)]
3.20 If a credit card contract is entered into in breach of section
133BC or section 133BD, it is still valid and enforceable, pursuant to
section 333 of the NCCP Act.
Division 4 -- Offers to increase the credit limit of the credit card
contract
3.21 The Home Loans and Credit Cards Bill inserts Division 4 of
Part 3-2B into the NCCP Act which imposes restrictions on a licensee
from making unsolicited invitations to increase the credit limit of a credit
card contract.
3.22 The credit limit is the maximum amount of credit that may be
provided under the credit contract, as specified in the contract pursuant to
section 17(3) of the National Credit Code. It does not include any default
buffer or supplementary buffer (these terms are defined in Division 5).
3.23 Credit providers must not make credit limit increase invitations,
except where they have obtained the express consent of the consumer to
do so, in accordance with the requirements of the Home Loans and Credit
Cards Bill. [Schedule 1, item 19, sections 133BE and 133BF]
3.24 The purpose of this reform is to assist consumers to actively
choose whether to increase their credit limit, rather than being prompted
to do so by written letters from their credit provider. A consumer who
accepts these types of offers can, over time, have a high credit limit and
find they are unable to repay the debt in full within a relatively short
period of time. For example, a consumer with a debt of $10,000 on a
credit card contract with an annual percentage rate of 20 per cent, and who
can only afford to make repayments of $200 a month, will have to make
19
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
these repayments for over nine years to discharge the debt, and will pay
over $11,000 in interest.
3.25 A credit limit increase invitation is made where a licensee gives
a written communication to a consumer about their credit card contract
which:
· offers to increase the credit limit of the credit card contract;
· invites the consumer to apply for an increase; or
· has a purpose of encouraging the consumer to consider
applying for an increase. [Schedule 1, item 19, subsection
133BE(5)]
3.26 This definition is intended to cover written communications
promoting easy access to a higher credit limit (for example, promotions
offering increases described as `pre-approved' or `tick-a-box' offers) or
other similar communications which result in consumers being
encouraged to apply for an increase.
3.27 The regulations may make provisions that apply to determining
whether a written communication has been given by a particular credit
provider to a particular consumer and whether it relates to a particular
credit card contract. The regulations may also be used to clarify
permissible communications. [Schedule 1, item 19, subsection 133BE(6)]
3.28 Breach of the requirement in section 133BE attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 100 penalty units. [Schedule 1, item 19, subsections 133BE(1) and (2)]
3.29 Strict liability also attaches to section 133BE with a penalty of
10 penalty units, meaning that this punishment applies regardless of fault.
This is to encourage strict compliance with the prohibition on sending out
credit limit increase invitations, given the potentially adverse
consequences for consumers. [Schedule 1, item 19, subsections 133BE(3) and(4)]
3.30 Credit providers will be able to make a credit limit increase
invitation where they have obtained the borrower's agreement to receiving
these types of offers, and this consent has not been withdrawn. [Schedule 1,
item 19, section 133BF]
3.31 Before obtaining the borrower's consent, the licensee must
inform the consumer that:
· the consumer has a discretion whether to apply for any
increase of the credit limit;
20
Credit card contracts
· the licensee has a discretion whether to grant any increase
applied for; and
· the consumer may withdraw their consent at any time.
[Schedule 1, item 19, subsection 133BF(4)]
3.32 The credit provider may need to inform the consumer of any
further matters prescribed by the regulations. Regulations may also
prescribe requirements in relation to the giving or withdrawing of consent
and informing the consumer of the above matters. [Schedule 1, item 19,
subsection 133BF(7)]
3.33 Credit providers will need to obtain a customer's consent before
providing a credit limit increase invitation. [Schedule 1, item 19, subsection
133BF(5)]
3.34 The credit provider must keep records of consents and
withdrawals of consents, in accordance with the requirements prescribed
by the regulations. [Schedule 1, item 19, section 133BG]
3.35 Breach of the requirement in section 133BG attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 50 penalty units. [Schedule 1, item 19, section 133BG]
Division 5 -- Use of credit card in excess of credit limit
3.36 Division 5 imposes restrictions on a licensee approving the use
of a credit card in excess of the credit limit for the credit card contract. It
also restricts the charging of fees under those circumstances.
3.37 The primary obligation introduced by this Division is a
requirement that credit providers must not approve the use of a credit card
in excess of a credit limit, or the default buffer or any supplementary
buffer where they may apply. [Schedule 1, item 19, section 133BH]
3.38 The credit provider approves the use of a credit card if they
approve or authorise its use, or if they debit the consumer's account in
respect of its use. This clarifies that the approval can happen before or
after the consumer has entered into a transaction with a retailer. [Schedule
1, item 19, subsection 133BH(5)]
3.39 Section 133BH allows a credit provider to approve purchases or
transactions made by the consumer that would result in the credit limit
being exceeded, limited by the amount of the default buffer. The default
buffer is 10 per cent of the credit limit. [Schedule 1, item 19, sections 133BH
and 133BI]
21
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
3.40 The default buffer enables borrowers to use their credit card
above their credit limit in limited circumstances, where this may be
convenient, for example where the credit limit is exceeded only by a small
amount.
3.41 A consumer can specifically elect not to have the option of a
default buffer. Where they have made such an election credit providers
must not approve the use of a credit card in excess of the credit limit of
the contract. Some consumers may chose to opt out of having a default
buffer, so that they can have the certainty that the credit limit will operate
strictly. [Schedule 1, item 19, sections 133BH and 133BI]
3.42 The regulations may prescribe requirements in relation to the
making or withdrawal of an election for the default buffer not to apply.
[Schedule 1, item 19, subsection 133BI(3)]
3.43 A credit provider can decline to offer a default buffer or decline
transactions within the default buffer. Their discretion to decline
transactions within the credit limit, default buffer or any supplementary
buffer, where applicable, is not constrained by this Bill.
3.44 The regulations may prescribe circumstances in which credit
providers may approve the use of a credit card in excess of the default
buffer. This would provide a defence to the general rule. An example of
the situations that may be addressed by such an exemption is where a
payment to a supplier of goods and services is processed manually
(because electronic communications between the supplier and the credit
provider are not operating), and it is not possible for the credit provider to
ascertain whether a customer has reached their credit limit. [ Schedule 1,
item 19, section 133BL]
3.45 Breach of the requirements in section 133BH attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 100 penalty units. [Schedule 1, item 19, subsections 133BH(1) and (2)]
3.46 Strict liability also attaches to section 133BH with a penalty of
10 penalty units, meaning that this punishment applies regardless of fault
(although identified situations where compliance is impractical are to be
addressed in the regulations). This reflects the importance of credit
providers ensuring that they have systems in place to avoid approving
transactions in excess of the default buffer. [Schedule 1, item 19, subsections
133BH(3) and (4)]
3.47 The regulations may provide for a supplementary buffer to
apply to a credit card contract to allow the approval of credit above the
default buffer. Any such regulations will define the circumstances in
which the supplementary buffer can operate, and include when a fee may
22
Credit card contracts
be charged for the provision of this service. [Schedule 1, item 19, section
133BJ]
3.48 The regulations may include offences and civil penalties where
this is necessary to ensure consistency in the operation of the default
buffer and the supplementary buffer, and that similar regulatory
requirements apply to safeguard borrowers and ensure compliance.
[Schedule 1, item 19, subsections 133BJ(3), (4) and (5)]
3.49 Credit providers must keep records of elections and withdrawals
which they have been notified of, in accordance with the requirements
prescribed by the regulations. [Schedule 1, item 19, section 133BK]
3.50 Breach of the requirement in section 133BK attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BK(1) and (2)]
3.51 Regulations may require credit providers to notify a consumer
where they become aware that the consumer has used the credit card in
excess of the credit limit of the contract (including within the default
buffer). The regulations may specify how and when notification must
occur and the content of the notification. This notification would be
required whether or not the use of the credit card is approved, but would
not apply to attempted use by the consumer where the credit provider
elects to decline the transaction. [Schedule 1, item 19, section 133BM]
3.52 Breach of the requirement in section 133BM attracts a civil
penalty of 2,000 penalty units and is an offence, attracting a criminal
penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BM(3) and (4)]
3.53 Credit providers must not impose fees or charges, or a higher
rate of interest on the consumer as a result of a credit card exceeding its
credit limit, even within the default buffer. [Schedule 1, item 19, section
133BN]
3.54 However, the credit provider is not prohibited from imposing
fees or charges, or a higher rate of interest, where the use of the credit
card is covered by the supplementary buffer applying to a credit card
contract (and where any other requirements prescribed by the regulations
are complied with). [Schedule 1, item 19, subsection 133BN(3)]
3.55 The requirements in respect of default buffers and
supplementary buffers are intended to operate in the following way:
· A consumer can exceed their credit limit provided they are
within the default buffer (that is, up to 10 per cent of their
credit limit), and cannot be charged a fee or additional costs
by the credit provider;
23
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
· A consumer can elect not to exceed their credit limit; or
· A consumer can elect to allow their account to exceed their
credit limit by the supplementary buffer (that is, by more
than 10 per cent of their credit limit), and the credit provider
can charge a fee or additional costs for providing this service
(with these arrangements subject to any requirements
imposed by the regulations).
3.56 By virtue of subsection 133BN(4), criminal and civil
consequences attach to a breach of section 133BN, through the operation
of section 23 and 24 of the National Credit Code. The effect of section 23
is that amounts paid by the consumer in excess of what is permitted by the
Bill may be recovered. By virtue of section 111 of the National Credit
Code, additional penalties and consequences may apply to a contravention
of section 23 of the National Credit Code.
3.57 There is a strict liability criminal penalty of 100 penalty units in
section 24 of the National Credit Code. The penalty is intended to ensure
compliance with these obligations, so that consumers can have certainty
they are not being overcharged, and that there is consistency between
credit providers in the way they charge fees and interest.
Division 6 -- Order of application of payments made under credit card
contracts
3.58 Division 6 imposes requirements relating to the order of
application of payments made under credit card contracts. Generally, a
payment must be applied against that part of their outstanding balance on
which they are charged the higher interest rate.
3.59 This measure addresses existing practices where some credit
providers allocate repayments under their credit card contracts in a way
that can maximise the amount and time required for the consumer to repay
their credit. They will also assist consumers in comparing different credit
card products, given that it is presently the case that the same repayments
can produce different results according to the allocation hierarchy under
the contract.
3.60 This Division regulates the order in which the credit provider
must attribute payments as follows:
· in accordance with an agreement between the consumer and
the licensee to apply certain payments made under the credit
card contract against a particular amount; [Schedule 1, item 19,
Section 133BP]
24
Credit card contracts
· against the amount owed contained in the most recent closing
balance provided in a statement provided to the consumer
before they made the relevant payment;
· against the part of the balance that has the highest annual
percentage rate (the rate specified as such in the credit
contract), then the part of the balance that has the next
highest annual percentage rate, and so on; and
· remaining payments in accordance with the terms of the
credit card contract. [Schedule 1, item 19, section 133BQ]
3.61 For the avoidance of doubt, it is specifically provided that the
requirement does not apply to a payment to a credit card account which is
made by the licensee as a result of a reversal of a previous transaction or a
refund made in respect of such a transaction. [Schedule 1, item 19, subsection
133BO(2)]
3.62 Where there is an agreement between the consumer and the
licensee to apply certain payments made under the credit card contract
against a particular liability, the credit provider must act in accordance
with the agreement. [Schedule 1, item 19, section 133BP]
3.63 An agreement can arise where the consumer requests for a
certain payment to be made against a particular liability. If the credit
provider has agreed to this request, they must then allocate repayments in
accordance with it. The consumer may withdraw a request at any time,
but the credit provider can only withdraw a request with the consent of the
consumer. [Schedule 1, item 19, section 133BP]
3.64 Regulations may prescribe further requirements in relation to the
operation of these requests and withdrawals. [Schedule 1, item 19, subsection
133BP(5)]
3.65 Such an agreement can only exist where the liability satisfies
any other requirements which may apply under the regulations. [Schedule
1, item 19, subparagraph 133BP(1)(a)(ii)]
3.66 Consumers may seek such agreements so that they can direct
payments to ensure a particular outcome; for example, they may want to
ensure an `interest free' purchase is paid off during the period in which
interest is not charged, as the cost of not making repayments in this
timeframe may exceed the cost of accruing higher interest on remaining
credit card balances. In situations such as these, the consumer has
discretion to assign repayments to pay off balances attracting the lowest
charges first, leaving other balances unpaid and accruing higher interest.
25
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
3.67 If the consumer has not agreed otherwise, a payment must be
first allocated to that part of the closing balance, from the previous
statement provided to the consumer, which attracts the highest interest. If
that part of the balance has been repaid in full, the remaining portion of
the payment must be allocated to that part of the closing balance which
attracts the next highest interest, and so on. [Schedule 1, item 19,
section 133BQ]
3.68 If the closing balance has been discharged in full, any remaining
part of the payment or further payment must be applied in accordance
with the terms of the credit card contract. [Schedule 1, item 19, section 133BR]
3.69 Repayments to fees and interest charges are to be allocated in
accordance with the above requirements. For example, if the closing
balance on a consumer's last statement includes an amount in respect of
interest charges (the interest balance), the application of repayments to
the interest balance will be determined by the annual interest rate
applicable charged in respect of the interest balance.
3.70 Interest that accrues after the last statement will be regulated by
the provisions governing the application of any remaining part of the
relevant payment.
3.71 In relation to the application of payments the order of
application is to be determined by reference to the relative rates of
interest. The size of any particular underlying debt being irrelevant. This
includes components of the balance to which the same interest rate
applies.
3.72 Breach of the requirement to apply payments in accordance with
this Division attracts a civil penalty of 2,000 penalty units and is an
offence, attracting a criminal penalty of 50 penalty units. [Schedule 1, item
19, subsections 133BO(1) and (3)]
3.73 Strict liability also attaches to this Division with a penalty of
10 penalty units, which applies regardless of fault. This reflects the
importance of credit providers ensuring that they have systems in place to
attribute payments in the required order and to give effect to agreements
with the consumer. [Schedule 1, item 19, subsections 133BO(4) and (5)]
3.74 Where a credit provider contravenes one of the obligations in the
Division, the consumer may end up paying more interest than would
otherwise have been the case. The consumer would then have suffered a
loss because of the contravention. A court which can exercise jurisdiction
under the NCCP Act can make an order compensating the consumer for
this loss under section 178 or 179 of the NCCP Act.
26
Credit card contracts
3.75 The obligations in the Division will be applied separately in
relation to each credit card contract that a person has, so that a payment
made in relation to one credit card contract cannot be applied against an
amount owed under another credit card contract.
3.76 If a consumer has a credit card contract, and one or more other
kinds of credit contracts with a particular credit provider, the obligations
in this Division will only apply to payments made under the credit card
contract.
3.77 Consequential amendments are also made to the note under
subsection 23(1) of the National Credit Code, introducing a second note
and renumbering the existing note. [Schedule 1, item 20 and 21, subsection 23(1)]
Amendments to the National Credit Code
3.78 The Home Loans and Credit Cards Bill introduces a number of
amendments to the National Credit Code.
3.79 Section 30 of the National Credit Code specifies the maximum
amount that can be charged under a credit contract, including a continuing
credit contract. However, there is currently significant divergence in
practices as to the circumstances in which credit providers may offer
borrowers a benefit by reducing or reversing accrued interest charges;
`interest free periods' are the most common example of these
arrangements.
3.80 Borrowers do not always appreciate or understand the nature or
impact of these types of arrangements. These arrangements can mean that
the amount of interest charged can vary between different credit products,
even if the same annual percentage rate is charged.
3.81 It is intended to introduce reforms that will provide greater
consistency in relation to annual percentage rates, and will therefore allow
consumers to compare credit cards more effectively. The details of this
reform are to be addressed through regulations.
3.82 Section 30B provides appropriate power for this by allowing
regulations to be made in relation to any of the following matters relating
to interest charges under credit card contracts:
· the day from which a daily percentage rate may be applied,
and the balance (or part of the balance) to which it may be
applied; and
· how matters relating to interest charges may be described in
credit card contracts and other documents or advertisements
27
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
published by or on behalf of credit providers. [Schedule 1, item
22, subsection 30B(1)]
3.83 Regulations made for this purpose may omit, modify or vary
provisions of this Division in relation to a credit card contract. They may
provide for offences not exceeding 50 penalty units for an individual or
250 penalty units for a body corporate. They may also provide for civil
penalties against the regulations, not exceeding 500 penalty units for an
individual or 2,500 penalty units for a body corporate. [Schedule 1, item 22,
subsections 30B(2), (3) and (4)]
3.84 Specific provision is made for the imposition of penalties
through the regulations as these reforms are intended to provide greater
consistency between different credit card products. This will allow
consumers to make more efficient choice in product selection and ensure
that differences in the operation of competing products can no longer
continue. It is therefore important that these objectives can be enforced
through appropriate sanctions.
3.85 The Home Loans and Credit Cards Bill also makes a number of
consequential amendments to definitions in the National Credit Code to
ensure internal consistency with the NCCP Act:
· the phrase `continuing credit contract under which credit is
ordinarily obtained only by the use of a card' is replaced by
the defined term `credit card contract' in subsection 33(2)(a)
and subsections 34(5) and 204(1) of the National Credit
Code;
· the terms `credit card', `credit card contract' and `credit
limit' are included in the list of definitions in subsection
204(1) of the National Credit Code, and defined as having
the same meaning as applicable to those terms in the NCCP
Act.
28
Chapter 4 Application and Transitional
provisions
4.1 The Home Loans and Credit Cards Bill makes a number of
consequential amendments to the National Consumer Credit (Transitional
and Consequential Provisions) Act 2009 (Transitional Act):
· it introduces, in a new Schedule 4 to the Transitional Act,
definitions of the term amended Act (meaning the NCCP Act
as amended by Part 2 of Schedule 1 of the National
Consumer Credit Protection Amendment (Home Loans and
Credit Cards) Act 2011) and commencement (meaning the
commencement date of Part 2 of Schedule 1 of the National
Consumer Credit Protection Amendment (Home Loans and
Credit Cards) Act 2011); and
· it specifies that:
- the requirements introduced by Part 3-2B, Division 4 of
the Home Loans and Credit Cards Bill, in respect of the
restrictions on the making of credit limit increase
invitations, apply to credit card contracts whether or not
the contract was entered into prior to commencement (as
defined above); and
- the requirements introduced by Part 3-2B, Divisions 5 and
6 of the Home Loans and Credit Cards Bill, in relation to
approving the use of a credit card in excess of the credit
limit and the allocation of payments made under a credit
card contract, only apply to credit card contracts entered
into after commencement (as defined above).
29
Chapter 5 Regulation impact statement:
requiring a home loan `key facts'
document and standard terminology
Problem1
5.1 The complexity of financial products available makes
understanding the key features of a home loan and the choice of a home
loan for consumers a difficult one. Timely and clear disclosure of
information before a consumer applies for a home loan (precontractual
disclosure) can also assist consumers in comparing different home loans
and assessing home loan products. Improved precontractual disclosure
can lead to better understanding and increase home loan choice for
consumers, which may drive demand-side competition in the home loan
market.
5.2 Complexity of precontractual disclosure for home loans can lead
to poor decision making. Consumers may not understand the true cost of
the credit contract and, as such, select a home loan that does not meet their
needs and requirements. These observations are consistent with empirical
research.
5.3 The 2010 Standing Committee of Officials of Consumer Affairs
Simplification of Disclosure Regulation for the Consumer Credit Code
(SCOCA Report) noted that only 6 per cent of test participants understood
the true cost of home loan credit using the current method of disclosing
home loan information. 2 Other empirical research has indicated that
improved disclosure can convey complex home loan information to
consumers more effectively.3
5.4 The problem of consumers not understanding key features of the
home loan stems from several sources; complexity, different terminology,
comparability, varied formatting and timing issues.
1 See Attachment A for glossary of terms.
2 2010 Standing Committee of Officials of Consumer Affairs Simplification of Disclosure
Regulation for the Consumer Credit Code, pg 6.
3 Lacko, J and Pappalardo, K ` Improving consumer mortgage disclosures - an empirical
assessment of current and prototype disclosure forms' (2007) US Federal Trade
Commission's Bureau of Economics 13 June 2007.
31
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
Complexity
5.5 The range of features included in a home loan can make it
difficult for consumers to understand the information and compare home
loans based on the true cost of a loan, particularly where there are
different interest rates and fee structures and the use of non-advertised
discounting.
5.6 Moreover, when comparing different home loan products the
information at the precontractual disclosure stage may not be tailored to
the consumer's requirements. This means that the consumer may be
comparing home loan information that is less relevant to their particular
situation. For example, consumers may consider several different types of
home loan products (such as fixed rate mortgage, adjustable rate
mortgage, hybrid mortgage or interest-only mortgage). Each product
could be suitable for the consumer but comparing the products would be
complex given that they all have different information and features. An
effective means of reducing complexity is to highlight key features of the
home loan relevant to the consumer's particular situation.
5.7 The level of numeracy required to understand the document adds
to complexity. Consumers may have to calculate costs or fees in order to
compare and understand home loans. Data suggests that many individuals
may not have the numeracy skills to perform complex calculations. The
2006 ABS Adult Literacy Survey indicated that numeracy levels were
relatively low, with approximately 53 per cent of Australians assessed at
Level 1 or 2.4
5.8 Making clear the costs, fees and charges in total dollar amounts
would reduce the need for consumers to perform calculations in order to
understand the cost of the home loan and to compare the home loan with
other products.
Terminology
5.9 Closely linked to the issue of complexity is the different
technical language associated with home loan contracts. Consumers may
be unaware of, or not fully understand, the various fees and charges that
apply to their mortgage products. This could be due to the range of
different terms for the same issue, but also due to the technical nature of
4 ABS Adult Literacy Survey 2006, pg 2. The scale of 1-5 used is based on proficiency
measures, with Level 1 being the lowest level of literacy and Level 5 being the highest level
of literacy. Level 3 is regarded by the survey developers as the `minimum required by
individuals to meet the complex demands of everyday life and work in the emerging
knowledge-based economy.'
32
Regulation Impact Statement: Home loans
the language. Many individuals may not have the literacy skills to
understand home loan terminology. The 2006 ABS Adult Literacy
Survey indicated that in most cases, Australian's level of literacy fell into
the Level 1 and Level 2 range: for prose literacy, 46 per cent were Level 1
and Level 2, and for document literacy, 47 per cent Level 1 and Level 2.5
5.10 Currently, there is no standardised nomenclature for the features
of these products, including fees and charges. Across the majority of
precontractual home loan disclosure there continues be a reliance on legal
or technical language. This decreases the likelihood that a consumer will
read a document and understand that document.
5.11 Standard terminology, descriptions and/or structure for fees and
charges would make it simpler and clearer for consumers to compare fees
and charges across institutions, and in particular the level of those fees
and charges that are of interest to the consumer.
Comparability
5.12 Comparability of credit contract information to assist consumer
comprehension has been identified as an issue warranting an appropriate
policy response. Previous attempts to resolve this issue have included
developing comparison rates.
5.13 Under the previous credit regulatory system, the Uniform
Consumer Credit Code (UCCC) introduced the requirement for lenders to
include in their advertising a `comparison rate', which includes both the
interest rate and fees and charges relating to a loan.6 However there are
problems with the comparison rate. It is calculated on a loan size of
$150,000 making it difficult to compare loans of a different value. It also
does not include contingent fees that are charged only in certain
circumstances.
5.14 The introduction of a mandatory comparison rate may have led
to some lenders avoiding advertising interest rates to circumvent
comparison rate requirements. Industry may have also restructured
products so that most fees and charges could be included under the
5 ABS Adult Literacy Survey 2006, pg 2. The scale of 1-5 used is based on proficiency
measures, with Level 1 being the lowest level of literacy and Level 5 being the highest level
of literacy. Level 3 is regarded by the survey developers as the `minimum required
individuals to meet the complex demands of everyday life and work in the emerging
knowledge-based economy.
6 Uniform Consumer Credit Code: Mandatory Comparison Rates Final Impact Statement,
7 May 2008.
33
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
`unascertainable fees and charges', which led to reduced transparency for
consumers.7
Transparency
5.15 Lack of transparency can exacerbate information asymmetry
where suppliers in the market have a better understanding than the
consumer of the cost of credit and the terms of the home loan. This can
compound the issue of poor understanding of credit.
5.16 Advertised mortgage interest rates typically do not include any
interest rate discounts which are often available depending on the size of a
loan, the loan-to-valuation ratio, profession of the borrower or other
variables. Information on these discounts is not readily available and, in
general, can only be obtained through a direct enquiry with a lender. The
lack of transparency about these discounts makes it difficult for eligible
borrowers to compare mortgage products.
Format
5.17 Understanding of the cost of credit is also determined by the
format of the information. If the information is formatted in a simple
manner it can improve consumer comprehension. In the United States
formatting has been mandated to include a Schumer Box, which consists
of a tabular format which clearly labels the relevant amounts or interest
rate.8
5.18 At present there are no requirements for standardisation of
formats and, as such, consumers may have difficulty in selecting the
relevant comparable features of the credit contract. This can hinder their
ability to understand and compare essential features.
5.19 Standardisation of formats and clearly labelling the essential
information could enable a consumer to compare different credit contracts
from a range of suppliers. Standardised formats would highlight and
simplify the relevant information for consumers, which could avoid the
information overload associated with lengthy precontractual disclosure
documents.
7 June 2008 Financial Services and Credit Reform Green Paper, pg 10.
8 The Schumer Box is named after the US Senator Schumer who proposed that all important
features of a credit contract be placed in a box on the front of the credit contract.
34
Regulation Impact Statement: Home loans
Timing
5.20 Timing of precontractual disclosure can determine the
effectiveness of that disclosure. Empirical cognitive testing and
behavioural economics shows that consumers have greater comprehension
when presented with information early in the decision making process.
5.21 The concept of `early disclosure' has been considered previously
in consumer policy; with the general understanding that early disclosure in
the consumer credit context would be considered to be the first contact
with a credit provider or credit assistance provider. For `early'
precontractual disclosure, consumers could be given the document to
assist them in understanding key features of the home loan but also to
compare different types of home loans.
5.22 Early disclosure also has a focus on assisting comparison, which
can encourage demand-side competition. If consumers have a longer
period in which to consider different types of home loans, it is likely they
will shop around and choose the product that is most appropriate.
5.23 There are different policy outcomes for `late' precontractual
disclosure, where policy focuses on ensuring consumer protection by
informing them of their statutory rights. `Late' disclosure would be
considered to be the stage where the consumer has settled on a particular
type of home loan and is provided with further information specific to that
particular home loan.
Empirical evidence
5.24 Empirical studies show that simplified and timely disclosure can
improve consumer comprehension of credit contracts as well as improve
decision making processes, such as encouraging them to consider a wider
range of options and choosing the right option for them.
Consumer cognitive testing -- SCOCA Report
5.25 In December 2005 the Uniform Consumer Credit Code
Management Committee released a consultation package, Precontractual
disclosure under the UCCC, which included a proposed disclosure model
to replace the UCCC disclosure model. Following the consultation, an
independent consultant was commissioned to conduct research into
precontractual disclosure, with the aim of developing an evidence-based
disclosure model to meet the information needs of consumers and, where
possible, provide consumers with a better understanding of the cost of
credit.
35
The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill
2011
5.26 Following the 2008 COAG decision to transfer responsibility for
the regulation of consumer credit to the Commonwealth, it was agreed
that the Commonwealth would consider the finding of the report as part of
Phase 2 of the Consumer Credit Reforms. In mid-May 2010 the final
report was released, Simplification of Disclosure Regulation for the
Consumer Credit Code: Empirical Research and Redesign. The report
used an evidenced-based approach and tested various precontractual
disclosure models through simulation, surveys, focus group discussions,
qualitative research and comprehension testing. The study found that only
around 6 per cent of participants understood the true cost of home loan
credit using the UCCC method of disclosing home loan information .9
5.27 The study found that simplified precontractual disclosure greatly
assisted consumers to improve their understanding of the cost of the credit
contract, by simplifying the financial summary table accompanied by a set
of standard terms or the loan contract. Final comprehension tests based
on simplified disclosure found that questions about the cost of credit
improved by factors of between 400 per cent and 1,800 per cent. The
report tested several different disclosure formats on consumers and
recommended disclosure model consists of a simplified Financial
Summary Table of the key facts.
5.28 The research also tested an early disclosure model which
summarised the key information into a one page, stand alone Financial
Summary Table that is intended to be used early in the decision process.
The report found that when exposed earlier to simple disclosure of key
facts, consumers find comparison of products easier and make more
informed choices.
5.29 Other studies also show that lengthy precontractual disclosure
documents do not assist consumers and instead overloads them with
information.10 Consumers generally focus on the headline information,
such as amount repayable each month, interest rates and whether
insurance is required.11 Studies have also found that 41.09 per cent of
9 2010 Standing Committee of Officials of Consumer Affairs Simplification of Disclosure
Regulation for the Consumer Credit Code, pg 6.
10 Malbon, J `Taking Credit: A Survey of Consumer Behaviour in the Australia Consumer
Credit Market' (1999) September Law School, Griffith University for the Consumer Credit
Code Post Implementation Review Committee on behalf of the Ministerial Council on
Consumer Affairs.
11 92 per cent of low income consumers and 84 per cent of high income consumers said that
they mainly took notice of the key features of the credit contract, Malbon, J `Taking Credit:
A Survey of Consumer Behaviour in the Australia Consumer Credit Market' (1999)
September Law School, Griffith University for the Consumer Credit Code Post
Implementation Review Committee on behalf of the Ministerial Council on Consumer
Affairs.
36
Regulation Impact Statement: Home loans
participants found that the interest rate was most helpful in making their
decision with only 1.59 per cent finding information from the supplier as a
key factor.12
Behavioural economics research
5.30 Behavioural economics research, which combines economics
and psychology, examines an individual's comprehension of information.
Findings from behavioural economics are consistent with empirical
consumer comprehension cognitive findings.
5.31 The research indicates that an individual's behavioural biases
are a barrier to understanding complex contractual information and that in
most cases, individuals expect that lenders would act in their interests.
5.32 In particular, behavioural economics suggests that consumers
are overly optimistic when assessing their capacity to repay or take on
debt.13 Research also indicates that the quantity of information can
overwhelm consumers, which can encourage consumers to ignore the
precontractual disclosure information.
Scope and magnitude
5.33 Chart 1 shows the number of new housing commitments by
number of loans from 1992 to March 2010.
5.34 The data is based on new loans as well as refinancing loans.
The data shows that there are potentially a large number of consumers that
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