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CONSUMER CREDIT LEGISLATION AMENDMENT (ENHANCEMENTS) BILL 2012 Explanatory Memorandum

CONSUMER CREDIT LEGISLATION AMENDMENT (ENHANCEMENTS) BILL 2012

                               2010-2011-2012


    THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA




                                  SENATE




CONSUMER CREDIT LEGISLATION AMENDMENT (ENHANCEMENTS) BILL
                           2012




               REVISED EXPLANATORY MEMORANDUM




                         Circulated by the authority of the
  Minister for Financial Services and Superannuation, the Hon Bill Shorten MP




THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE
     HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED


Table of contents Glossary ................................................................................................. 3 General outline and financial impact....................................................... 5 Chapter 1 Introduction ................................................................... 9 Chapter 2 Enhancements .............................................................13 Chapter 3 Reverse mortgages ......................................................33 Chapter 4 Small amount credit contracts ......................................53 Chapter 5 Caps on costs etc. for credit contracts ........................61 Chapter 6 Consumer Leases ........................................................79 Chapter 7 Application provisions ................................................101 Chapter 8 Lay-by agreements etc ...............................................105 Chapter 9 Regulation impact statement ......................................107 Chapter 10 Regulation impact statement ......................................201 Chapter 11 Regulation impact statement ......................................231 Index....................................................................................................307 2


Glossary The following abbreviations and acronyms are used throughout this explanatory memorandum. Abbreviation Definition ACL Australian credit licence ADI Authorised Deposit-taking Institution AGM annual general meeting APR Annual percentage rate ASIC Australian Securities and Investments Commission ASIC Act Australian Securities and Investments Commission Act 2001 CCA Competition and Consumer Act 2010 COAG Council of Australian Governments Code National Credit Code. This is Schedule 1 to the National Consumer Credit Protection Act 2009 Corporations Act Corporations Act 2001 EDR scheme External dispute resolution scheme Enhancements Bill Consumer Credit Legislation Amendment (Enhancements) Bill 2012 FAA Financiers Association of Australia KMP key management personnel licensee A holder of an Australia credit licence issued by ASIC under the NCCP Act NCCP Act National Consumer Credit Protection Act 2009 NFSF National Financial Services Federation TPA Trade Practices Act 1974 RIS Regulation Impact Statement Transitional Act National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 UCCC Uniform Consumer Credit Code 3


General outline and financial impact Outline The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) amends the National Consumer Credit Protection Act 2009 (NCCP Act). The NCCP Act implemented a national framework for the regulation of credit by the Commonwealth. The key reforms introduced by the Enhancements Bill are: · a number of specific changes to the provisions of the NCCP Act, to improve its operation (for example, changes to make it easier for debtors to seek a variation of the repayments under their contract due to financial hardship); · product-specific obligations in respect of reverse mortgages, including a statutory protection against negative equity and improved disclosure requirements, intended to assist consumers to make more informed choices in relation to the use of these products; · caps on the maximum amount credit providers can charge under both small amount credit contracts, and all other credit contracts, and additional obligations in relation to small amount contracts (including additional responsible lending obligations and new disclosure requirements); and · changes to provide greater regulatory consistency between consumer leases and credit contracts (to address regulatory arbitrage arising from the current lower level of obligations applying to consumer leases). The Enhancements Bill also amends the Australian Consumer Law (ACL), to correct a minor error by replacing references to `consumer goods' with `goods' or `goods supplied to a consumer' (as appropriate), in the lay-by and repair notice provisions. Summary of regulation impact statements Impact: The Enhancements Bill will affect businesses that engage in credit services, particularly in relation to consumer leases, short-term small amount loans and reverse mortgages. The main beneficiaries of the new laws will primarily be consumers of those types of credit products. It will also affect ASIC as national regulator for consumer credit. 5


Consumer Credit Legislation Amendment (Enhancements) Bill 2011 Main points: · Enhancements to the NCCP Act: - consumers will benefit as, first, licensees will be required to meet higher standards of conduct, and, second, the procedures for debtors seeking changes to their contracts on the grounds of financial hardship will be made more accessible; - there will be a limited financial impact on persons engaging in credit activities as the changes largely target misconduct; and · Reverse mortgages: - consumers will be assisted to make more informed choices in respect of the balance between current access to credit and the future restrictions on lifestyle choices from reduced equity; - consumers will have protections that reduce the risk of them being evicted from their home; - the changes to procedures and to the content of contract documents will have a low level of compliance costs for reverse mortgage providers (as many already meet similar standards on a voluntary basis); - third parties will find it easier to provide advice to consumers about reverse mortgages, because there will be consistent statutory requirements in relation to matters such as no negative equity guarantees, default clauses and the position of non-title holding residents (reducing their time and cost in assessing competing products, and making advice more accessible); and · Small amount credit contracts: - the creation of presumptions to inform the responsible lending obligations will address the risk of debtors entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments; - improving disclosure about the availability of alternatives will help consumers to make better and more informed financial decisions and to seek out lower cost alternatives to relatively higher cost short-term credit contracts; - the introduction of these requirements will have a low level of compliance costs (because of the limited nature of these obligations); and 6


General outline and financial impact · Caps on costs: - specifying the maximum amount that can be charged will reduce the cost to consumers, and particularly assist those on low-incomes (as currently the financial position of many borrowers, together with the level of costs that can be charged by credit providers can result in such a reduction in income that the debtor may, in a very short period, be placed in a position where the debt cannot be repaid); - the introduction of the cap would generally not require significant compliance costs, given that the cap on small amount credit contracts is straightforward in its application, and that, in relation to other credit contracts, most larger credit providers will already be complying with a similar cap that is in force in the Australian Capital Territory, New South Wales and Queensland; and - the introduction of the cap may have a significant impact on the revenue generated by individual credit providers, although the extent will vary according to their business model; and · Consumer leases: - consumers who enter into consumer leases will have rights similar to those available to consumers in relation to credit contracts (and that have proved effective in that context); and - the application to lessors of obligations that currently apply to credit contracts will require changes to internal procedures, but the cost would be limited given that these obligations are generally already well understood. Date of effect: The substantive obligations in Schedule 1, Schedule 2 (other than as noted below) and Schedules 3 and 5 commence on 1 March 2013. The remaining obligations commences as below: · substantive obligations in respect of the protection against negative equity in Schedule 2 commence the day after the Enhancements Bill receives the Royal Assent; · application and transitional provisions in Schedule 6 commence on the day after the Enhancements Bill receives the Royal Assent; · provisions in Schedule 4 in relation to the caps on costs for credit contracts commence on 1 July 2013; 7


Consumer Credit Legislation Amendment (Enhancements) Bill 2011 · amendments to the Australian Consumer law commence upon proclamation, or 12 months after Royal Assent if they are not proclaimed by that time. Proposal announced: The reforms in Schedule 2 in respect to the regulation of reverse mortgages are part of the Government's Delivering for Seniors package, announced on 7 August 2010. The remaining reforms, in respect to enhancements, consumer leases and short term small amount lending, are implemented as part of Phase Two of the COAG National Credit Reform agenda announced in July and October 2008. 8


Chapter 1 Introduction Outline of chapter 1.1 This chapter provides a summary of reforms introduced by the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill). Context of amendments 1.2 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. 1.3 The NCCP Act implemented Phase One of the implementation plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, primarily lenders and brokers. 1.4 The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 introduced reforms in relation to home loans (by requiring credit providers to make available a Key Facts Sheet to enable consumers to compare different products more effectively) and credit card contracts (to address specific practices that had developed in relation to these products, for example, by introducing a payment allocation hierarchy, so that the highest interest bearing component of a consumer's liability would be repaid first). 1.5 The Enhancements Bill introduces a number of specific changes to improve its effectiveness. It provides additional obligations and protections in respect of three classes of credit products: reverse mortgages, small amount credit contracts and consumer leases (to address particular risks identified with each of those products). Summary of new law 1.6 The Enhancements Bill amends the NCCP Act to provide protections to consumers when they use credit and to assist consumers to make more efficient use of credit contracts and consumer leases. 9


Consumer Credit Legislation Amendment (Enhancements) Bill 2011 1.8 These reforms will: · enhance the regulation of credit by a number of specific reforms (for example, introducing a remedy for unfair or dishonest conduct by credit service providers); · implement the Government's election commitments in relation to reverse mortgages through the introduction of a statutory protection against negative equity, pre-contractual disclosure requirements and other protections relevant to seniors; · introduce protections for consumers who enter into small amount credit contracts (including a cap on the maximum amount credit providers can charge under these contracts); and · address the current regulatory gap in respect of consumer leases. 1.9 The Enhancements Bill also amends the Australian Consumer Law (ACL), to correct a minor grammatical error. Detailed explanation of new law Commencement 1.10 Sections 1 to 3 and any other provision for which a commencement date is not specified commence on the day the Enhancements Bill receives the Royal Assent. 1.11 Schedules 1, 3 and 5, and both Part 2 of Schedule 2 and items 12, 13, 14, 16, 17, 18, 21, 22, 24, 25 and 26 of Schedule 2 apply from 1 March 2013. Part 1 and items 15, 19, 20 and 23 of Schedule 2 commence on the day the Enhancements Bill receives Royal Assent. Schedule 1 contains general enhancements to the National Credit Code (Code). Schedule 2 contains amendments relating to reverse mortgages. Schedules 3 and 5 contain amendments relating to small amount credit contracts and consumer leases respectively. 1.12 Schedule 4 applies from 1 July 2013. Schedule 4 introduces a cap on costs for small amount credit contracts, and a complementary cap for all other credit contracts. 1.13 Schedule 6 applies the day after the Enhancement Bill receives the Royal Assent. Schedule 6 specifies the way in which the provisions in Schedules 1 to 5 will apply to conduct and to contracts before and after the commencement of those Schedules. 1.14 Schedule 7 commences on a single day to be fixed by Proclamation, however, if the provision(s) do not commence within the 10


Chapter 1 -- Introduction period of 12 months beginning on the day the Enhancements Bill receives the Royal Assent, they commence on the day after the end of that period. This schedule contains amendments to the Australian Consumer Law (ACL), to correct a minor error by replacing references to `consumer goods' with `goods' or `goods supplied to a consumer' (as appropriate), in the lay-by and repair notice provisions. 1.15 These new reforms will: · enhance the regulation of credit by: - improving the capacity of borrowers to obtain hardship variations; - introducing a remedy for unfair or dishonest conduct by credit service providers; - restricting the use of high impact terms and representations by licensees; - giving ASIC and consumers comprehensive standing in relation to contraventions of the Code; and · implement the Government's election commitments in relation to reverse mortgages through the introduction of: - a statutory protection against negative equity; - pre-contractual disclosure requirements (including a requirement on licensees to provide the consumer with different scenarios in relation to the impact of a reverse mortgage on the equity in their home before they enter into a reverse mortgage); - other protections relevant to seniors (including an obligation to make reasonable attempts to personally contact a defaulting debtor); and · introduce protections for consumers who enter into small amount credit contracts by: - imposing a cap on the maximum amount credit providers can charge under these contracts (complemented by a more restrictive cap on all other credit contracts); - introducing a number of presumptions and obligations in relation to suitability under the responsible lending conduct provisions in Chapter 3 of the NCCP Act to address concerns about specific practices that are likely to increase the dependency of consumers on small amount lending; and - requiring credit providers and providers of credit assistance to disclose the availability of alternatives; and 11


Consumer Credit Legislation Amendment (Enhancements) Bill 2011 · addressing the current regulatory gap in respect of consumer leases, by requiring lessors to comply, where appropriate, with similar obligations to those that currently apply to credit providers. Application provisions 1.16 Schedule 6 of the Enhancements Bill specifies the conduct and the contracts to which the provisions in Schedules 1 to 5 will apply. 12


Chapter 2 Enhancements Outline of chapter 2.1 The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) introduces a number of changes to enhance the operation of the NCCP Act. The key elements of the reforms in Schedule 1 are that they: · enhance the capacity of debtors who are in financial hardship to seek a variation of their credit contract; · introduce a remedy for unfair or dishonest conduct by credit service providers; · restrict the use of particular words or phrases; · enhance the range of remedies available to consumers; and · increase the circumstances in which ASIC has standing to apply to the court for an order. Context of amendments 2.2 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. 2.3 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 2.4 COAG agreed that in Phase Two the Commonwealth would examine issues that had been identified in relation to the operation of the Uniform Consumer Credit Codes in force in the States and Territories, but that had not been resolved prior to the transfer to the Commonwealth of responsibility for the regulation of credit. 2.5 The Enhancements Bill addresses the following issues: · the current statutory procedures inhibit the capacity of debtors to apply for a variation to their credit contract; · there is no counterpart to the remedy for unjust conduct in the Code in relation to the conduct of credit service providers 13


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (even though their conduct can result in debtors incurring significant liabilities to credit providers under credit contracts); · a credit provider is able to commence enforcement action even while the consumer is waiting for a reply to their hardship variation request, and without their underlying hardship being addressed; · certain high impact words and phrases are being used in ways which can mislead consumers; and · some restrictions prevent both ASIC and consumers from seeking comprehensive remedies for contraventions of the Code. Summary of new law 2.6 The Enhancements Bill amends the NCCP Act, to give greater protections to consumers and provide greater certainty for licensees. Key elements of these reforms are that they: · make it easier for debtors to apply for hardship variations, by making the procedures more flexible; · require credit providers to respond to an outstanding application for a hardship variation before commencing enforcement proceedings; · introduce a remedy for unfair or dishonest conduct by credit service providers; · restrict the use of particular words or phrases which have an emotional or high impact resonance with consumers, so that these words and phrases will only be able to be used where they strictly describe or relate to particular types of conduct or arrangements; · enhance the range of remedies available to consumers, so that consumers can seek restitution or compensation for an offence, in addition to the remedy available under the civil effect of that offence; and · improve ASIC's enforcement capacity by giving it standing to apply to the court for an order under section 124 of the Code, irrespective of whether or not a specific civil effect is prescribed for a contravention of the Code. 14


Chapter 2 -- Enhancements Comparison of key features of new law and current law New law Current law All debtors have a statutory right to The debtor only has a statutory right request a hardship variation to request a hardship application regardless of the amount of credit that where the amount of credit provided is provided under their contract. is less than $500,000. There are no limits to the form of An application for hardship variation hardship variation that can be must seek to change the contract in requested, making it easier for one of three ways stipulated in the consumers to engage with their credit Code. provider. Credit providers must respond to an Credit providers are not required to outstanding application for a hardship respond to applications for hardship variation before commencing variations before they can commence enforcement proceedings. enforcement proceedings Consumers have a remedy for credit The NCCP Act does not provide service providers' conduct that is consumers with a general remedy for unfair or dishonest. credit service providers' conduct that is unfair or dishonest The use of particular words or There are no direct restrictions on the phrases which have an emotional or use of these terms. high impact resonance with There are general prohibitions against consumers is restricted to where they providing misleading information and describe or relate to particular types making false or misleading of conduct or arrangements. representations. These prohibitions Use of the following terms or lack the clarity of prohibitions in representations is regulated: respect of specified terms, and do not necessarily apply to all situations · independent, impartial and covered by the proposed restrictions. unbiased; · financial counsellor and financial counselling; and · representations that a consumer is eligible for credit before an unsuitability assessment has been conducted. ASIC has standing to apply to the ASIC does not have standing under court for an order regardless of section 124 of the Code to apply to whether a civil remedy is also the court for an order in relation to available under another provision. offences which provide for a specific civil effect. Consumers may seek restitution in Consumers are not able to seek relation to offences for which a restitution in relation to offences for specific civil effect is already which a specific civil effect is already provided. provided. 15


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Detailed explanation of new law Part 1 -- Protection of debtor in cases of hardship 2.7 Part 1 amends the Code in relation to hardship applications made by debtors. Where a debtor cannot meet their obligations under a credit contract, they may give the credit provider notice of this (a hardship notice). This notice may be given orally or in writing. [Schedule 1, item 1, section 72(1)] 2.8 Within 21 days of receiving a hardship notice, the credit provider may give the debtor a notice requiring the debtor to give the credit provider within 21 days information relevant to deciding whether and how to change the credit contract to address the debtor's inability to meet the debtor's obligations under the contract. [Schedule 1, item 1, subsection 72(2)] 2.9 The debtor must comply with the requirement to provide more information. The reforms do not introduce any criteria a credit provider must consider in deciding whether or not to vary a contract, but only establish a process for resulting in consideration of this question. For example, the credit provider could reject the request if they do not believe that there is a reasonable cause for the consumer being unable to meet the repayments, or if they believe that the debtor would not be reasonably able to meet their obligations under the credit contract, even if it were changed. [Schedule 1, item 1, subsection 72(3)] 2.10 If the credit provider and the debtor agree to change the credit contract, the credit provider must give the debtor notice of this. This notice must be in the form prescribed by the regulations (if any are made), and must record the fact that the credit provider and the debtor have agreed to change the credit contract. [Schedule 1, item 1, subsection 72(4)(a)] 2.11 If the credit provider does not agree to change the credit contract, the credit provider must give the debtor a notice. This notice must be in the form prescribed by the regulations (again, only if any are made), and record: · the fact that the credit provider and the debtor have not agreed to change the credit contract; · the reasons why they have not agreed; · the name and contact details of the approved external dispute resolution scheme of which the credit provider is a member; and · the debtor's rights under that scheme. [Schedule 1, item 1, subsection 72(4)(b)] 2.12 A breach of this section will attract a civil penalty of 2000 penalty units. [Schedule 1, item 1, subsection 72(4)] 16


Chapter 2 -- Enhancements 2.13 The credit provider must give a notice as described in paragraphs 2.10 or 2.11 by a specified deadline, as follows: · if the credit provider did not require further information from the debtor, this notice must be given 21 days after receiving the hardship notice from the debtor; · if the credit provider required further information from the debtor but did not receive any information in compliance with the requirement, this notice must be given 28 days after the day of making the requirement; and if the credit provider required further information from the debtor and received information in compliance with the requirement, this notice must be given 21 days after receiving the information. [Schedule 1, item 1, subsection 72(5)] 2.14 A regulation-making power is introduced to allow the regulations to prescribe a smaller amount of days than is proposed in the amendments for various actions to be completed. This is to allow, pending further consultation, shorter time periods to be specified for different classes of contracts (particularly small amount credit contracts). [Schedule 1, item 1, subsection 72(6)] 2.15 If, as a result of negotiations, the credit provider agrees to a change to the terms of the credit contract, they must comply with the existing requirements in section 73 of the Code. [Schedule 1, item 2, section 73] 2.16 Where a credit provider does not agree to change the terms of the credit contract, a debtor still has the option to apply to a court for a change in the terms pursuant to section 74 of the Code. The court is restricted from making any order that reduces the total amount ultimately payable by the debtor under the credit contract, and is therefore confined to orders affecting the amount and timing of individual payments made under the credit contract. [Schedule 1, item 3, section 74] 2.17 The requirements in section 88 of the Code, requiring credit providers to give a default notice before they can commence enforcement proceedings against a debtor continue to operate. However, the cross-references to sections 72 and 94 in subparagraphs 88(3)(f)(i) and (ii) are changed, so that their wording is consistent with the changes to those provisions. [Schedule 1, item 5, subparagraphs 88(3)(f)(i) and (ii)] 2.18 A new section 89A is introduced to restrict the capacity of credit providers from commencing enforcement action until they have responded to any hardship notice under section 72. [Schedule 1, item 6, section 89A] 2.19 A credit provider will be prohibited from commencing enforcement action where the following conditions apply: · they are required to serve a default notice under section 88; 17


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · the debtor has given a current hardship notice under section 72; and · the debtor has not previously given a hardship notice or had given one not materially different from the current hardship notice in the four month period before the current hardship notice was given. [Schedule 1, item 6, subsection 89A(1)] 2.20 The credit provider cannot begin enforcement proceedings until they have given the debtor notice stating that the credit provider and debtor have not agreed to change the credit contract and 14 days have passed from the day on which this notice was given. [Schedule 1, item 6, subsection 89A(2)] 2.21 Under the current section 88, the credit provider must allow the debtor at least 30 days from the date of the default notice to remedy the default. The 14 day period from the day the lessor gave the hardship notice may therefore occur before, during, or after the 30 day period. 2.22 A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability [Schedule 1, item 6, subsection (2) and (4)]. 2.23 The imposition of a strict liability offence is appropriate since: · it is important that debtors have certainty regarding whether or not their credit provider will negotiate or intends to commence enforcement proceedings; · the requirement to give the debtor notice is procedural, so that the credit provider should be able to comply with it in all circumstances; and. · it significantly enhances ASIC's ability to enforce this requirement. 2.24 However, the credit provider may take possession of any mortgaged goods if the credit provider believes on reasonable grounds that: · the debtor has, without the credit provider's permission, removed or disposed of the mortgaged goods, or intends to do so; or urgent action is necessary to protect the goods. [Schedule 1, item 6, subsection 89A(3)] 2.25 The burden rests on the credit provider to show that they held this belief on reasonable grounds. Repossession of mortgaged goods has a serious consequence for the debtor, mortgagor or guarantor. Credit providers should therefore only be able to rely on these exceptions where 18


Chapter 2 -- Enhancements they reasonably believe circumstances to be in existence which establish the requisite belief. [Schedule 1, item 6, subsections 89A(2) and (3)] 2.26 A debtor who has been given a default notice can make a postponement request regarding postponement of enforcement proceedings or of any acceleration clauses. There have been minor changes to the wording of this provision so that it operates more clearly. [Schedule 1, item 7, subsection 94(1)] 2.27 If a debtor gives the postponement request the credit provider must not begin enforcement proceedings unless they have responded to the postponement request and 14 days has elapsed from when they gave that response. [Schedule 1, item 9, subsection 94(3)] 2.28 A breach of this section will attract a criminal penalty of 50 penalty units and is an offence of strict liability. The imposition of a strict liability offence is appropriate since: · it is important that debtors have certainty regarding whether or not their credit provider will negotiate or intends to commence enforcement proceedings; · this requirement is strictly procedural, requiring no fault element; and · it significantly enhances ASIC's ability to enforce this requirement (which seeks to give the debtor an opportunity to assess their options following receipt of the notice). [Schedule 1, item 9, subsections 94(3) and (5)] Part 2 -- Remedies for unfairness or dishonesty by providers of credit services 2.29 Item 10 inserts section 180A into the NCCP Act. This provision introduces a remedy for unfairness or dishonesty by providers of credit services, and sets out matters relevant to a court determining whether conduct has been unfair or dishonest. [Schedule 1, item 10, section 180A] 2.30 The court will have power to make orders where it is satisfied that: · a person (the defendant) provided a credit service to a consumer (the plaintiff); · the defendant engaged in conduct that was connected with the provision of the service and that was unfair or dishonest; and · the conduct had one or more of the following results: - the consumer entered into a credit contract, consumer lease, mortgage or guarantee that they would not have entered into had the conduct not occurred; 19


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 - the consumer entered into a credit contract, consumer lease, mortgage or guarantee with different terms to one that they would have entered into apart from the conduct; or - the consumer became liable to pay fees or costs to the defendant or a third party. [Schedule 1, item 10, section 180A] 2.31 The conduct may precede or follow the provision of the credit service, provided that it is connected with the provision of those services. 2.32 The requirement that the unfair or dishonest conduct had a result as listed in paragraph 180A(1)(c) is to be determined objectively. For example, if the defendant engaged in unfair conduct in relation to the supply of goods, and subsequently arranged a credit contract to finance the purchase of those goods, it could be reasonably concluded that their unfair conduct had the result the consumer entered into that contract as a result of the unfair conduct. 2.33 The term engage in conduct is defined as meaning the doing of an act or omitting to perform an act, and would therefore encompass conduct such as failing, unfairly or dishonestly, to disclose information to the consumer. [Schedule 2, item 6, subsection 204(1)] 2.34 If the defendant engaged in unfair or dishonest conduct a court can make orders: · that the defendant take, or refrain from taking specified action; · that the defendant pay the plaintiff a specified amount; · that a specified sum is not due or owing by the plaintiff to the defendant; and · orders that the court thinks are appropriate to redress the unfairness or dishonesty, or to prevent the defendant from profiting from the plaintiff in connection with the unfairness or dishonesty. [Schedule 1, item 10, subsection 180A(2)] 2.35 The power of the court to make orders to prevent the provider of credit services from profiting from their unfairness or dishonesty recognises that the provider of credit services may not be remunerated directly by the consumer, but may receive, and be motivated by, financial benefits such as commissions from third parties. The purpose of giving the court the power to require them to disgorge these payments ensures these persons should not be able to profit from unfair or dishonest conduct in situations where the consumer was not charged a fee. [Schedule 1, item 10, paragraph 180A(2)(d)] 20


Chapter 2 -- Enhancements 2.36 The court may not, however, make an order that affects a credit contract, consumer lease, mortgage or guarantee to which the conduct related. Consumers have other remedies available to them in the NCCP Act in relation to credit providers and lessors, including where the transaction was unjust. Determining whether conduct was unfair or dishonest 2.37 Section 180A sets out elements that the court must consider in determining whether conduct was unfair or dishonest, but does not limit the matters to which the court may have regard. A person providing credit services may therefore still have engaged in conduct that was unfair or dishonest even where none of the factors listed in subsection 180A(4) are present. 2.38 The effect of subsection 180A(3) is that the existence of factors listed in subsection 180A(4) will in all cases be relevant to a court considering whether conduct was unfair or dishonest. 2.39 However, these factors are not prerequisites or necessary to a finding that conduct was unfair or dishonest. For example, it would not be necessary to find a consumer was under a special disadvantage (as discussed in paragraph 180A(4)(a)) in order for conduct by the provider of credit services to be unfair or dishonest. 2.40 The first element is whether the consumer was at a special disadvantage in dealing with the person in relation to the transaction [Schedule 1, item 10, paragraph 180A(4)(a)]. The concept of special disadvantage refers to the consumer being in a position where they are unable to protect their own interests, as discussed in Commercial Bank of Australia v Amadio (1983) 151 CLR 447. 2.41 The special disadvantage may exist in relation to: · the provision of the credit service; · a credit contract, consumer lease, mortgage or guarantee to which the conduct related; and · any other contract requiring the consumer to make payments, for the purposes of which it is reasonable to expect that the consumer would or did enter into such a credit contract, consumer lease, mortgage or guarantee. 2.42 The special disadvantage may exist in relation to all of these three categories or only a single one. 2.43 The court must consider whether the consumer was a member of a class whose members were more likely than others to be at such a disadvantage. [Schedule 1, item 10, paragraph 180A(4)(b)] 2.44 Where the plaintiff was a member of such a class, the court must determine whether a reasonable person would consider that the 21


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 defendant's conduct was directed at that class [Schedule 1, item 10, paragraph 180A(4)(c)]. The purpose of this provision is to address practices where a credit service provider will target a class of persons (for example, elderly or commercially unsophisticated persons) on the basis the perceived characteristics of the class mean that individuals within it are more likely to succumb to unfair or dishonest conduct (irrespective of whether the credit service provider is aware that any particular individual under the class was under a special disability). 2.45 Another element is whether the plaintiff was unable or considered themselves unable to be able to enter into a credit contract, consumer lease, mortgage or guarantee other than with the credit provider, lessor, mortgagee or beneficiary to whom the conduct related [Schedule 1, item 10, paragraph 180A(4)(d)]. Where a plaintiff either had, or considered themselves to have, no other choices they are at greater risk of entering into transactions that exploit this vulnerability. 2.46 A credit service provider may have contributed to this belief by, for example, representing that they can arrange credit or a consumer lease irrespective of the circumstances of the consumer, in order to attract potential clients who would then be prepared to accept whatever terms are offered, irrespective of the cost. 2.47 Another element is whether the conduct involved a technique that in good conscience should not have been used, or that manipulated the plaintiff [Schedule 1, item 10, paragraph 180A(4)(e)]. These terms may largely overlap in practice, and are primarily intended to address coercive or manipulative marketing techniques. 2.48 Some providers of credit services use sophisticated marketing techniques designed to persuade consumers to enter into a contract. This process can be incremental rather than overt through, for example, a series of questions, where the consumer is directed or guided, through those techniques, to a position where it becomes increasingly difficult for the consumer to refuse to enter into the transaction (but where the conduct may not meet the higher threshold required by remedies such as unconscionability or duress). 2.49 The court must also consider whether the defendant could determine or significantly influence either the terms of a credit contract, consumer lease, mortgage or guarantee to which the conduct related or any other contract where it is reasonable to expect the consumer entered into the credit contract or consumer lease to finance their liability under that other contract. [Schedule 1, item 10, paragraph 180A(4)(f)] 2.50 The term `determine or significantly influence' is used to describe situations where the provider of credit services has the capacity to actively influence the terms of a transaction beyond ordinary negotiations. It would clearly apply in situations where the provider of credit services may have an agreement with a third party in which they 22


Chapter 2 -- Enhancements can fix the price or cost within limits specified in the agreement, or subject to a right of veto by the third party. Example 2.1 A broker attracts potential customers through running wealth creation seminars. Attendees are encouraged to purchase investment properties, and to have finance arranged by the broker. However, the broker has an arrangement with the developer selling the properties that it will receive as commission 50 per cent of the amount of the purchase price in excess of a base price. The broker does not tell the consumer about this arrangement and it can be presumed that they were unlikely to have agreed to purchase the units, either at all or for the price for which they purchased it, had this been the case. This conduct would therefore be unfair or dishonest. 2.51 The final element the court must consider is whether the terms of the transaction were less favourable to the consumer than the terms of a comparable transaction [Schedule 1, item 10, paragraph 180A(4)(g)]. This factor recognises the role of providers of credit services where they both arrange credit or a consumer lease and simultaneously arranging other transactions (for example, for the purchase or supply of goods or services). If the consumer could have entered into a comparable transaction with more favourable terms, this would be relevant to consideration of whether the conduct of the provider of credit services in arranging a contract on less favourable contract constituted unfair or dishonest conduct. 2.52 Applications for orders can only be made within six years after the defendant first started engaging in the conduct. The court can only make an order under this section where either a plaintiff or ASIC specifically applies for such an order. [Schedule 1, item 10, subsection 180A(5)] 2.53 ASIC may make an application on behalf of a plaintiff where the plaintiff has given their consent in writing, before the application is made [Schedule 1, item 10, subsection 180A(6)]. ASIC can apply on behalf of more than one plaintiff provided they all consent (for example, where they are members of a class as described in paragraph 180A(4)(b)). 2.54 Where a provider of credit services engages in unfair or dishonest conduct, and it has a successful outcome, they can be expected to repeat that conduct. Section 180A is therefore intended to address both individual and systemic conduct that is unfair or dishonest, and to enable ASIC to take action where a provider of credit services has engaged in similar unfair or dishonest conduct towards different consumers. 2.55 Where the court orders that the defendant pay an amount to the plaintiff, the plaintiff may recover this amount as a debt due to them. [Schedule 1, item 10, subsection 180A(7)] 2.56 This section does not apply to credit assistance by a person who is, or becomes, a credit provider under the contract to which the assistance relates. The section also does not apply to lessors under a consumer lease 23


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 to which the assistance relates, mortgagees under a mortgage connected to the credit contract to which the assistance relates, or beneficiaries of a guarantee connected to the credit contract to which the assistance relates. [Schedule 1, item 10, subsection 180A(8)] 2.57 This provision is necessary as the definition of providing credit assistance in section 8 of the NCCP Act can include credit providers or lessors (where they engage in conduct as described in that section in relation to credit contracts or consumer leases where they will be the provider). Consumers are provided with remedies in the Code and in other legislation against credit providers and lessors. Part 3 -- Representations about eligibility to enter credit contracts, consumer leases etc without assessing unsuitability 2.58 Part 3 of Schedule 1 of the Enhancements Bill introduces a prohibition on licensees, unless they have completed a suitability assessment, from unconditionally representing to a consumer that they are eligible to enter into a credit contract or consumer lease with the licensee, or that the credit limit of an existing credit contract will be able to be increased. 2.59 Licensees can make representations as to the possibility that a future contract or credit limit increase may be provided, so long as such statements are appropriately qualified or have caveats (for example, by a credit provider using a term such as `pre-approved' provided they also indicate the steps to be taken before approval of the loan will be finalised). [Schedule 1, items 15, 16 and 19, sections 128 and 151], 2.60 Sections 125 and 128 of the NCCP Act are amended so that a credit provider is prohibited from representing to the consumer that they are eligible to enter into a credit contract, or to have the credit limit of an existing contract increased unless the credit provider has made an assessment that the contract or the increase will be suitable in accordance with the requirements of section 129. [Schedule 1, items 12 to 16, sections 125 and 128], 2.61 The effect of these amendments is to prohibit credit providers from making representations to consumers that they are eligible to enter into a contract, or have their credit limit increased irrespective of, for example, their personal circumstances or credit history. These types of representations can encourage a consumer to apply for credit because of the certainty their application will be accepted, but where the resulting terms on which the credit is provided may be more onerous than those offered by other credit providers. 2.62 As a result of the amendments the credit provider can represent to the consumer they are eligible to enter into the contract (or have the credit limit increased) once an assessment has been made. This representation can only be made for the same period of time following an 24


Chapter 2 -- Enhancements assessment that the credit provider is able to rely on the assessment in order to enter into the credit contract or increase its limit (that is, for a period of 90 days or such other period as may be prescribed in the regulations). 2.63 Item 19 replaces the existing section 151 of the NCCP Act with a replacement section. The new section implements the same restrictions in respect of representations to a consumer that they are eligible to enter into a consumer lease. [Schedule 1, item 19, section 151] 2.64 There are consequential changes to section 148 of the NCCP Act and to the heading to Division 3 of Part 3-4. [Schedule 1, items 17 and 18, section 148 and heading to Division 3] 2.65 A breach of the requirements in section 151 attracts a civil penalty of 2,000 penalty units. [Schedule 1, item 19, section 151] 2.66 These provisions will also prevent credit providers or lessors from using advertisements which represent that a consumer is eligible to enter into a contract, even where they have poor credit. Advertisements of this type will need to be suitably qualified. Part 4 -- Prohibitions on certain representations and other matters 2.67 A new Part 3-6A will be inserted into the NCCP Act, and will include a number of miscellaneous prohibitions that apply to persons who engage in credit activities. 2.68 As a result section 33, which prohibits a person from giving misleading information when they are engaging in credit activities, is more appropriately located in Part3-6A, and has been repealed. [Schedule 1, item 24, section 33] 2.69 The repeal of section 33 results in a number of consequential amendments to the Guide to Part 2-1 in section 27, and to the heading to Division 3 of Part 2-1. [Schedule 1, items 22 and 23, section 27 and the heading to Division 3 of Part 2-1] 2.70 The Enhancements Bill introduces a new Part 3-6A and a Guide to the Part in section 160A. [Schedule 1, item 25, Part 3-6A and section 160A] 2.71 Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee's actions in providing the assistance: · `independent'; · `impartial'; · `unbiased'; and · any other term (in English or any other language) of similar meaning to those words. 25


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 [Schedule 1, item 25, section 160B] 2.72 However, a licensee may use those terms if they satisfy all of the following requirements: · the licensee does not receive any commissions (apart from commissions that are rebated in full to the person's clients) or any other gifts or benefits from a credit provider or lessor that may reasonably be expected to influence the licensee; · the licensee's employer (if any) or any other person (or class of person) that may be identified in the regulations does not receive any of the commissions, gifts or benefits described above; · in providing a credit service, the licensee does not operate under any direct or indirect restrictions, other than restrictions imposed by the NCCP Act or by an Australian credit licence (so that this would cover, for example, directions from a credit provider that restrict the capacity of the provider of credit services to arrange credit contracts with other credit providers); and · in providing a credit service, the licensee does not operate under any conflicts of interest that might arise from the person's associations or relationships with credit providers and lessors, that may reasonably be expected to influence the person in providing the services. [Schedule 1, item 25, subsection 160B(2)] 2.73 The prohibition applies to any representation or means of communication, whether written, oral or otherwise. 2.74 The reference to commissions does not include amounts paid to the licensee by consumers who use their services. 2.75 Contravention of this prohibition attracts a civil penalty of 2,000 penalty units. [Schedule 1, item 25, subsection 160B(1)] 2.76 The licensee bears the evidentiary burden in relation to this defence. This is appropriate as the circumstances which give rise to the defences are matters which are particularly within the knowledge or control of the licensee, as they relate to their commercial arrangements with third parties. 2.77 Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee's actions in providing the assistance: · `financial counsellor'; 26


Chapter 2 -- Enhancements · `financial counselling'; and · any other term prescribed by the regulations that is of similar import to these phrases (whether in English or any other language). [Schedule 1, item 25, subsection 160C(1)] 2.78 The power to provide for additional terms to be prescribed by regulations recognises that these terms may evolve or change over time. 2.79 However, a licensee may use those terms if : · they are providing, or offering to provide, the credit service on behalf of another person (the principal); · they are a representative (as defined in section 5 of the NCCP Act) of the principal; · regulations exempt the principal from this prohibition in relation to a credit activity because the principal engages in the activity as part of a financial counselling service; and · the person's actions in providing or offering to provide the credit service are within the authority of the principal. [Schedule 1, item 25, subsection 160C(3)] 2.80 The section applies to any representation or means of communication, whether written, oral or otherwise. 2.81 Contravention of this prohibition attracts a civil penalty of 2,000 penalty units. [Schedule 1, item 25, subsection 160C(1)] 2.82 The effect of the defence is to allow these terms to only be used by Government funded or not for profit financial counsellors (who currently meet the exemption from the need to hold an Australian credit licence in subregulation 20(5) of the National Consumer Credit Protection Regulations 2010). These organisations are exempted as they provide free services to consumers, including financial education and advice, and assisting consumers to communicate and negotiate with creditors and other organisations. 2.83 A licensee may also use those terms in the negative, for example, to represent that licensee is not a financial counsellor. [Schedule 1, item 25, subsection 160C(4)] 2.84 The person providing or offering to a credit service bears the evidentiary burden in relation to both defences, as the defences relate to matters which are largely or particularly within their knowledge or control (and in the case of financial counsellors where they have already identified that they do not need to be a licensee). 2.85 There is a consequential amendment to the NCCP Act, so that section 33, which prohibits a person from giving misleading information 27


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 when they are engaging in credit activities, is moved into Part3-6A, and renumbered as section 160D. [Schedule 1, item 25, section 160D] 2.86 The use of these authorities was identified as an area of concern in the course of the review of the Enhancements Bill by the Senate Economics Committee and the Joint Parliamentary Committee on Corporations and Financial Services. 2.87 The use of these authorisations is generally straightforward where they are relied upon from the outset of the contract. However, some credit providers or lessees may require the consumer to sign an employer payment authorisation when they enter into the contract, and then only seek to rely on it to obtain payments directly from the employer when the consumer is in default. 2.88 There is no current requirement for employer payment authorisation to specify a particular amount to be deducted. The absence of any nominated dollar amount can permit the credit provider or lessor to subsequently seeking payment from the employer of an amount higher than the repayments under the contract (following default by the consumer). 2.89 The use of employer payment authorisations may therefore exacerbate the consumer's financial difficulties (by at least temporarily limiting them from paying their debts according to the priority they give them so that, for example, the consumer could be left with insufficient funds to pay their rent after the unforeseen use of an employer payment authorisation results in a deduction being made from their salary). 2.90 A new Division 4 in Part 3-6A of the Enhancements Bill in inserted relating to giving authorisation for deduction by employers of debtors or lessees. [Schedule 1, item 25, sections 160E] 2.91 This Division contains provisions that enable notices to be prescribed in relation to the use of employer payment authorisations as follows: · a credit provider or lessor must give an employer a statement with the employer payment authorisation if the credit contract or contract or lease is of a kind prescribed by the regulations; and · a credit provider or lessor must give a debtor or lessee at least seven days' notice, in a form prescribed by the regulations (if any), of the intention of the credit provider or lessor to give the employer payment authorisation to the employer. 2.92 The amendments will allow for regulations to be made to introduce notice requirements to address these risks, noting that it is expected further consultations would be undertaken to ensure the effective 28


Chapter 2 -- Enhancements operation of such requirements, and that the design and content of any forms maximises their effectiveness. 2.93 In each case, should the requirement apply as a result of regulations being made, then if the credit provider or lessor does not comply the civil penalty is 2,000 units. 2.94 Any requirements that may be prescribed in relation to employer payment authorisations will not extend to credit contracts provided to purchase goods or services as part of a consumer's remuneration package. The exemption will apply to salary packaging arrangements which can include payments from a consumer's pre- and post-tax salary. The potential application of a form in such circumstances would be confusing and unnecessary. Part 5 -- Civil remedies for contravention of the National Credit Code 2.95 Subsection 124(1) of the Credit Code will be amended to remove the words `other than one for which a civil effect is specifically provided by Division 1 or by any other provision of this Code'. [Schedule 1, item 27, subsection 124(1)] 2.96 This amendment results in two changes: · consumers will be able to seek orders both for a specific civil effect (where this is provided for in the Code), and for compensation or restitution resulting from the contravention; and · ASIC will have comprehensive standing under the Code, in relation to contraventions where a specific civil effect is provided for in the Code, and all other contraventions. 2.97 The following entities can make an application to the court under this section: · ASIC on its own behalf; · ASIC on behalf of a person affected by the contravention, if that person has consented in writing to ASIC making the application; and · a person affected by the contravention. [Schedule 1, item 28, subsection 124(4)] 2.98 The amendment does not create new offences for past conduct that did not previously give rise to a penalty or a liability to a consumer. The amendment will mean that where the remedy available to a consumer for a past contravention was limited to the civil effect, they will now be able to obtain a more comprehensive remedy where they have suffered additional loss or damage. 29


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 2.99 There is no retrospectivity in regards to what constitutes a contravention, so entities would always have been operating with full knowledge about the legality of their conduct. The amendment to section 124 therefore does not introduce new or retrospective obligations on persons who engage in credit activities. Part 6 -- Miscellaneous amendments 2.100 Part 6 contain consequential amendments to the Code to resolve ambiguities, clarify the operation of certain provisions and ensure internal consistency throughout the Code with the new amendments. 2.101 In relation to alterations of documents, subsection 19(1) is amended to refer to a new contract document, instead of a contract document. [Schedule 1, item 29, subsection 19(1)] 2.102 Section 32 of the National Credit Code is repealed and replaced with a new section 32. The amendment changes the language of section 32 to mirror the language of the proposed new section 176D under this Enhancements Bill. [Schedule 1, item 30, section 32] 2.103 In relation to statements of amounts owing under credit contracts, amendments are made to the operation of paragraphs 36(1)(c) and 36(1)(d) to clarify that any overdue amounts must be accompanied by the date they became due, and amounts currently payable must be accompanied by the date they become due. [Schedule 1, items 31 and 32, paragraphs 36(1)(c) and (d)] 2.104 Section 40 of the Code outlines when certain transactions are not to be treated as contracts in relation to credit contracts. This section is amended to clarify its operation and ensure consistency with the new section 175J which applies to consumer leases. [Schedule 1, item 38, section 40] 2.105 Subsection 71(1) of the Code which refers to changes by agreement of parties is amended to clarify that it applies to changes made under existing credit contracts. [Schedule 1, item 39, subsection 71(1)] 2.106 Section 83 has two overlapping criminal offences. The section is amended to remove the offence in subsection 83(1). [Schedule 1, items 40, 41 and 42, section 83] 2.107 Section 87 is amended to omit references to a direct debit default notice, and instead, refer to a notice complying with the section. [Schedule 1, items 43 and 44, section 87] 2.108 Paragraphs 88(5)(a) and (d), subsection 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d) are amended to change the phrase `believes on reasonable grounds' to `reasonably believes'. The Code currently uses both expressions to refer to the same concept and it is preferable to use one expression only. [Schedule 1, items 45, 46, 47 and 48, 30


Chapter 2 -- Enhancements paragraphs 88(5)(a) and (d), subsection 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d)] 2.109 Subsection 95(1) is amended to omit references to a default notice or demand for payment, and clarify its operation by referring to a default notice under section 88 or a demand for payment under section 90. [Schedule 1, item 49, subsection 95(1)] 2.110 Section 206 currently specifies that the way in which headings, notes and punctuations are to be used for the purposes of interpreting the Code. This approach was inherited from the State and Territory predecessor to the Code, the Uniform Consumer Credit Code. The provision is being repealed so that the interpretation of headings, punctuation and notes will be in accordance with the Acts Interpretation Act 1901, and therefore consistent with Commonwealth legislation generally. [Schedule 1, item 51, section 206] Part 7 -- Technical corrections 2.111 Part 7 contains a series of technical amendments. The NCCP Act is amended: · to amend incorrect cross- references in section 128 and subsection 130(1) [Schedule 1, items 52 and 53, section 128 and subsection 130(1)]; and · to correct the omission of the word `section' in paragraph 181(b) [Schedule 1, item 54, paragraph 181(b)]. 2.112 Part 7 amends the Code by: · correcting a reference to `or' instead of `and' in subparagraph 88(3)(g)(i) [Schedule 1, item 55, subparagraph 88(3)(g)(i)]; · correcting the reference to a tied continuing credit contract in subsection 127(2) [Schedule 1, item 56, subsection 127(2)]; · changing a number of headings and sections in Division 3 of Part 7 that contain references to a provision, section 73 of the Trade Practices Act 1974, that has now been repealed [Schedule 1, items 57, 58, 59, 60 and 61, headings to sections 129, 130, 131, 132 and 133]; and · correcting a grammatical error in the definition of approved external dispute resolution scheme in subsection 204(1). [Schedule 1, item 51,subsection 204(1)] 31


Chapter 3 Reverse mortgages Outline of chapter 3.1 Schedule 2 of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) introduces new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are: · introducing a `no negative equity guarantee' protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions); · mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act: - using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the value of the equity they have in their home; - provide the consumer with a printout of these projections; - notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and - give the consumer a reverse mortgage information statement; · prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract; · disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract; · prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and 33


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · introducing new requirements on credit providers where they have given a default notice to a debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default. Context of amendments 3.2 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 responsibility for the regulation of credit to the Commonwealth. 3.3 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 3.4 Under Phase Two, COAG agreed the Commonwealth would consider reforms to the regulation of reverse mortgages. 3.5 In August 2010, the Government announced the Delivering for Seniors package which included enhancements to protections for seniors seeking to access the equity in their homes using reverse mortgages and home reversion schemes. 3.6 Reverse mortgage contracts require targeted regulation because they differ from other credit contracts. Some of the main differences are that: · they are marketed exclusively to seniors or persons approaching an age where they will retire from the workforce; · interest is capitalised as there is no obligation on the borrower to make regular repayments, meaning the amount owing increases over time; · at the time they are considering taking out the loan, consumers have no way of accurately determining the value of the equity in their home over time; and · debtors may be required to repay more than the value of the mortgaged property at a stage in their life when they may no longer have the financial resources to be able to do so. 3.7 The Enhancements Bill contains amendments to the NCCP Act to address these issues. 34


Chapter 3 -- Reverse mortgages Summary of new law 3.8 The Enhancements Bill contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages. 3.9 In general terms a reverse mortgage contract is defined as a contract in which the balance of the credit contract will increase over time (as the borrower will ordinarily only repay the debt following sale of their residence). 3.10 The key elements of these amendments are: · creating a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property; · requiring licensees to undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act: - using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home; - provide the consumer with a printout of these projections; - notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and - give the consumer a reverse mortgage information statement. · prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract; · disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract; · prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and · new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default. 35


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Comparison of key features of new law and current law New law Current law Specific obligations will be The NCCP Act regulates reverse introduced on credit providers and mortgage contracts consistently with persons engaging in credit services all other credit contracts. It does not in relation to reverse mortgage include any responsible lending contracts. conduct obligations or disclosure requirements that are specific to reverse mortgages. Credit providers cannot demand or The NCCP Act does not include any accept payment of an amount to specific requirements in relation to discharge the debtor's liability reverse mortgages. which exceeds the value of the reverse mortgaged property (subject to limited exceptions). Licensees must give consumers The obligations under the NCCP Act projections of equity before do not require the disclosure of providing credit assistance or projections of future equity. entering into a reverse mortgage credit contract. Licensees must make available a The obligations under the NCCP Act reverse mortgage information do not require the provision of a statement on their website or upon reverse mortgage information request by a consumer. statement. Detailed explanation of new law Commencement 3.11 Part 2 and items 12, 13, 14, 16, 17, 18, 21, 22, 24, 25 and 26 of Schedule 2 commence on 1 March 2013. Part 1 and items 15, 19, 20 and 23 of Schedule 2 commence on the day the Enhancements Bill receives Royal Assent. Schedule 2 -- Reverse mortgages Part 1 -- Definitions Division 1 -- Definition of reverse mortgage 3.12 Part 1 inserts definitions of expressions relevant to these reforms into both section 5 of the NCCP Act and section 13A of the Code. 36


Chapter 3 -- Reverse mortgages 3.13 A reverse mortgage is defined for the purposes of the NCCP Act as having the same meaning as in section 13A of the Code. [Schedule 2, item 1, subsection 5(1)] 3.14 A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor's obligations under the contract and either: · the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage [Schedule 2, item 2, paragraph 13A(1)(b) and subsection 13A(4)]; or · the arrangement meets the following two conditions: - the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure equal to or below that maximum amount [Schedule 2, item 2, paragraph 13A(1)(a) and subsection 13A(2)]; and - the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation-making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate) [Schedule 2, item 2, paragraph 13A(1)(a) and subsection13A(3)]. Example 3.1 A lender offers a credit product which provides the borrower with a $50,000 loan. The credit contract allows the borrower to not have to make regular repayments but that full repayment has to be made if the borrower sells or permanently vacates their home, or upon the death of the borrower. Until this time, interest on the loan is compounded with the total amount owing under the loan able to increase above the $50,000. Since the credit contract allows the borrower's total debt to exceed the initial $50,000 without any obligation to reduce that liability under that amount (and meets any of the additional prerequisites under the regulations) the contract would be a reverse mortgage for the purposes of the Code and the NCCP Act. 3.15 ASIC may, by a legislative instrument, declare a credit contract to be a reverse mortgage [Schedule 2, item 2, subsection 13A(4)]. This will allow ASIC, as the national regulator for consumer credit, to ensure that changes in product design do not have the result that those credit contracts which should be regulated under the NCCP Act as a reverse mortgage will not be subject to the protections introduced in Schedule 2. ASIC's power to make this type of declaration in respect to reverse mortgage contracts is analogous to its power under section 761AE of the Corporations Act 2001 in relation to margin lending facilities. 37


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 3.16 There is a cross-reference to the definition of a reverse mortgage in subsection 204(1) of the Code, with that subsection specifying that the term is defined in section 13A of the Code. [Schedule 2, item 3, subsection 204(1)] Division 2 -- Other definitions 3.17 For the purposes of the NCCP Act, a reverse mortgage information statement is defined as a document relating to reverse mortgages which complies with the regulations. [Schedule 2, item 4, subsection 5(1)] 3.18 It is anticipated that the form of the reverse mortgage information statement will be a document containing generic information regarding the key features and implications of reverse mortgages (in response to the characteristics of this market as discussed in paragraph 3.6). 3.19 The Enhancements Bill also introduces a definition of a bridging finance contract, as a contract where: · firstly, at the time the contract is made the debtor reasonably expects to receive a lump sum before the end of the contract and to use that sum as far as possible to meet their obligations under the contract; · secondly, that the contract must be for a term of two years or less; and · thirdly, if the regulation prescribe any conditions, those conditions are met. [Schedule 2, item 5, subsection 204(1)] 3.20 Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary. 3.21 It is anticipated that additional conditions that must be met in order for the definition of bridging finance contract to be met will be prescribed by regulations. 3.22 The Enhancements Bill also introduces the following definitions: · engage in conduct is defined as meaning the doing of an act or omitting to perform an act [Schedule 2, item 6, subsection 204(1)]; · practising lawyer is defined as a person admitted to the legal profession by a federal court or State or Territory Supreme Court who holds a practising certificate entitling them to practice law [Schedule 2, item 7, subsection 204(1)]; and 38


Chapter 3 -- Reverse mortgages · reverse mortgaged property in relation to a credit contract is defined as a dwelling or land that is mortgaged to secure a borrower's obligation under a reverse mortgage contract. [Schedule 2, item 8, subsection 204(1)] Part 2 -- Provisions applying to licensees 3.23 A note is inserted into section 133 of the NCCP Act to illustrate the consequences of a breach of the prohibition in that section. The example in the note states that if a person has suffered loss or damage from entering into a credit contract which is unsuitable, when a reverse mortgage would have been not unsuitable, that person may apply to a court under sections 178 or 179 for appropriate orders. These orders may either compensate them for the loss or damage or reduce the loss or damage suffered, by putting the consumer in the position they would have been in had they been placed into a not unsuitable reverse mortgage. [Schedule 2, item 9, section 133] 3.24 This note will assist licensees and debtors to appreciate the importance of complying with section 133, by a cross-reference to the power of the court to make flexible orders to provide a remedy under section 179 where a licensee arranged a credit contract which was unsuitable. Part 3-2D -- Licensees and reverse mortgages 3.25 Part 3-2D of Schedule 2 of the Enhancements Bill imposes obligations on licensees that are intended to enhance a consumer's understanding of the potential outcomes of entering into a reverse mortgage, before they decide whether or not to enter into a particular reverse mortgage contract. These obligations will be in addition to those currently required under Chapter 3 of the NCCP Act. 3.26 The introduction of a new Part 3-2D results in the need to include a Guide to this Part. [Schedule 2, item 10, section 133DA] 3.27 The first obligation will be that licensees use an ASIC-approved website to generate projections made in accordance with the regulations, and to show them to a consumer in person or give them to the consumer in a way prescribed by the regulations. It is expected these projections will illustrate the effect a reverse mortgage contract may have on the value of the equity the consumer has in their home over time, and the potential impact of interest rates and house price movements. They may also show the effect on their equity of different types of loan payments (for example, the difference in the rate at which the consumer's liability increases where they borrow a lump sum or drawdown regular monthly payments). [Schedule 2, item 10, subsection 133DB(1)] 3.28 The licensee must also give the consumer a printed copy of the projections. [Schedule 2, item 10, paragraph 133DB(1)(b)] 39


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 3.29 The requirement to show the projections in person is intended to assist the consumer by enabling them to seek explanations directly from the licensee, or ask them questions prompted by the projections. 3.30 It is a defence to these requirements if the licensee reasonably believes the consumer has been shown the projections and received a copy of them from another person [Schedule 2, item 10, subsection 133DB(3)(a)]. The projections would need to have been the same or substantially the same as those the licensee would otherwise be required to show the consumer [Schedule 2, item 10, subsection 133DB(3)]. 3.31 Licensees will also have a defence to these requirements in any circumstances that may be prescribed in the regulation. This will enable the obligations to be applied flexibly and respond to changes in licensee procedures. [Schedule 2, item 10, subsection 133DB(4)] 3.32 These defences will avoid duplication if, for example, the credit provider knows that a consumer has already received a copy of the projections from an intermediary such as a mortgage broker. 3.33 The second obligation will be that licensees tell the consumer in person certain matters that relate to reverse mortgages and are prescribed in the regulations [Schedule 2, item 10, paragraph 133DB(1)(c)]. It is anticipated these matters will include notifying the consumer that: · there are alternatives to a reverse mortgage which they could consider (such as downsizing to a smaller house); and · taking out a reverse mortgage may affect their entitlements to any government benefits they receive (if any). For example, if the proceeds of a reverse mortgage are placed into a financial investment, such as a term deposit, then income from that investment would be assessed under the Commonwealth's deeming rules that apply to all financial investments. 3.34 The third obligation will be to give the consumer a reverse mortgage information statement (as discussed at paragraph 3.18). [Schedule 2, item 10, paragraph 133DB(1)(d)] 3.35 It is a defence to this requirement if the licensee reasonably believes the consumer has already received a statement from another person within the previous 90 days. [Schedule 2, item 10, subsection 133DB(5)] 3.36 A defendant will bear the onus of proving the defences under subsections 133DB(3) and (4). This is appropriate since it would be relatively easier for the defendant to prove that they believed a consumer has been provided with either the projections or information statement by reference to internal procedures. 40


Chapter 3 -- Reverse mortgages 3.37 A breach of these requirements will attract a civil penalty of 2000 penalty units and also be an offence attracting a criminal penalty of 50 penalty units. [Schedule 2, item 10, subsections 133DB(1) and (2)] 3.38 In addition to the obligation to provide a reverse mortgage information statement under subsection 133DB(3), the following classes of persons must also make available a reverse mortgage information statement: · credit providers under one or more reverse mortgages; and · licensees who provide, or hold themselves out as providing, credit assistance in relation to reverse mortgages. 3.39 The circumstances in which they must provide an information statement are: · through their website (where the person has a website which provides information about reverse mortgages) [Schedule 2, item 10, subsections 133DC(1) and (2)]; · when the consumer asks the licensee for an information statement, and the consumer has given the licensee their contact details as required by the regulations [Schedule 2, item 10, subsections 133DD(1) and (2)]; and · the regulations require a consumer to be given an information statement (and the consumer has given the licensee their contact details as required by the regulations) [Schedule 2, item 10, subparagraph 133DD(1)(b)(ii)]. This regulation making power will allow for flexibility in the circumstances under which a consumer will be able to access an information statement as industry practices change over time. 3.40 Failure to provide an information statement in the above circumstances will attract a civil penalty of 2000 penalty units and is an offence attracting a criminal penalty of 50 penalty units. [Schedule 2, item 10, subsections 133DC(2) and (3) and subsections 133DD(2) and (3)] 3.41 There are two defences provided for a contravention of the requirement to provide a reverse mortgage information statement in response to a consumer's request. These are: · that the licensee has already given the consumer, or reasonably believes the consumer has already been given, an information statement [Schedule 2, item 10, subparagraph 133DD(4)(a)]; and · if they are a credit provider who offers reverse mortgages, the licensee reasonably believes the consumer would not be eligible for a reverse mortgage from them. [Schedule 2, item 10, subparagraph 133DD(4)(b] 41


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 3.42 A defendant will bear the evidentiary burden in relation to these defences. This is considered appropriate since it would be relatively easier for the defendant to prove that they believed a consumer need not be provided with an information statement (either because they establish facts or circumstances as to why they reasonably believe another person has done so or because the consumer would not be eligible for their products, by reference to internal procedures). 3.43 The regulations may also prescribe circumstances in which licensees are not required to give a consumer a reverse mortgage information statement. This will allow reasonable relief from the requirement to provide an information statement as industry practices change over time. [Schedule 2, item 10, paragraph 133DD(4)(c)] 3.44 The Enhancements Bill will prohibit licensees, when providing or offering to provide a credit service to a consumer, from using the phrase `reverse mortgage' or another term of similar import to it. [Schedule 2, item 10, subsections 133DE(1)and (2)] 3.45 This provision ensures that consumers can have confidence that the term `reverse mortgage' will be used to describe only those contracts where they will have the benefit of the statutory protections introduced by the Enhancements Bill. Licensees should not be able to use this term where the effect or result may be to encourage a consumer to enter into a credit contract with none of these protections (for example, where they are required to repay the contract after five years). 3.46 A breach of the prohibition on the use of the term `reverse mortgage' will attract a civil penalty of 2000 penalty units. [Schedule 2, item 10, subsection 133DE(2)] 3.47 It is a defence to this requirement if the use of the phrase reverse mortgage (or phrase of similar import) accurately represents that the credit contract or mortgage being referred to: · is or will be a reverse mortgage: or · is not or will not be a reverse mortgage. · [Schedule 2, item 10, subsection 133DE(3)] 3.48 A defendant will bear the onus of proving the defences under subsections 133DE(3). This is appropriate since it would be relatively easier for the defendant to prove that using the term `reverse mortgage' is appropriate by reference to internal procedures or the contracts used. 3.49 Section 179 of the NCCP Act is amended to provide for specific consequences where a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for orders to let the plaintiff reside in a reverse mortgaged property to prevent or reduce any loss or damage they have suffered, or are likely to suffer if they were otherwise required to vacate the property. [Schedule 2, item 11, paragraph 179(6)(d)] 42


Chapter 3 -- Reverse mortgages 3.50 Under section 179 the court is given power to make orders to compensate a consumer or to reduce the loss or damage suffered by a consumer. The power to reduce the loss or damage suffered by a consumer can be exercised through specifying that an unsuitable contract should operate in accordance with orders of the court. This existing power is supplemented by specific provisions in respect of reverse mortgages that are intended to deter this type of conduct from occurring, given the potential vulnerabilities of borrowers who enter into unsuitable reverse mortgages. 3.51 In the case of a consumer who is placed into a contract that is unsuitable, where a reverse mortgage would have been not unsuitable, this power would allow the court to make orders so that the unsuitable credit contract is rewritten to apply in the way that the suitable reverse mortgage would have (for example, by allowing the consumer to remain in their residence until they permanently vacate it). 3.52 The effect of the amendment to section 179 is to specify circumstances in which a consumer may apply for such orders, and where the court would be able to make such orders. 3.53 The circumstances under which a plaintiff may apply for such an order are: · the defendant is a credit provider who has contravened section 133 of the NCCP Act in relation to a credit contract that is not a reverse mortgage; · the debtor's obligations under that contract are secured by a mortgage over their principal place of residence; and · the court is satisfied that, at any time when the assessment needed to be made in relation to the contract under section 128 of the NCCP Act: - a credit provider was offering reverse mortgages; - the debtor would have been eligible to enter into a reverse mortgage; and - the reverse mortgage would not have been unsuitable under section 133 of the NCCP Act. [Schedule 2, item 11, subsection 179(6)] 3.54 If these circumstances are met and a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for the orders, the court must consider the order appropriate and make the order, unless it would adversely affect a person other than the debtor and the defendant. [Schedule 2, item 11, subsection 179(7)] 3.55 This approach reflects the importance of protecting elderly consumers who may be placed in unsuitable credit contracts, and the 43


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 desirability, where this is the case, of allowing these consumers to be able to remain in their residence (rather than, for example, being provided with compensation through a lump sum). It is considered appropriate to protect these consumers by minimising the circumstances in which this class of borrowers would have to vacate their residence (with consequent impacts such as social dislocation and potential isolation). Example 3.2 The credit provider advertises to seniors in need of cash. It arranges a loan for a pensioner on the following terms: the loan is interest only for a five year term, with the funds necessary to meet the repayments included in the amount borrowed. The loan also discharges the borrower's existing home loan. The pensioner was eligible for a reverse mortgage at this time. At the end of the five year term the borrower cannot repay the loan without selling their property, as the amount of the debt relative to the value of the equity means that they cannot obtain a reverse mortgage. Assuming the loan is unsuitable; section 179 requires the court to consider whether it is appropriate to allow the pensioner to remain in their home in order to reduce the loss or damage they would otherwise suffer. Part 3 -- Provisions applying to credit providers generally 3.56 Some potential debtors will be concerned about the rights of a fellow resident to remain in the property after they have vacated it; for example, a debtor may want their spouse (who does not share title to the residence) to be able to remain in the residence after they themselves move into aged care accommodation. 3.57 If a reverse mortgage contract gives residency protections for non-title holding residents, the Enhancements Bill regulates the way in which those protections are to be provided. The contract document must provide that the debtor may at any time nominate to the credit provider a person who will be allowed to occupy the property under the same rights as the debtor. The debtor must also be able to revoke any such nomination. [Schedule 2, item 12, subsection 17(15A)] 3.58 This provides a consistent and minimum level of protections for non-title holding residents across all credit providers who elect to who offer such protections. 3.59 This requirement only applies if a reverse mortgage contract provides for non-title holding resident protections. This provision: · does not require all credit providers to offer protections to non-title holding residents; and · does not regulate or prescribe who can be a non-title holding resident (so that credit providers can adopt different eligibility criteria). 44


Chapter 3 -- Reverse mortgages Example 3.3 A credit provider offers reverse mortgages that do not provide residency protections to persons living the home over which the reverse mortgage is secured, apart from the title holder. Therefore, subsection 17(15A) would not apply to the credit provider in relation to its reverse mortgages. Example 3.4 A credit provider offers a reverse mortgage under which non-title holding residents nominated by the borrower are allowed to remain in the property after the borrower has died. This credit provider will need to comply with subsection 17(15A). This credit provider could also have their own criteria regarding who can be nominated by the borrower to have these residency protections (for example, they must be over a certain age). 3.60 Subsection 17(15A) will be inserted into Part 2, Division 1 of the Code. A consequence of this is that it becomes subject to the operation of existing section 22 of the Code. This section prohibits a credit provider from entering into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. 3.61 A breach of this requirement will attract a criminal penalty of 100 penalty units and is an offence of strict liability. 3.62 The imposition of a strict liability offence is considered appropriate since: · a credit provider can easily determine or control whether those matters are to be included in their contract documents; and · it enhances ASIC's ability to enforce this requirement. 3.63 A credit provider is prohibited from both entering into a reverse mortgage, or subsequently changing the terms of a reverse mortgage contract, to allow them to commence enforcement proceedings against the debtor for any of the following categories of default: · the debtor: - failing to inform the credit provider that someone else lives in the property, or failing, when the debtor occupies the reverse mortgaged property, to provide evidence they or a nominated person occupies the property; - leaving the property unoccupied (but only whilst it is still their principal place of residence); or 45


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 - failing to pay a cost they are required to pay apart from the contract (for example, council rates or insurances) within three years after the payment became due; · a provision which does not make clear what the debtor must do to comply with the obligation; · a cross default (for example, the debtor defaulting on another credit contract with the same credit provider); or · any act or omission by the debtor prescribed by regulations. [Schedule 2, item 13, section 18A] 3.64 The intention in excluding these terms from reverse mortgage contracts is that these borrowers will not be in default (and at risk of enforcement action) because of minor oversights or for reasons which bear no relationship to the risk to the credit provider from the default. 3.65 Section 18A will be inserted into Part 2, Division 1 of the Code and will therefore also attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. Therefore, a breach of this item will attract a criminal penalty of 100 penalty units and is an offence of strict liability. 3.66 The imposition of a strict liability offence is considered appropriate since: · a credit provider can easily take steps to ensure those matters are not included in their contract documents; and · it enhances ASIC's ability to enforce this requirement. 3.67 If a proposed reverse mortgage contract does not provide residency protection provisions for person other than the debtor, a person must inform the proposed debtor of this before providing credit services to them in relation to the contract. [Schedule 2, item 13, subsections 18B(1) and (2)] 3.68 This disclosure will enable the consumer to make a fully informed decision about whether a particular reverse mortgage contract is suitable for their requirements in respect of the consequences for non-title holding residents (such as a partner whose name is not on the title of the property). If the borrower wants to protect this person, they would then be on notice and could choose to find a credit provider who offers reverse mortgages with the appropriate protections. 3.69 Credit providers must also meet this requirement before entering into a contract for a reverse mortgage. [Schedule 2, item 13, subsection 18B(4)] 3.70 This disclosure must occur in writing in the form prescribed by the regulations (if any). [Schedule 2, item 13, subsections 18B(2) and (4)] 46


Chapter 3 -- Reverse mortgages 3.71 A breach of this requirement will attract a criminal penalty of 50 penalty units and is an offence of strict liability. The imposition of a strict liability offence is considered appropriate since it will significantly enhance ASIC's ability to enforce this requirement. 3.72 The Enhancements Bill will enable regulations to be made that may regulate or prohibit a credit provider from entering into a reverse mortgage without the debtor having received legal advice. [Schedule 2, item 13, section 18C] 3.73 Section 18C will be included in Part 2, Division 1 of the Code, and therefore attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. Therefore, a breach of this section will attract a criminal penalty of 100 penalty units and is an offence of strict liability. 3.74 The deferral of this obligation until a commencement date has been prescribed by regulation is to enable the provision to come into force when the Government can have certainty that there are appropriately accredited solicitors available to provide legal advice. 3.75 The imposition of a strict liability offence is considered appropriate since it significantly enhances ASIC's ability to enforce this requirement. 3.76 Items 14, 15, 16 and 17 amend subsection 22 and 26 and paragraph 33 to make consequential amendments to the Code as follows: · item 14 amends subsection 22 to provide that a contravention of section 18B attracts the penalties under subsections 18B(4) and (5) rather than section 22 [Schedule 2, item 14, subsection 22]; · item 15 amends subsection 26 to provide that section 26, which relates to debtors making payments before they are due, does not apply to payments made in accordance with section 86A (which specifically addresses the ability of a borrower to make payments which terminate their reverse mortgage) [Schedule 2, item 15, section 26]; and · items 16 and 17 amend subsection 33 to provide that in the case of a reverse mortgage (whether it be a continuing credit contract or not) the maximum period for a statement of account period is 12 months. [Schedule 2, items 16 and 17, subsection 32(2)] 3.77 A purported change to a reverse mortgage contract is void to the extent that it: · removes a provision required to be in the contract by subsection 17(15A) [Schedule 2, item 18, paragraph 67A(a)]; or 47


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · varies the contract so as to limit the ability of a debtor to nominate to the credit provider a person who is to be allowed to occupy the property or varies the rights they are provided under the contract (so that if a debtor entered into the contract because they had the right to later be able to nominate a non-title-holding resident, that right cannot be taken away). [Schedule 2, item 18, paragraph 67A(b)] Subdivision B -- Ending of reverse mortgage by credit provider receiving value of reverse mortgaged property 3.78 The Enhancements Bill inserts Subdivision B which regulates the debtor's accrued liability upon the conclusion of the reverse mortgage credit contract, whether by the sale of the reverse mortgaged property or other payment by the debtor. 3.79 As a result of the introduction of this Subdivision, there is a need to amend the heading to Division 1, and to introduce an additional heading, specifying that sections 82 to 86 of the Code are included in Subdivision A. [Schedule 2, item 19 , Division 1 of Part 5 (heading)] 3.80 The Subdivision introduces a statutory `no negative equity' guarantee, so that the debtor cannot be required, subject to specific exceptions, to pay more than the market value of any property that is mortgaged to the credit provider. 3.81 In summary, the Subdivision introduces requirements so that where the credit provider receives an amount equal to the adjusted market value of the property that is secured under the reverse mortgage: · the effect of such a payment will be to discharge the debtor's liability to the credit provider; · the credit provider must not demand or accept payments in excess of the adjusted market value, and must refund any such payments; and · exceptions to these restrictions are introduced (for example, where the debtor deliberately damaged the secured property). 3.82 Where a credit provider receives an amount at least equal to the adjusted market value of the reverse mortgage property, the debtor's obligations and the mortgage securing those obligations is discharged. [Schedule 2, item 20, sections 86A and 86B] 3.83 A credit provider may receive those amounts either as a payment from the debtor or the proceeds of the sale of the reverse mortgaged property. [Schedule 2, item 20, subparagraphs 86A(b)(i) and (ii)] 3.84 This allows a debtor to voluntarily pay out a reverse mortgage contract if they repay an amount at least equal to the property's market value. 48


Chapter 3 -- Reverse mortgages 3.85 The effect of a payment of the adjusted market value is to discharge all the debtor's liabilities and the mortgage over their property. [Schedule 2, item 20, subsection 86B(2)] 3.86 Regulations may be made to determine how the adjusted market value of a property is to be worked out or adjusted. This will enable a mechanism to be specified to address situations where there may be a dispute about how this figure should be calculated or determined. [Schedule 2, item 20, subsection 86A(2)] 3.87 Where a reverse mortgage credit contract has been terminated under section 86A, a credit provider must refund any payments received in excess of the adjusted market value, and must not demand or accept further payments under the credit contract. [Schedule 2, item 20, sections 86C and 86D] 3.88 There are specific circumstances where the payment of an amount equal to the adjusted market value will not terminate the credit contract and that the credit provider may seek further payment from the debtor. These circumstances are: · where the debtor engaged in fraud, or made a misrepresentation relating to the reverse mortgage; or · any other circumstance prescribed in the regulations. [Schedule 2, item 20, section 86E] 3.89 The regulation-making power will allow flexibility in accommodating other situations that may be identified where it would be appropriate for the credit provider to be able to demand and receive an amount in excess of the adjusted market value. 3.90 Before commencing enforcement proceedings against a debtor or mortgagor under a reverse mortgage, a credit provider must either contact or make reasonable attempts to contact the debtor or mortgagor (or their lawyer, or a person who has a power of attorney over their financial affairs). [Schedule 2, item 21, subsections 88(1) and (2)] 3.91 This contact must occur in the 30 day period commencing on the date of the notice. The contact must be in person or by telephone, with the credit provider required to confirm whether the debtor or mortgagor received the default notice and to also inform them of the consequences of failing to remedy the default. 3.92 These additional requirements in relation to contacting debtors and mortgagor about defaults recognises the impact age and declining health may have on this class of borrowers, their reliance on third parties to assist or advise them, and the consequent need for greater requirements on credit providers in respect of potentially senile delinquents. For example: 49


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · many reverse mortgage borrowers may better understand that they are in default and how to remedy it when this is disclosed to them verbally, rather than in writing; and · a default occurring during a period that a debtor is temporarily absent from the reverse mortgaged property due to circumstances such as illness or hospitalisation, is more likely to be resolved should the credit provider become aware of this absence when they attempt to contact the debtor. 3.93 A breach of this requirement will attract a criminal penalty of 50 penalty units. [Schedule 2, item 21, subsections 88(1) and (2)] 3.94 Under section 18A a credit provider is prohibited from specifying in a reverse mortgage contract that certain types of conduct will constitute a default. If a credit provider issues a notice relating to a reverse mortgage for an alleged default of the contract because the debtor or mortgagor has not complied with a contract term prohibited under section 18A, the notice is not a default notice for the purposes of subsections 88(1) and (2) or section 93 of the Code. [Schedule 2, item 22, subsection 88(7A)] 3.95 However, the notice will still be effective as a default notice for the purposes of sections 89, 94 or 95 of the Code. [Schedule 2, item 22, subsection 88(7B)] 3.96 Section 93A applies to reverse mortgages where the liability of the debtor or mortgagor to the credit provider can exceed the adjusted market value because one of the exemptions in section 86D applies. 3.97 If a credit provider is required under Section 88 of the NCCP Act to give a debtor or mortgagor a default notice before beginning enforcement proceedings, the default notice sent by the credit provider must include the following additional matters: · the amount received by the credit provider; · the debtor's liability under the reverse mortgage contract just before that amount was received; and · the ground or grounds under section 86D under which they are seeking payments in excess of the adjusted market value (such as deliberate damage or fraud or misrepresentation by the debtor). [Schedule 2, item 23, subsection 93A(2)] 3.98 The Code currently provides that contravention of particular provisions of the Code will be a breach of a key requirement under section 111, with the credit provider liable for additional penalties in accordance with Part 6 of the Code. 50


Chapter 3 -- Reverse mortgages 3.99 Section 111 is amended to provide that a breach of section 17(15A) will be a breach of a key requirement under section 111. [Schedule 2, items 24 and 25, subsections 111(1) and (2)] 3.100 Credit providers that allow a debtor to nominate a person who may occupy the reverse mortgaged property on the same terms of the debtor (as discussed in paragraphs 3.57 to 3.58 above), must keep records of any nomination or revocation of a nomination by a debtor. [Schedule 2, item 26, subsection 185A(1)] 3.101 A breach of this requirement will attract a criminal penalty of 50 penalty units. [Schedule 2, item 26, subsection 185A(2)] 51


Chapter 4 Small amount credit contracts Outline of chapter 4.1 The Consumer Credit Legislation (Enhancements) Bill 2012 (Enhancements Bill) introduces new requirements for credit providers and persons who provide credit assistance in relation to small amount credit contracts. 4.2 Small amount credit contracts are defined, in general terms, as contracts where the amount of credit provided is less than $2,000 and the term is less than two years. 4.3 The following obligations will apply in relation to small amount credit contracts: · licensees will be required to meet disclosure requirements in relation to their websites and business premises about the availability of alternatives will help consumers to make better and more informed financial decisions and to seek out lower cost alternatives to relatively higher cost short-term credit; · presumptions to inform the responsible lending obligations which will address the risk of debtors entering into a debt spiral, where the amount of their indebtedness increases over time, as a greater proportion of their income is used to meet repayments; and · a prohibition on entering into or arranging contracts for small amounts where the term of the contract is 15 days or less (to allow consumers to generally have at least two income cycles over which to meet repayments). Context of amendments 4.4 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 responsibility for the regulation of credit to the Commonwealth. 4.5 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 53


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 4.6 Under Phase Two, COAG agreed the Commonwealth would consider additional reforms to the regulation of credit, including whether or not to introduce measures to address practices in relation to small amount credit contracts. 4.7 The Enhancements Bill introduces specific obligations in relation to this class of credit contracts because of the particular risks that arise to consumers from their use. In particular there are risks that the repeated or continued use of credit provided through these this form of credit result in consumers entering into multiple contracts where the overall level of indebtedness increases over time so that: · an increasing proportion of their income will need to be used to meet the repayments; and · the capacity of the borrower to use the credit for purposes that can improve their standard of living is severely diminished (and can result in consequent broader impacts, including adverse impacts on the health of the borrower). 4.8 The Enhancements Bill addresses these issues by: · new disclosure requirements -- so that consumers are alerted to alternatives that may avoid the need to enter into a small amount credit contract; and · presumptions in relation to repeat and multiple borrowing, and a prohibition on very short-term lending -- to address the risk of the debtor's liability escalating through entering into a number of small amount credit contracts. Summary of new law 4.9 The Enhancements Bill introduces website disclosure requirements for licensees in relation to small amount credit contracts. 4.10 These obligations will apply to: · licensees who have a website where they represent that they are able to provide credit assistance in relation to small amount credit contracts; and · licensees who have a website that can be used by a consumer to apply for or make an inquiry about a small amount credit contract (where the licensee would be the credit provider). 4.11 The regulations will prescribe the disclosure requirements. It is proposed the disclosure requirements will consist of a short, high impact statement advising the availability of both sources of assistance and alternative no cost or low cost sources of credit. 54


Chapter 4 -- Small amount credit contracts 4.12 The Enhancements Bill will also introduce prohibitions to repeated and continued use of credit provided through small amount credit contracts (the multiple contract prohibitions). 4.13 Licensees will be prohibited from providing credit assistance by either suggesting that a consumer apply for, or assisting a consumer to apply for a short-term credit contract (in general terms, a contract where the credit provider is not an ADI, the credit limit of the contract is $2,000 or less and the term of the contract is 15 days or less). 4.14 Additional responsible lending requirements in relation to small amount credit contracts are to be included: · A licensee must review the account statements of a consumer for the previous 90 days when verifying their financial situation in relation to a small amount credit contract. · Displaceable presumptions will be introduced so that a small amount credit contract, or an increase in the credit limit of such a contract, will be unsuitable where: - the borrower is already in default under another small amount credit contract; or - in the three-month period before the licensee makes their assessment as to suitability, the consumer has been a debtor under two or more small amount credit contracts. Comparison of key features of new law and current law New law Current law Specific obligations will be The NCCP Act currently does not introduced on persons engaging in include any specific disclosure or credit activities in relation to small conduct obligations or prohibitions in amount credit contracts to: relation to small amount credit · disclosure of alternatives to credit; contracts that apply to persons · prohibition of very short-term engaging in credit activities. contracts; and · specific responsible lending obligations. Detailed explanation of new law 4.15 Schedule 3 of the Enhancement Bill introduces a number of additional conduct obligations for persons engaging in credit activities in relation to small amount credit contracts. 55


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 4.16 The obligations in Schedule 3 commence on 1 March 2013. [Item 2, provision 2K in the table in subsection (1)] 4.17 Item 1 of Schedule 3 inserts a definition of short-term credit contract into Schedule 3. A short-term credit contract is defined as being a contract that is not a continuing credit contract, where the credit provider is not an ADI, the credit limit of the contract is $2,000 or less and the term of the contract is 15 days or less. [Schedule 3, item 1, subsection 5(1)] 4.18 This definition may also include any other requirements prescribed by regulations. This power is introduced, first, to address any potential avoidance of the definition that would otherwise prevent a licensee from entering into short term credit contracts, and, second, so there can be consequent changes if necessary following any amendments by regulation to the definition of a small amount credit contract. 4.19 The use of short term credit contracts is considered to be high risk, where the amount of the repayments is dictated by the need to repay the loan balance within a short period (rather than the borrower's capacity to meet those repayments). 4.20 There is a concern that a significant percentage of consumers who currently enter into short term credit contracts are on low incomes, and that the extremely short period of the loan means that the repayment will consume a disproportionate amount of the borrower's income, resulting in a risk of repeat use or financial hardship. Accordingly, restrictions have been introduced in Schedule 3 that prohibit licensees from: · suggesting that a consumer apply, or assisting the consumer to apply, for a short term credit contract or an increase to the credit limit of a short term credit contract (section 124A); · entering into a short term credit contract (section 133CA); or · increasing the credit limit of a short term credit contract (section 133CA). [Schedule 3, item 7, section 124A and item 13, section 133CA] 4.21 A breach of these prohibitions attracts a civil penalty of 2,000 penalty units and a criminal offence of 50 penalty units. 4.22 A definition of small amount credit contract will be included in section 5 of the NCCP Act. It is defined as a credit contract: · that is not a continuing credit contract; · where the credit provider is not an Authorised Deposit-taking Institutions (ADI); · where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations) or less; 56


Chapter 4 -- Small amount credit contracts · where the term of the contract is at least 16 days but not longer than 1 year (or any such number of years as prescribed by the regulations); and · where the contract meets any other requirements that may be prescribed by regulations. [Schedule 3, item 2, subsection 5(1)] 4.23 A power to change aspects of the definition through regulations has been introduced to allow flexibility in the application of the consequent obligations. Credit providers may adopt different legal structures in relation to their contracts according to whether or not they consider it preferable for their contracts to be subject to the obligations applying to small amount credit contracts. The regulation-making power will allow the Commonwealth to respond more promptly to such responses, where necessary. [Schedule 3, item 2, paragraph 5(1(f))] 4.24 Additional responsible lending requirements in relation to small amount credit contracts are to be inserted after subsections 117(1) and 130(1), so that a licensee must review the account statements of a consumer when verifying their financial situation. [Schedule 3, items 4 and 8, subsections 117(1) and 130(1)] 4.25 Where a consumer has an account with an ADI into which their income is paid, the licensee is required to obtain and consider a consumer's account statements relating to the period of at least 90 days prior to making a preliminary assessment under paragraph 115(1)(d) or an assessment under paragraph 128(1)(d). 4.26 This provision seeks to ensure that the licensee considers the income and expenses of the consumer as disclosed by their transaction history in the account statement. It could ordinarily be assumed that licensees would obtain this type of information in order to comply with the responsible lending obligations. However, a specific obligation has been introduced in relation to small amount credit contracts, given, first, the particular risks associated with this product, and, second, the evidence from reviews undertaken by ASIC since the commencement of responsible lending conduct obligations has found that there are inconsistent standards in this sector, resulting in a greater need for statutory direction. 4.27 It is specifically provided that the introduction of this requirement does not mean the licensee does not need to make other inquiries into the consumer's financial situation; for example, the information in the account statement may prompt additional inquiries. 4.28 The requirement to obtain and consider account statements does not mean the licensee needs to review a statement as issued by the consumer's ADI. What is relevant is the information in those statements, whether it be provided through internet access or other means. 57


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 4.29 Schedule 3 also introduces two presumptions in relation to suitability under the responsible lending conduct provisions in Chapter 3 of the Credit Act. It will be presumed that a small amount credit contract, or an increase in the credit limit of such a contract, will be unsuitable where: · the borrower is already in default under another small amount credit contract; or · in the three-month period before the assessment occurs, the consumer has been a debtor under two or more small amount credit contracts. [Schedule 3, items 5, 6, 11 and 12, subsections 118(3), 123(3), 131(3) and 133(3)] 4.30 The effect of the presumptions is that, unless the contrary is proven, a consumer would be considered to be in substantial hardship. The provisions therefore place an onus on a licensee to establish that the short term credit contract was suitable for the consumer. These provisions provide targeted reform to address concerns in relation to both debt spirals and recurrent use of small amount credit contracts. The more credit contracts that the borrower takes out within a short period of time (whether concurrently or successively), the more likely it is that income is being continually diverted to meet the repayments, and the greater the risk that they may experience consequent financial hardship. 4.31 The presumptions have effect in this way as the operation of the responsible lending obligations means that a loan can be unsuitable because it results in substantial hardship, even if it meets the consumer's requirements and objectives. The use of presumptions, rather than a prohibition, allows for greater flexibility and acknowledges that there may be situations where a refinance would not result in financial hardship (such as where it results in lower repayments that the consumer can afford). 4.32 Conversely, even if a consumer can repay a small amount credit contract (or other type of credit contract) without such hardship it does not mean that the contract necessarily or invariably meets their requirements and objectives. A licensee would still need to make additional inquires to meet their statutory obligations; for example, some research has found that some consumer have conflicted objectives in that they still use small amount credit contracts when their preference would be to avoid this outcome if at all possible. 4.33 Schedule 3 introduces a requirement for licensees to display information or ensure their website is in accordance with the regulations where: · the licensee represents that they provide or are able to provide credit assistance to consumers in relation to small amount credit contracts; or 58


Chapter 4 -- Small amount credit contracts · the licensee represents that they enter into or are able to enter into small amount credit contracts with consumers under which the licensee would be the credit provider. [Schedule 3, item 7, section 124B and item 13, section 133CB] 4.34 The location and content of the information is to be prescribed by the regulations, so as to enable these requirements to be specified in a way that allows for flexibility and maximises the impact of the information on the consumer. For example, the regulations may prescribe a notice to be displayed inside the licensee's business premises, or require a hyperlink to a Government website to be provided on the licensee's website. 4.35 Schedule 3 introduces a prohibition on a licensee from entering or offering to enter into a small amount credit contract if the consumer is a class of consumer prescribed by regulations and the repayments required would not meet the requirements set out in the regulations. [Schedule 3, item 13, section 133CC] 4.36 This provision is intended to enable the future implementation of a `Protected Income Amount' requirement. This concept was initially raised in submissions to the Parliamentary Committees. It would, for example, enable the Government to prohibit a credit provider from providing a loan to a recipient of Centrelink benefits under which the repayments would exceed 20 per cent of their income (and irrespective of whether the credit contract otherwise was suitable within the meaning of Chapter Three). 4.37 A breach of this provision attracts a civil penalty of 2,000 penalty units and a criminal penalty of 50 penalty units. 4.38 A court will be able to make an order under section 180 of the Credit Act for breaches of sections 124A and 133CA, including an order that would prevent credit providers and providers of credit assistance from profiting where they breach the prohibitions in these sections. This approach is intended to create a greater deterrent to persons who might otherwise seek to engage in conduct in breach of these provisions, on the grounds that they may have no liability to the consumer, as they may not suffer any loss, or any easily demonstrable loss, from entering into such a contract. [Schedule 3, item 7, section 124A and item 13, section 133CA] 4.39 The Minister is required to commission, as soon as practicable after 1 July 2015, a review of the operation of provisions in the NCCP Act and the Code in relation to small amount credit contracts, including the provisions imposing caps on costs. The review must be undertaken by three persons who, in the Minister's opinion, possess appropriate qualifications to undertake the review. [Schedule 3, item 15, section 335A] 59


Chapter 5 Caps on costs etc. for credit contracts Outline of chapter 5.1 The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) introduces new obligations to provide for a tiered cap on the costs that can be charged under credit contracts. 5.2 The key elements of these obligations are: · credit providers under small amount credit contracts (in general terms, contracts where the amount of credit is less than $2,000 and the term is less than one-year) will only be able to charge the following amounts: - an establishment fee that can be a maximum of 20 per cent of the adjusted credit amount (defined as, in practice, the amount of credit the debtor receives in their hand); - monthly fees that can be a maximum of 4 per cent of the adjusted credit amount; - fees payable in the event of default; and - any government fee, charge or duty payable in relation to the contract; · all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent (with the inputs into the annual cost rate adjusted according to the size of the loan); and · the introduction of penalties against credit providers for breaching either cap, and penalties against providers of assistance for suggesting credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap. Context of amendments 5.3 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 responsibility for the regulation of credit to the Commonwealth. 61


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 5.4 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence. 5.5 Under Phase Two, COAG agreed the Commonwealth would consider whether or not to regulate the costs that can be charged under credit contracts. 5.6 The Enhancements Bill introduces caps on credit contracts to address specific risks of financial detriment or harm to consumers, through the use of relatively high-cost credit. 5.7 The risk to a consumer of this financial detriment increases according to the following factors: · the borrower's income -- the lower the income the greater the reduction in income that will result from having to meet repayments under a credit contract (noting that a significant percentage of borrowers who use these products will have very low incomes); · the term of the credit contract -- the shorter the term the less income the borrower can expect to receive from other sources while they need to repay it, so that there is less opportunity for a borrower to receive sufficient income to either repay the debt or avoid an immediate need for additional credit to meet expenses temporarily deferred in order to make that repayment; · the number of credit contracts -- the more credit contracts that the borrower takes out within a short period of time (whether concurrently or successively), the more likely it is that income is being diverted to meet repayments, rather than ongoing expenses; and · the level of costs charged by the credit provider -- there can be significant differences in the level of costs charged by credit providers, in part reflecting the difficulties some debtors have in being able to obtain credit from other credit providers (with the result they enter into contracts irrespective of the costs being charged). 5.8 The combination of these factors can result in such a reduction in income that the borrower may, in a very short period, be placed in a position where the debt cannot be repaid, or can only be repaid through a significant drain on the borrower's financial resources. 5.9 The tiered approach to the cap on costs allows credit providers to receive a greater return for small amount credit contracts, given the 62


Chapter 5 -- Caps on costs etc. for credit contracts higher establishment costs they may incur relative to the amount of the loan. 5.10 The Senate Economics Committee and the Joint Parliamentary Committee on Corporations and Financial Services (the Parliamentary Committees) both reviewed the operation of the cap on costs. Both Committees supported the need for a restriction on costs to protect borrowers, but considered that the level at which it was set should be reconsidered to address concerns about the viability of the industry. 5.11 The Senate Economics Committee in its report on the Enhancements Bill stated at paragraph 2.46: There is, therefore, a sound and principled case for national legislation to curb excessive interest rates, fees and charges by the payday loan industry in Australia. 5.12 Consistent with the observations and recommendations of the Parliamentary Committees, it is proposed to create a tiered cap on costs to balance the interests of consumers with the viability of the industry. 5.13 Lenders argued that the high establishment costs for short term credit contracts are not recouped under the current interest rate caps and the model set out in the Enhancements Bill. The avoidance of caps through various artificial legal constructs is common in all relevant jurisdictions. 5.14 The tiered model seeks to accommodate the costs of lenders as they transition between the caps while targeting specific problems in the market. In particular, the amendments introduce prohibitions on providing a short term credit contract, increase the maximum amount of permitted fees for a small amount credit contract and provide for a bridging cap on costs for a medium amount credit contract. Table 5.1 Summary of Tiered Cap on Costs CREDIT CONTRACT PERMITTED COSTS Short Term Credit Contracts Provision of credit contract is prohibited. Applies to a credit contract that: is not a continuing credit contract; where the credit provider is not an Authorised Deposit-taking Institution (ADI), the credit limit is $2,000 or less; and the term of is 15 days or less. 63


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 CREDIT CONTRACT PERMITTED COSTS Small Amount Credit Contract 20 per cent establishment fee plus 4 per cent monthly Applies to credit contracts: fee on the original value of that is not a continuing credit the loan for example contract; maximum total costs of where the credit provider is not an $24 on a $100 loan for a ADI, term of 16 days. the credit limit of the contract is $2,000 or less; and 200 per cent total cap on a maximum term of one-year. charges for all lending. Medium Amount Credit Contract Annual cost rate must not exceed 48 per cent, with Applies to credit contracts that: the formula allowing for an is not a continuing credit contract; additional $400 fee to be where the credit provider is not an charged. ADI, the credit limit of the contract is between $2,000 to $5,000; and a maximum term of two years. All Remaining Credit Contracts Annual cost rate must not exceed 48 per cent. Excludes ADIs. Summary of new law 5.15 Schedule 4 of the Enhancements Bill introduces new obligations in relation to the restricting the maximum amount that can be charged in under both small amount credit contracts and all other credit contracts regulated by the Code. 5.16 The obligations will commence on 1 July 2013. 5.17 Schedule 4 will introduce the following obligations: · a cap on small amount credit contracts so that the maximum cost (other than in the event of default) will be the total of: - 20 per cent of the amount of credit the debtor receives in their hand; - monthly fees of four per cent of this amount; and - any government fees, charges or duties payable in relation to the contract; 64


Chapter 5 -- Caps on costs etc. for credit contracts · all other credit contracts are subject to a cap so that the annual cost rate (including credit fees and charges and interest charges) cannot exceed 48 per cent; · credit providers are liable to penalties for breaching either cap; · providers of credit assistance who suggest credit contracts, or assisting the consumer to apply for credit contracts where the cost would exceed either cap are liable to penalties (including being required to refund any fees or charges paid by the consumer); and · a number of provisions are introduced to address specific avoidance practices that have developed in response to the operation of similar caps currently in force in some Australian States and the Australian Capital Territory. Comparison of key features of new law and current law New law Current law Specific provision s will be The NCCP Act currently does not introduced: regulate the maximum amount that · to restrict the maximum amount can be charged under credit contracts. that credit providers can charge In the Australian Capital Territory, under a credit contract; and New South Wales and Queensland, · to introduce complementary there is currently in force a cap of obligations to further compliance 48 per cent which includes interest, with the caps on costs. fees and charges. In Victoria there is a 48 per cent interest rate cap excluding fees and charges. There is no cap in place in the Northern Territory, South Australia, Tasmania or Western Australia. Detailed explanation of new law Schedule 4 -- Caps on costs etc for credit contracts 5.18 The obligations in Schedule 4 will commence on 1 July 2013. [Item 2, provision 3 in the table in subsection 2(1)] 5.19 The definition of small amount credit contract will be included in section 5 of the NCCP Act. It is defined as a credit contract: · that is not a continuing credit contract; 65


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · where the credit provider is not an Authorised Deposit-taking Institution (ADI); · that is not secured by a mortgage (over any type of property); · where the credit limit is a maximum of $2,000 (or any other figure prescribed by the regulations); · where the term of the contract is two years or less (or any term prescribed by the regulations); and · where the contract meets any other requirements that may be prescribed by regulations. [Schedule 3, item 1, subsection 5(1)] 5.20 Section 17 of the Code prescribes disclosure requirements for credit providers. The changes proposed in relation to small amount credit contracts means that credit providers will only be able to impose an upfront establishment fee and monthly fees (and not interest charges in respect of this class of contracts. As a result, there is a consequent need to exempt providers of small amount credit contracts from the disclosure requirements that relate to annual percentage rates and interest charges. [Schedule 4, item 1, subsections 17(4) to (6)] 5.21 Section 23A will introduce prohibited monetary obligations that only apply to small amount credit contracts. As a result amendments are introduced to, first, change the heading for section 23 (to clarify the distinction between that section and section 23A), and, secondly, to amend section 23 so that it does not apply to small amount credit contracts. [Schedule 4, items 2 and 3, section 23 and subsection 23(1)] 5.22 Section 23A will introduce a prohibition on a provider of a small amount credit contract from charging, under the contract, the following amounts: · interest charges (irrespective of whether there has been a default by the debtor); · fees and charges prohibited by the Code (which would not include the establishment fee and monthly fees permitted under section 31A); or · an amount that is greater than the amount of a permitted fee and charge (for example, overcharging a government fee). [Schedule 4, item 4, section 23A] 5.23 Subsection 23A(2) provides a specific penalty for contravention of this requirement. A credit provider who, under a small amount credit contract, imposes a prohibited liability will lose their entitlement to all fees and charges (including the establishment fee and monthly fees). The credit provider is therefore not only required to refund the amount of any excess fee, charge or cost, but cannot retain any amounts, including those 66


Chapter 5 -- Caps on costs etc. for credit contracts fees that would otherwise be permitted under section 31A. The debtor can recover any such amounts as a debt. [Schedule 4, item 4, subsection 23A(2)] 5.24 The purpose of this provision is to create a greater financial incentive for credit providers to comply with the prohibition. The nature of small amount credit contracts means that if credit providers charge amounts in breach of the prohibition they are likely to be relatively low in dollar terms. Allowing a penalty whereby the consumer can recover all fees and charges that were imposed will therefore encourage stricter compliance. 5.25 Section 24 of the Code will be amended to introduce a criminal penalty of 100 penalty units for a breach of section 23A, or for a credit provider requiring or accepting payments in breach of the prohibition. [Schedule 4, items 6 and 7, subsections 24(1A) and (2)] 5.26 The effect of this amendment is that a credit provider who breaches the prohibition in section 23A will have committed an offence under subsection 24(1A), with the contravention also being an offence of strict liability under subsection 24(2). A contravention of section 23A will be an offence of strict liability to encourage credit providers to maintain rigid compliance with the cap on costs (given that the amount they charge in respect of a small amount credit contract is within their control). 5.27 In order for the caps on small amount credit contracts to be effective it is considered necessary to introduce strict penalties against providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap. This will address situations where small amount credit provider have commercial relationships with brokers who may direct consumers to that credit provider irrespective of the cost of their products, or where the credit provider has adopted a legal structure to avoid the cap, but where the broker may not be willing to assume the same risks as the credit provider. [Schedule 4, item 8, section 24A] 5.28 The introduction of section 24A has resulted in a need to change the heading of section 24, to clarify that the two sections apply to prohibited monetary obligations in relation to credit providers and providers of credit assistance respectively. [Schedule 4, item 5, section 24] 5.29 Part 2 Division 3 of the Code prescribes requirements in relation to the charging of interest under credit contracts. The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to exempt small amount credit contracts from this Division. [Schedule 4, item 9, section 27A] 5.30 Section 31 of the Code provides a power to make regulations prohibiting credit providers from imposing particular credit fees of 67


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 charges, or particular classes of such fees or charges. The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose any credit fees of charge other than those expressly permitted under section 31A. There is a consequent need to amend this provision so that the regulation-making power does not apply to small amount credit contracts. [Schedule 4, items 10 and 11, section 31] 5.31 Section 31A prohibits a provider of a small amount credit contract from charging fees and charges other than: · an establishment fee that can be a maximum of 20 per cent of the adjusted credit amount; · monthly fees that can be a maximum of 2 per cent of the adjusted credit amount; · fees payable in the event of default; and · a government fee, charge or duty payable in relation to the contract. [Schedule 4, item 12, section 31A] 5.32 The adjusted credit amount is defined in section 204 of the Code as the first amount of credit that is to be provided under the contract (excluding fees). The meaning of this term is discussed in detail at paragraphs 5.81 and 5.82, but in substance it refers to the amount of money that the debtor will receive under the contract. 5.33 The prohibition applies to all fees and charges imposed or provided for under the contract. It is therefore not restricted to credit fees and charges as defined in section 204 of the Code. The use of the broader term is deliberately used to restrict the debtor's liability under a small amount credit contract, by only allowing credit providers to charge those amounts specifically listed in subsection 31A(1). 5.34 The amendments to the cap for small amount credit contracts will result in the maximum amount that can be charged being doubled. Setting the cap at this level would allow for a viable small amount lending industry to continue while meeting the Government's objective of indirectly encouraging longer term loans. 5.35 This is demonstrated by Table 5.2 below, which compares the effect of the model in the Enhancements Bill with other models proposed to the Joint Parliamentary Committee on Corporations and Financial Services by individual credit providers, and by an industry body for small amount lenders, the National Financial Services Federation (NFSF). 68


Chapter 5 -- Caps on costs etc. for credit contracts 5.37 These other models were: · an upfront fee of 28 per cent of the adjusted credit amount, and a monthly fee of 2 per cent of this amount -- by the NFSF1; · an upfront fee of 27 per cent of the adjusted credit amount, and a monthly fee of 3 per cent of this amount -- by Cash Stop Financial Services Pty Ltd2; and · an upfront fee of 25 per cent of the adjusted credit amount, and a monthly fee of 3 per cent of this amount -- by Money3 Corporation Limited3 . Table 5.2 Comparison of return under different models 3 months 4 months 5 months 6 months 7 months 8 months 9 months Charges under a 20/4 32% 36% 40% 44% 48% 52% 56% formula Charges under a 27/3 36% 39% 42% 45% 48% 51% 54% formula Charges under a 25/3 34% 37% 40% 43% 46% 49% 52% formula Charges under a 28/2 34% 36% 38% 40% 42% 44% 46% formula Note: Charges are expressed as a percentage of the adjusted credit amount. 5.38 Table 5.2 demonstrates that the `20/4 model' provides a higher return than the other models after a period of time of between five and nine months. Restrictions on fees and charges for small amount credit contracts 5.39 Paragraph 31A(1)(a) currently includes a requirement for the permitted establishment fee to reflect the credit provider's costs in respect of that contract. This means that if the credit provider's costs are less than 20 per cent of the adjusted credit amount, than they are restricted to this 1 Submission by the National Financial Services Federation to the Parliamentary Joint Committee on Corporations and Financial Services on the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, page 10. 2 Submission by Cash Stop Financial Services Pty Ltd on the National Consumer Credit Protection Amendment (Enhancements) Bill 2011 Exposure Draft, page 3. 3 Submission by Money3 Corporation Limited on the National Consumer Credit Protection Amendment (Enhancements) Bill 2011 Exposure Draft, page 3. 69


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 lower figure. It is proposed to simplify this provision, so that credit providers can charge a maximum of 20 per cent in all cases. 5.40 Items 12 and 23 replace the definition in paragraph 31A(1)(a) of the permitted establishment fee to remove this limitation, and provides that 20 per cent of the adjusted credit amount can be charged as an establishment fee. [Schedule 4, items 12, subsection 31A(2) and item 23, subsection 204(1)] 5.41 These items also include a prohibition on imposing a permitted establishment fee if refinancing the original small amount credit contract. This prohibition addresses the conduct of some providers in regularly refinancing consumers to increase the amount of the debt. 5.42 Items 12 and 24 increase the permitted monthly fee for a small amount credit contract in subsection 31A(3) from 2 per cent to 4 per cent. [Schedule 4, items 12, subsections 31A(3) and item 23, subsection 204(1)] 5.43 Table 5.3 below provides examples of the permitted establishment and monthly fees under two loans of $100 with terms of 4 and 5 weeks respectively. Table 5.3 Comparison of maximum amount repayable on $100 loans of four and five weeks Loan Loan Permitted Permitted monthly Maximum term amount establishment fee fee repayment 4 weeks $100 $20 $4 $124 5 weeks $100 $20 $8 (that is 2 x $4) $128 5.44 A prohibition is introduced on a credit provider or a person prescribed by regulations from requiring or accepting a payment by the debtor of a fee or charge in relation to a small amount credit contract, or the provision of the amount of credit under a small amount credit contract, or a thing that is connected with a small amount credit contract or the provision of the amount of credit under such a contract. [Schedule 4, item 12, section 31B] 5.45 This prohibition operates as an anti-avoidance mechanism. This addresses both historic and current concerns about credit providers in the short term lending market using sophisticated legal techniques to avoid existing State and Territory caps on costs. Avoidance mechanisms include a `broker' model, using third parties to obtain additional fees and charges by way of brokerage, the requirement to purchase a product at an inflated price in order to obtain a loan, and the requirement to obtain, from a third party, verification that the applicant is creditworthy. Allowing for the prohibition to extend to third parties is necessary to prevent such avoidance techniques migrating to small amount credit contracts. 5.46 The Enhancements Bill introduces a cap on costs for all other contracts other than small amount credit contracts. Section 32A will introduce a prohibition on a credit provider entering into a credit contract 70


Chapter 5 -- Caps on costs etc. for credit contracts where the annual cost rate exceeds 48 per cent. [Schedule 4, item 13, subsection 32A(1)] 5.47 As with the caps on small amount credit contracts, strict penalties are introduced for providers of credit assistance where they suggest or arrange a credit contract, and they either know or are reckless as to whether the cost charged under that contract will exceed the cap. [Schedule 4, item 13, subsections 32A(2) and (3)] 5.48 The 48 per cent cap does not apply in the following circumstances: · where the credit provider is an ADI (to give this class of credit providers certainty where they may otherwise inadvertently breach the cap, particularly in relation to contracts where both credit and debit facilities are provided, and noting that they are subject to a broader range of prudential and regulatory oversight than other classes of credit providers); · where the credit contract is a small amount credit contract (as the cap in section 31A will apply); or · where the credit contract is a bridging finance contract (where a combination of a short term and relatively high upfront costs may result in the 48 per cent cap being exceeded). [Schedule 4, item 13, subsection 32A(4)] 5.49 A definition of a bridging finance contract is included in the Enhancements Bill. It is defined as a contract where: · at the time the contract is made the debtor: - reasonably expects to receive a lump sum before the end of the contract; and - intends to use that sum as far as possible to meet their obligations under the contract; · the contract is for a term of two years or less; and · if the regulation prescribe any conditions, those conditions are met. [Schedule 2, item 5, subsection 204(1)] 5.50 Section 32AA provides that a credit provider is considered to have exceeded the annual cost rate of 48 per cent if the annual cost rate would have been exceeded when the contract was entered into but the calculation was made on the basis that: · the annual percentage rate under the contract would have been increased; or · there was an increase in the credit cost amount as a result of an increase, as prescribed by the regulations, in the amount of 71


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 a fee and charge (as referred to in subsection 32B(3)), including an increase from zero dollars where no fee was previously charged. [Schedule 4, item 13, section 32AA] 5.51 Section 32AA applies to a credit provider who is party to a credit contract other than a small amount credit contract or bridging finance contract, provided they are not an ADI. 5.52 The difference in approach between increases in the annual cost rate resulting from changes to the annual percentage rate and from increases in fees and charges reflects the greater potential compliance burden for credit providers in having to monitor changes to the annual cost rate from the imposition of fees. The fees and charges that may be prescribed by the regulations are likely to include those developed by credit providers to avoid the cap on costs, with a need for ongoing flexibility as new techniques are developed. 5.53 The prohibition ensures that credit providers can apply consistent compliance practices across their portfolio of credit contracts, with the need to review the impact of particular fees and charges in specific and limited circumstances only. A breach of this prohibition attracts a criminal penalty of 50 penalty units. 5.54 Section 32B sets out the formula for calculating whether or not the 48 per cent annual cost rate has been exceeded. This formula largely adopts the model currently in force in New South Wales, pursuant to the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Act 2011. [Schedule 4, item 13, section 32B] 5.55 The use of an existing formula avoids the need for changes by credit providers who currently have developed practices to comply with the New South Wales cap on costs. 5.56 Section 32B will, however, allow for amounts to be prescribed by regulation that would need to be taken into account in calculating the annual cost rate. The introduction of this regulation-making power will enable the Government to quickly respond to attempts to circumvent the objective of these reforms. [Schedule 4, item 13, paragraph 32B(3)(c)] 5.57 Subsection 32B(4A) provides the flexibility to exclude, by regulations, certain fees or charges from a class of credit contracts that would otherwise be required to be included in the credit cost amount. This complements section 32AA, and will allow for fees and charges to be taken into account in applying the annual cost rate over the life of the contract, where an assessment has been made that the fee or charges are of a nature that they are relevant to the cost of credit and therefore should be included in the annual cost rate. [Schedule 4, item 13, subsection 32B(4A)] 72


Chapter 5 -- Caps on costs etc. for credit contracts 5.58 This regulation-making power is included in recognition, in the Australian jurisdictions that have a cap on costs, of the development of a diverse range of methods of charging the borrower additional amounts that do not meet the definition of costs to be included in calculating the cap in State or Territory legislation. Credit providers have adopted a range of practices in order to be able to generate a return of more than 48 per cent while still complying with the cap. 5.59 A contravention of the annual cost rate requirement in section 32A will be a consequential breach of the current prohibition in section 23 on credit providers charging amounts in excess of the monetary liabilities allowed under the Code. 5.60 Subsection 34(6) of the Code prescribes requirements in relation to the disclosure of interest charges in a statement of account. The changes proposed in section 23A would mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to exempt small amount credit contracts from subsection 34(6). [Schedule 4, item 14, subsection 34(6)] 5.61 A credit provider under a small amount credit contract (or any person prescribed by the regulations) will be prohibited from receiving any part of the amount of the credit provided under the contract. [Schedule 4, item 15, subsection 39A(1)] 5.62 Any amount of credit provided under the contract retained or paid to the credit provider or to any person prescribed by the regulations is defined as a prohibited credit amount. [Schedule 4, item 25, subsection 204(1)] 5.63 The intention of this prohibition is to address existing practices that have developed following the introduction of similar caps on credit contracts in some States and the Australian Capital Territory. The purpose of the provision is to prevent credit providers from increasing the amount that must be paid by the debtor under the contract through, for example, practices such as requiring the debtor to also purchase goods or services at inflated prices, with the cost of those goods or services included in the amount of credit provided under the contract. 5.64 This practice enables a credit provider to obtain a higher return in two ways: first, the debtor must pay an inflated price for the goods relative to the cost to the credit provider of providing them; and, second, the debtor pays interest on the cost of the goods or services. 5.65 Similar arrangements between credit providers and third parties have developed to avoid the restriction on costs, so that the amount of credit is increased by fees or amounts payable to those third parties (with commercial arrangements between those parties in relation to the charging of the fees or costs). The regulation-making power, that will enable payments to prescribed third parties to be included in the prohibited credit 73


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 amount, will enable the Government to respond promptly to any such practices. [Schedule 4, item 15, paragraph 39A(1)(b)] 5.66 Subsection 39A(2) provides that this prohibition does not apply to the permitted establishment and monthly fee, government fees or charges, credit used to refinance any amount of credit provided under another small amount credit contract, or to any types of payments permitted by regulations (so that credit providers can include those charges in the amount of credit provided (although subject to other restrictions). [Schedule 4, item 15, subsection 39A(2)] 5.67 The regulation-making power will enable exemptions from the prohibition to be made where it would be appropriate for the credit provider to pass on the cost to the debtor. [Schedule 4, item 15, paragraph 39A(2)(c)] 5.68 The effect of Section 39B is to cap the amount the credit provider can charge by way of default fees, by specifying that the maximum amount that can be recovered under a contract in the event of default by the borrower must not exceed an amount that is twice the adjusted credit amount. [Schedule 4, item 15, subsection 39B] 5.69 A credit provider is allowed to retain money used to pay for a refinance of some or all of the credit provided under another small amount credit contract. [Schedule 4, item 15, paragraph 39A(2)(ba)] 5.70 The effect of this provision is that the total of the permitted establishment and monthly fees and the default fees can, at most, only be equal to twice the adjusted credit amount. For example, in relation to a small amount credit contract where the adjusted credit amount was $1000 and the period of the contract was four months, the total of the establishment and monthly fees would be $180. If the debtor then defaulted the total amount the credit provider could recover would be $1000, or a maximum of $820 in default fees. 5.71 If a term of a small amount credit contract allows the credit provider to recover default fees in excess of the maximum amount, that term or provision is void to the extent it authorises the credit provider to collect the excess. The credit provider would, however, still be allowed to receive or retain default fees up to the maximum amount. [Schedule 4, item 15, subsection 39B(2)] 5.72 The rate at which default fees can be charged is not regulated by the Enhancements Bill. However, credit providers would be subject to other requirements that apply more broadly (including common law principles that the default fees must reflect their loss from any default by the debtor). 5.73 The restriction on the maximum amount that can be recovered under a contract -- so that this figure must not exceed an amount that is 74


Chapter 5 -- Caps on costs etc. for credit contracts twice the adjusted credit amount -- does not apply to enforcement expenses. [Schedule 4, item 15, subsection 39B(3)] 5.74 The Code already regulates the way in which enforcement expenses can be charged, and expressly provides, in section 107, that the amount must not exceed those reasonably incurred by the credit provider. 5.75 A regulation-making power is to be introduced that would require a credit provider to do specified things, where they are party to a small amount credit contract that is being repaid by a direct debit, and there has been a failure in the direct debit request (and payment has not occurred). 5.76 This provision is intended to address the risk of fees accruing to a debtor's account through repeated unsuccessful use of a direct debit. It is contemplated the regulations would require the credit provider to try and make contact with the debtor in order to clarify why the direct debit is being rejected (in circumstances where a debtor is in default and likely to be in financial hardship). The exact nature of the obligations is to be determined following specific consultations on this issue. A breach of this provision attracts a criminal penalty of 50 penalty units. [Schedule 4, item 15, section 39C] 5.77 The amendments will provide that a contravention of the annual cost rate requirements in section 32A and 32AA will be a breach of a key requirement under section 111. Under section 111 a court can penalise the credit provider by finding that they should forfeit up to a maximum of all interest charged under the contract (and not simply reduce the interest charges to 48 per cent). This recognises that the Government has intended to create a significant disincentive to credit providers exceeding the annual cost rate of 48 per cent or the other cap on costs. If, for example, the credit provider was only at risk of losing the amount charged in excess of the annual cost rate some credit providers may consider the potential gains that can still be realised are sufficient to engage in conduct in breach of the prohibition. They may be influenced particularly when they are dealing with vulnerable consumers who are less likely to complain to ASIC. [Schedule 4, items 16 and 17, subsection 111(1) and paragraph 111(2)(f)] 5.78 There are a number of key requirements that a credit provider can breach other than in relation to prohibited monetary obligations. 5.79 The changes proposed in section 23A mean that providers of small amount credit contracts will not be able to impose interest charges. As a result there is a consequent need to modify section 114, which sets out the orders a court can make where a credit provider has breached a key requirement in relation to a small amount credit contract. 5.80 The Enhancements Bill therefore makes consequential amendments to section 114 as follows: 75


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · small amount credit contracts are excluded from subsection 114(1) (which enables orders to be made in relation to interest charges payable under a credit contract); and · subsection 114(1A) is inserted, which provides that the maximum penalty that a court may impose is the total of the permitted establishment and monthly fees payable under the contract. [Schedule 4, items 18 and 19, subsections 114(1) and (1A)] 5.81 The term adjusted credit amount means, in relation to a small amount credit contract, the first amount of credit that is, or is to be, provided under the contract. [Schedule 4, item 20, subsection 204(1)] 5.82 The adjusted credit amount is defined by reference to the first amount of credit provided under the contract, and will typically be the amount of money the borrower receives in their hand. The credit provider will determine this sum as the amount they are prepared to lend to the borrower, typically as a result of undertaking the assessment required by the responsible lending obligations in Chapter 3 of the Credit Act. 5.83 The establishment fee and monthly fee must be calculated as 20 per cent and 4 per cent respectively of the adjusted credit amount. The adjusted credit amount would therefore exclude: · any fees that the credit provider may be considering financing under the contract; · the amount of any prohibited credit amount, where there is a contravention of subsection 39A(1); and · any other amounts that may be prescribed by the regulations. 5.84 The operation of this provision is illustrated by the following examples. Example 5.1 A consumer seeks a loan for $1000. They can pay an establishment fee from their existing funds. The consumer will enter into a contract under which the amount of credit provided is $1000. The adjusted credit amount is also $1000. The consumer can be charged a permitted establishment fee of 20 per cent of the adjusted credit amount (or $200), and permitted monthly fees of 4 per cent of the adjusted credit amount (or $40). A consumer seeks a loan for $1000. They are unable to pay an establishment fee from their existing funds The consumer will enter into a contract under which the adjusted credit amount is $1000. 76


Chapter 5 -- Caps on costs etc. for credit contracts The consumer can be charged a permitted establishment fee of 20 per cent of the adjusted credit amount (or $200), and permitted monthly fees of 4 per cent of the adjusted credit amount (or $40). The amount of credit provided under the contract will therefore be $1200. 5.85 The definition of a medium amount credit contract will be included in the Enhancements Bill. A medium amount credit contract is a credit contract that meets the following criteria: · it is not a continuing credit contract; · the credit provider is not an ADI; · the credit limit of the contract is at least $2,001 but not more than $5,000 (or another amount prescribed by the regulations); · the term of the contract is at least 16 days but no longer than two years (or number of years as prescribed by the regulations); and · the contract meets any other requirement prescribed by the regulations. 5.86 The definition can therefore be varied through the use of regulations. This is required to address any potential avoidance of the definition and related compliance requirements. [Schedule 4, item 22, subsection 204(1)] 5.87 The Enhancements Bill will insert a number of `signpost' definitions, referring to terms that are central to the operation of these provisions and specifying the sections in which they appear. These terms are annual cost rate, credit cost amount, permitted establishment fee, permitted monthly fee, prohibited credit amount and small amount credit contract. [Schedule 4, items 21, 22, 23, 24, 25 and 26] 77


Chapter 6 Consumer Leases Outline of chapter 6.1 The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (the Enhancements Bill) introduces new requirements for persons who engage in credit activities in relation to consumer leases. The key amendments relate to: · the form of consumer lease documents; · obligations on the lessor to provide statements of account -- both ongoing and at the end of the lease; · changes to obligations under a consumer lease; · changes on the grounds of hardship and on the grounds the consumer lease was unjust; · the rights of the lessor in regards to repossessing goods under a consumer lease; · terminating a consumer lease; · enforcement procedures and expenses; · the liability of lessors for misrepresentations by suppliers of the leased goods; and · offences for false or misleading representations and for harassment in relation to consumer leases. Context of amendments 6.2 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. 6.3 In phase one, the National Consumer Credit Protection Act 2009 (the NCCP Act) introduced a Commonwealth statutory framework for the regulation of lenders and brokers. Under phase two, COAG agreed the Commonwealth would consider reforms to the regulation of consumer leases under the National Credit Code (the Code). 79


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 6.4 Leases that contain a right or option to purchase are functionally the same as a credit contract and are therefore deemed to be credit contracts by the Code in section 9. 6.5 Part 11 regulates consumer leases where there is no right or obligation to purchase the leased goods. However, the different regulatory treatment of consumer leases and credit contracts has led to the provision of finance through consumer leases because of the preference of the provider to be subject to a more limited range of obligations that can be inconsistent with the requirements of the consumer. 6.6 The difference in regulation of consumer lease arrangements and other consumer credit contracts stems from the different nature of the products. However, in respect of the majority of the obligations under the Code, there is little rationale for varying treatment. 6.7 Some of the main regulatory differences between the two products include: · the form of consumer leases; · the obligation to provide an information statement or statement of account; · the content of the disclosure requirements; · liability for conduct such as false and misleading representations; and · the rights of lessees and lessors in respect of enforcement proceedings. 6.8 There is a systemic risk that consumers will enter into leases where they mistakenly believe that they have an ability to buy the goods under the consumer lease when this is not the case, or where they are under an obligation to make continuing payments in order to have continued use of the goods even where they may already have paid more than their cash value. 6.9 Regulatory arbitrage has also led to adverse competitive impacts on suppliers of credit contracts relative to suppliers of consumer leases, where their products may be cheaper than a consumer lease but this would not be readily apparent to or discoverable by the consumer. Summary of new law 6.10 Schedule 5 of the Enhancements Bill addresses the current risks arising from the regulatory arbitrage arising from the lower level of obligations applying to lessors. It extends, as appropriate, the consumer protection measures that currently apply to credit contracts to consumer 80


Chapter 6 -- Consumer leases leases. A comparison table of the provisions of the Code which are being applied to consumer leases is included at paragraph 6.81. 6.11 Schedule 5 of the Enhancements Bill introduces the following amendments in respect of the following matters: · amendments to Division 2: form of and information to be included in consumer leases; · introduction of a new Division 4: fees and charges under a consumer lease; · introduction of a new Division 5: the lessor's obligation to account including the provision of ongoing statements of account, and end of lease statements; · introduction of a new Division 6: certain transactions not to be treated as consumer leases; · introduction of a new Division 7: changes to obligations under consumer lease arrangements including changes by agreement, as well as changes on the grounds of hardship and unjust transactions; · introduction of a new Division 8: repossession of goods, termination of a consumer lease and enforcement procedures; · introduction of a new Division 9: introducing the concept of linked lessors and the liability of the lessor for a suppliers' misrepresentation; · introduction of a new Division 10: regulate specific conduct relating to consumer leases -- namely, false or misleading representations and harassment; · introduction of a new Division 11: relocating the deeming provision which extends Part 12 relating to miscellaneous matters to consumer leases · amendments to Part 13 of the Code: introduce new defined terms to reflect the new obligations imposed by the Amendment Bill; and · minor technical amendments to the Code. 6.12 The Enhancements Bill will also introduce consequential and technical changes to the provisions applying to credit contracts. 81


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Comparison of key features of new law and current law New law Current law A consumer lease: A consumer lease must be in writing · must be in written form; and signed by the lessee under · must be signed by both the lessor section 173. and lessee; · may be made up of multiple documents; and · may be made in a form other than in writing. A unilateral alteration of a lease No equivalent for consumer leases. document by the lessor will be void, The requirement only applies to unless the lessee agrees to the credit contracts under section 19 of change. the Code. The new law will prohibit lessors No equivalent for consumer leases. from overcharging fees payable under The requirement only applies to a consumer lease. credit contracts under sections 31 and 32 of the Code. Lessors are required to provide: No equivalent for consumer leases. · an ongoing statement of account The obligation to provide an if requested by the lessee; and ongoing statement of account only · an end of lease statement. applies to credit contracts under section 33 of the Code. Consumer leases can be changed on Part 4 Division 3 previously applied the grounds of hardship or on the to consumer leases by virtue of the basis the transaction is unjust. former deeming provision in section 177(1)(a) (except section 78). Imposes an obligation on the lessor to No equivalent for consumer leases. provide a statement of the amount The obligation only applies to credit payable on termination. contracts under section 83 of the Code. Imposes an obligation on the lessor to No equivalent for consumer leases. inform the lessee when a direct debit The obligation only applies to credit default occurs. contracts under section 87 of the Code. Lessee have a right to terminate a A lessee may terminate the lease lease in two different circumstances: after goods have been provided by · before the goods have been returning the goods under section provided; and 179 of the Code. · after the goods have been There is no equivalent obligation provided. under the old law to provide a The lessor is also required to provide statement of account. a statement of account to the lessee upon termination. 82


Chapter 6 -- Consumer leases New law Current law The following enforcement matters Those enforcement matters only are extended to consumer leases: apply to credit contracts: · enforcement proceedings; · enforcement proceedings under · postponement of enforcement sections 88, 89 and 93; proceedings; · postponement of enforcement · procedures for goods hired under proceedings under sections 94 to a consumer lease; and 97; · recovery of enforcement expenses · enforcement procedures for from the lessee. goods mortgaged under sections 98 to 101; and · recovery of enforcement expenses under section 107. Sections 98 to 101 currently apply to consumer leases by virtue of the deeming provision section 177. Lessors are liable for a suppliers' No equivalent for consumer leases. misrepresentation. Credit contracts are regulated in The new law also imposes a criminal relation to linked credit providers penalty on a lessor or supplier for and false or misleading harassment. representations under sections 125 to133. Detailed explanation of new law Part 11 -- Consumer leases 6.13 Items 1 to 9 make minor consequential amendments to the NCCP Act. These are outlined below at paragraphs 6.84 to 6.87. Amendments to Division 2 -- Form of and information to be included in consumer leases Form of consumer lease 6.14 The Enhancements Bill makes a number of amendments to Division 2 of Part 11 of the Code. This Division currently regulates both the form and content of consumer leases. 6.15 Lessors will be required to ensure that a consumer lease is in the form of a written document and that it is signed by both the lessor and the lessee. [Schedule 5, item 14, subsection 173(1)]. 6.16 The amendments also allow a lessor to have a consumer lease that is made up of multiple documents [Schedule 5, item 14, subsection 173(1A)]. In these instances, the lease will be regarded as signed in accordance with subsection 173(1) if one of the documents is signed, and the other documents are referred to in that document [Schedule 5, item 15, subsection 173(2A)]. 83


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 6.17 The amendments will allow for regulations to be made which authorise consumer leases to be formed other than by a party signing a contract, such as by specified conduct [Schedule 5, item 16, section 173A]. Under the Code, credit contracts can be formed by conduct and this approach is being extended to consumer leases. This will allow flexibility in relation to the way in which consumer lease contracts can be formed to reflect changes in practice (for example, by potentially allowing contracts to be formed by the consumer accepting delivery of the leased goods). 6.18 Finally, there are restrictions on consumer lease documents being altered that operate in a similar manner to the way credit contracts are regulated under the Code. A lessor will be prohibited from making unilateral changes to a lease document (other than alterations that reduce the liabilities of the lessee) unless the lessee agrees to the change in writing. [Schedule 5, item 17, section 174A] Division 4 -- Fees and charges 6.19 A new Division 4 is introduced which reflects the provisions of the Code in respect of fees and charges that currently apply to credit contracts. The Code will allow for specific types of consumer lease fees and charges to be prohibited by regulation. The introduction of a regulation-making power mirrors the power provided in relation to credit contracts in section 31 of the Code, and will allow for a consistent approach across both classes of contracts where appropriate. [Schedule 5, item 18, section 175A] Division 5 -- Lessor's obligation to account Subdivision A -- Statements of account 6.20 A new Division 5 is introduced into the Code to impose obligations on the lessor to provide statements which provide information in relation to the history of the lessee's account. Credit providers are obliged under the Code to provide statements of account, and the Enhancements Bill extends similar requirements to lessors. The underlying policy considerations for requiring a statement of account for credit contracts equally extends to lessees under a consumer lease, primarily in that it provides an opportunity for the consumer to review their account and identify any discrepancies between the actual and the stated payments. 6.21 The Enhancements Bill will introduce obligations on the lessor to provide statements of account both every 12 months and in response to a request by the lessee [Schedule 5, item 18, section 175C and 175E]. The information that must be included in the statements of account will be prescribed in the regulations [Schedule 5, item 18, section 175D]. It is anticipated that regulations will be made requiring the lessee to provide information such as a record of ongoing payments over a specified period of time, and the remaining term of the lease. 84


Chapter 6 -- Consumer leases 6.22 Failure to provide a statement of account annually, or upon the request of the lessee, will be an offence of strict liability [Schedule 5, item 18, subsection 175C(4)]. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences. The offence also attracts a criminal penalty of 100 penalty units. The rationale for this penalty is historic as the penalty provision for the offence under section 33 which applies to credit contracts was carried over from state legislation. As this new provision is intended to mirror the current provisions that apply to credit contracts, to maintain consistency, the same penalty is also applied to lessors. 6.23 If the lessor does not provide a statement of account within the timeframes specified, the lessee can apply to a court to order provision of the statement or itself determine the amounts under the statement. [Schedule 5, item 18, section 175F] 6.24 A lessor will also be able to seek a written explanation from the lessor, as the trigger for a mechanism to resolve disputes. A lessor is required to give a lessee a written explanation where a lessee disputes a particular liability, provided they do so within 30 days of receiving the statement of account. A lessor must not commence enforcement action until at least 30 days after the written explanation is provided. Where the court has been asked to determine liability within 30 days of the lessor's explanation, the lessor must not commence enforcement proceedings without leave of the court. Failure to observe this requirement is a strict liability offence with a maximum penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence. [Schedule 5, item 18, section 175G] Subdivision B -- End of lease statement 6.25 Section 175H makes it an offence of strict liability if a lessor fails to provide a statement to the lessee at least 90 days before the end of the term of the consumer lease. The information that must be included in the statement will be prescribed by the regulations [Schedule 5, item 18, section 175H]. It is anticipated this will include information in relation to the lessee's options about whether or not they can negotiate to purchase the goods at the end of the lease. The regulations will also outline circumstances where the requirement would not apply (which could cover, for example, situations where the notice is unnecessary). [Schedule 5, item 18, subsection 175H(2)] 6.26 Failure to provide an end of lease statement within the prescribed time frame will be an offence of strict liability and attract a criminal penalty of 100 penalty units. The provision imposes 100 penalty units to maintain consistency with other offence provisions in the Code in respect of statements of accounts. The penalty is necessary because of the importance of the lessee being given information before the lease ends, that will maximise the opportunity for the lessee to begin negotiations in relation to the leased goods prior to the termination of the lease. 85


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Division 6 -- Certain transactions not to be treated as new consumer leases 6.27 Section 175J provides that certain types of changes to a consumer lease will not be regarded as creating a new consumer lease. 6.28 These changes are: · the provision of further goods; · the deferral or waiver of an amount owing under an existing consumer leases; and · a postponement relating to an existing consumer lease. 6.29 The effect of section 175J is that the requirements in relation to making new consumer leases will not apply in those three situations. [Schedule 5, item 18, section 175J] Division 7 -- Changes to obligations under consumer leases Subdivision A -- Changes by agreement of parties 6.30 The Enhancements Bill will set out notice requirements where a lease is changed as a result of an agreement between the contracting parties. Notice of any such change to the lease must be given to the lessee not later than 30 days after the agreement. It will be a strict liability offence not to comply with the appropriate procedure and noncompliance attracts a maximum penalty of 100 penalty units. [Schedule 5, item 18, subsection 177A(1)] 6.31 The notice requirements in subsection 177A do not apply where the change defers or reduces the obligations of the lessee for a period of not more than 90 days. [Schedule 5, item 18, subsection 177A(2)] 6.32 A breach of this provision will be a strict liability offence, in order to ensure the effectiveness of the enforcement regime. The offence also attracts a criminal penalty of 100 penalty units. The rationale for this penalty is historic as the penalty provision for the offence under section 71 which applies to credit contracts was carried over from state legislation. As this new provision is intended to mirror the current provisions that apply to credit contracts, to maintain consistency, the same penalty is also applied to lessors. 6.33 It is anticipated that regulations will be made which replicate those that currently apply to credit contracts in the same context, requiring the following information to be contained in the written notice provided in relation to the changes: · the date of the changes to the consumer lease; · current and future payment details; and · any proposed increase in the term of the consumer lease and new expiry date for the lease. 86


Chapter 6 -- Consumer leases 6.34 These notice provisions do not apply to changes made on the grounds of hardship or where the change was the result of the transaction giving rise to the consumer lease being found to be unjust. [Schedule 5, item 18, subsection 177A(3)] Subdivision B -- Changes on grounds of hardship and unjust transactions 6.35 The Enhancements Bill introduces provisions which specifically apply the hardship variation and unjust transactions provisions to consumer leases. The Enhancements Bill has repealed the former paragraph 177(1)(a) which extended these provisions to consumer leases in a shorthand way by way of a series of cross-references [Schedule 5, item 21]. The Code now sets out in detail the way in which these provisions apply to consumer leases. 6.36 The operation of the hardship provisions has been changed, consistent with the changes made to the equivalent provisions in respect of credit contracts to make it simpler for lessees to seek a variation of the terms of their contract. 6.37 The procedures for making and resolving hardship applications operate in the same way as the provisions in relation to debtors under credit contracts, discussed in paragraphs 2.7 to 2.25. [Schedule 5, item 18, section 177B] 6.38 If a lessor refuses to change the lease, the lessee may apply to a court for changes to the terms of the lease. The court may make orders to change the terms of the lease after giving the lessee and lessor a reasonable opportunity to be heard. The court is also empowered to stay enforcement proceedings and to make other orders until it determines the application. A lessor is also entitled to apply to the court to vary the original order. [Schedule 5, item 18, sections 177D and 177E] 6.39 Sections 177F to 177K cover a court's power to reopen unjust transactions. A court can reopen transactions giving rise to a lease (or a variation of a lease) if it is satisfied that the circumstances in which the lease was entered into or changed were unjust. [Schedule 5, item 18, subsection 177F(1)] 6.40 Unjust is defined in subsection 204(1) to include unconscionable, harsh or oppressive. The following principles apply to the interpretation of the term `unjust' and the phrase `unconscionable, harsh' and `oppressive': · they should be given a construction consistent with the beneficial policy intentions of the legislation; · the meanings of each concept may overlap but each word may also have an independent operation (so that a contract may be unjust because a term is harsh or the contract is oppressive, but it is not unconscionable); 87


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · the phrase is inclusive so that a consumer lease can still be unjust even if it is not unconscionable, harsh or oppressive; and · the reference to `unconscionable' encompasses both common law and statutory unconscionability. 6.41 Section 177F also sets out criteria which assist the court in determining whether or not the lease or a change to the lease was unjust [Schedule 5, item 18, subsection 177F(2)]. 6.42 The application of the unjust contract provisions requires a two stage inquiry. First, the court must determine whether the contract is unjust and, second, where this is the case, the court must decide what relief, if any, is appropriate. [Schedule 5, item 18, subsection 177F(5)] 6.43 Different considerations may apply in relation to each stage, so that, for example, the conduct and knowledge of the lessee may not prevent the consumer lease being found to be unjust, but may result in a lesser remedy, or no remedy, being provided to the lessee. 6.44 Where a transaction is reopened as unjust, the court is given power to make a range of orders that allow it flexibility in reshaping the contract. [Schedule 5, item 18, section 177G] Division 8 -- Repossession, termination and enforcement of consumer leases Subdivision A -- Repossession of goods under consumer lease 6.45 Item 20 will make a technical amendment to the heading of Division 8 to refer to the repossession, termination and enforcement of consumer leases. [Schedule 5, item 20] 6.46 The existing requirement in section 178 of the Code, for lessors to give notice before repossessing goods subject to the lease, is retained. Section 178 requires the lessor to give 30 days written notice of an intention to repossess goods which are the subject of a consumer lease. Failure to do so is a strict liability offence with a maximum penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence. The intention is to gives the lessee sufficient opportunity to rectify a default where this is possible (as it will be in the interests of both parties to resolve any default prior to enforcement action). 6.47 The existing exceptions to this requirement are also retained, so that notice is not required where: · repossession at the end of the term is a right under a fixed term lease; · the lessor believes on reasonable grounds that the lessee has, or intends to dispose of leased goods; 88


Chapter 6 -- Consumer leases · the lessor cannot locate the lessee, having made reasonable attempts; · the lessee becomes insolvent after entering into a consumer lease; or · the court authorises repossession. Subdivision B -- Termination of consumer lease by lessee 6.48 Section 178A will introduce a right for the lessee to terminate a lease by written notice if the leased goods have not yet been provided. The lessor is still entitled to demand payment of fees or charges which were incurred before the lease was terminated (but not, for example, amounts in relation to rental payments). This complements the lessor's existing right to terminate a lease under section 179. [Schedule 5, item 22, section 178A] 6.49 Section 179 currently enables lessors to end a consumer lease at any time by returning the goods hired under the lease. However, the heading to this section has been changed to clarify the distinction between this provision, and the right to terminate in section 178A. [Schedule 5, item 23, section 179 (heading)] 6.50 Section 179A imposes an obligation on the lessor to provide a statement summarising the amounts payable by the lessee on termination. The lessee may make a request for such a statement at any time. Failure to provide a statement of the amounts payable upon termination of the lease is an offence of strict liability that attracts a criminal penalty of 50 penalty units. [Schedule 5, item 24, section 179A] The rationale for the penalty being strict liability is that lessees should be promptly informed about the amount necessary to be paid to end a lease, rather than incurring additional liabilities as a result of a delay by a lessee in responding. 6.51 In the event the lessor does not provide a payout figure, a lessee has a right to apply to a court to determine the amount payable. [Schedule 5, item 24, section 179B] 6.52 The Enhancements Bill will also impose an additional obligation on the lessor to notify lessees about direct debit defaults. Lessees commonly arrange to meet their repayments under a lease by authorising the lessor to deduct amounts by a direct debit from an account held by the lessee. Direct debits generally occur automatically at pre-arranged intervals (for example, monthly). If a lessee has insufficient funds in their account at the time the direct debit request occurs, they may not become aware that they are in default for some time. This may result in the lessee accruing charges and fees to third parties before they become aware of the default. 6.53 Section 179C addresses this issue by requiring the lessor to give the lessee a notice within 14 days of the first direct debit payment failing in relation to a direct debit instruction. Failure to do so is an offence of 89


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 strict liability which gives rise to a criminal penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences. [Schedule 5, item 24, section 179C] Subdivision C -- Enforcement of consumer leases 6.54 The Code sets out notice procedures a lessor must follow before they can begin enforcement proceedings against a defaulting lessee. Before commencing enforcement proceedings, the lessor must give a default notice which provides the lessee with a period of 30 days from the date of the notice to remedy the default. Failure to do so amounts to a strict liability offence with a maximum penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime in seeking to have disputes resolved without the need for court action. The default notice must contain a number of matters under subsection 179D(2) including information prescribed by the regulations; this information is expected to ensure the person in default has relevant information relating to the default itself, the date after which enforcement action may begin, and their rights at law. [Schedule 5, item 24, section 179D] 6.55 The provisions also specify circumstances where a default notice is not required, such as where the lessor has made reasonable attempts to locate the lessee without success or the court has authorised the start of enforcement proceedings. [Schedule 5, item 24, subsection 179D(3)] 6.56 A lessee will have the right to remedy the stated default within the period specified in the default notice. This ensures that the lessee has the opportunity, where they are able to do so, of avoiding enforcement action, and then continuing to comply with their obligations under the consumer lease. [Schedule 5, item 24, section 179E]; 6.57 Section 179F limits the capacity of a lessor to begin enforcement proceedings against a lessee where the lessee gives a hardship notice under section 179D. [Schedule 5, item 24, subsection 179F(1)] 6.58 The effect of section 179F is that a lessor cannot commence enforcement proceedings against a lessee until 14 days from when they have sent a notice under paragraph 177(4)(b), that is, a notice stating that the lease will not be changed. [Schedule 5, item 24, subsection 179F(2)] 6.59 However, there is an exception to this restriction where a lessor had previously received a hardship notice from the lessee in the last four months and the lessee reasonably believes the basis for the most recent notice is not materially different from any earlier notices. Failure by the lessor to comply with subsection 179F(2) is a strict liability offence which incurs a penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for these offences, because of the effect enforcement proceedings can have on the lessee's rights. 6.60 However, provision is also made to allow the lessor to take possession of the goods where it is necessary to protect their interests (for 90


Chapter 6 -- Consumer leases example, if the lessor believes the lessee may be intending to remove or dispose of the goods). [Schedule 5, item 24, subsection 179F(3)] 6.61 Some consumer lease contracts may contain acceleration clauses that enable the lessor to require the lessee to pay a lump sum to terminate the lease. Subsection 204(1) defines an acceleration clause as a clause that allows the lessor, either on default, or at the lessor's discretion, to require repayment, therefore requiring the lessee to pay the outstanding balance under the lease immediately. [Schedule 5, item 25, subsection 204(1)] 6.62 Where a lessor has included an acceleration clause in their contract (enabling the lessor to require the lessee to pay the outstanding balance as a lump sum), the Code restricts the operation of such clauses so that the lessor cannot demand an acceleration in payments until a default notice is provided. The Code specifies circumstances where this restriction does not apply (for example, where the lessor is unable to locate the lessee). [Schedule 5, item 24, section 179G] Subdivision D -- Postponement of enforcement proceedings 6.63 The lessee has the right to request the lessor to postpone enforcement proceedings where the lessee has been provided with a default notice. The lessor must respond to the request within 21 days, and if they do not agree to the request, they must give reasons for their decision to the consumer. This is an offence of strict liability and failure to comply attracts a penalty of 30 penalty units [Schedule 5, item 24, section 179H]. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence. The section will also outline the procedures that must be satisfied before a lessor is entitled to begin enforcement proceedings against the lessee following a postponement request. However, provision is also made to allow the lessor to take possession of the goods in a situation where it is necessary to protect their interests (for example, if the lessor believes the lessee may be intending to remove or dispose of the goods). [Schedule 5, item 24, subsection 179H(4)] 6.64 Section 179J sets out the consequences where a postponement is negotiated. The default notice is taken to not have been given if the lessee complies with the conditions of postponement. A lessor must give written notice of the agreed conditions no later than 30 days after the agreement is reached. This is also an offence of strict liability and failure to comply attracts a penalty of 100 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence and give the parties certainty as to their varied obligations. [Schedule 5, item 24, section 179J] 6.65 A lessee may also apply to a court for a postponement if they are unable to negotiate a postponement with the lessor [Schedule 5, item 24, section 179K]. The lessor may also subsequently apply to the court for a variation to a court order made under this Subdivision. [Schedule 5, item 24, section 179L] 91


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Subdivision E -- Enforcement procedures for goods hired under a consumer lease 6.66 The provisions regarding enforcement procedures for goods hired under a consumer lease are intended to provide similar procedures to those which apply in relation to mortgaged goods under a credit contract. These provisions previously applied to consumer leases by virtue of paragraph 177(1)(b) of the Code . The Enhancements Bill repeals that provision and now sets out in detail the obligations that apply in relation to consumer leases. 6.67 The provisions: · require the lessee to inform the lessor of the location of the goods hired under the consumer lease. If the goods are no longer in their possession, the lessee must give any information that would assist the lessor in tracing the goods. This is a strict liability offence, and non-compliance attracts a penalty of 50 penalty units (because of the importance of the lessee being able to establish the location of their property) [Schedule 5, item 24, section 179M]; · restrict lessees from entering residential premises to seize the goods, unless the occupier has given written consent to enter or the Court has authorised entry. The regulations may also prescribe procedures for obtaining and giving consent (with it anticipated the regulations will provide for similar requirements to those that apply to credit providers in regulation 87 of the National Consumer Credit Protection Regulations 2010). This is a strict liability offence, and non-compliance attracts a penalty of 50 penalty units. Strict liability is necessary to ensure the effectiveness of the enforcement regime for this offence, given the importance of the lessee's rights over their property not being infringed illegally [Schedule 5, item 24, section 179N]; · allow a court to order entry to residential premises to allow the lessor to take possession of the goods hired under a consumer lease [Schedule 5, item 24, section 179P]; and · allow a court to order a person to deliver the goods hired under the consumer lease to a lessor at a specified time or place or within a specified period [Schedule 5, item 24, section 179Q]. Subdivision F -- Enforcement expenses 6.68 Section 179R prohibits a lessor from recovering any amount greater than reasonable enforcement expenses from a lessee. A penalty is imposed if the lessor does not comply. The court may determine a dispute 92


Chapter 6 -- Consumer leases about the amount of enforcement expenses that may be recovered by the lessor. [Schedule 5, item 24, section 179R] Division 9 -- Linked lessors and tied leases Subdivision A -- Interpretation and application 6.69 A new Division 9 is introduced into the Code which regulates the relationships between linked lessors and suppliers of goods. These provisions address the situation where a consumer's primary or exclusive contact in relation to a consumer lease will be with the supplier of goods, but where that supplier has no contractual relationship with the consumer. The goods are ultimately supplied to the consumer by a third party, the lessor with the supplier arranging for title to pass to the lessor following negotiations between the supplier and the consumer. 6.70 Section 179T will provide the consumer with a remedy for specified conduct where the lessor is linked to the supplier. This approach, which already applies in relation to linked credit contracts, recognises that the lessor may be in a commercial relationship with the supplier where they largely regulate or supervise their conduct, but where common law principles of agency may not necessarily provide the consumer with a remedy against the lessor for the conduct of the supplier. 6.71 The Enhancements Bill introduces definitions for the terms `a linked lessor' and `a tied consumer lease'. A linked lessor means a lessor: · with whom the supplier has a contract, arrangement or understanding relating to the goods; · to whom the supplier regularly refers persons for the purpose of providing a consumer lease; · whose contracts and application forms are made available to potential lessees by the supplier (by arrangement with the lessor); or · with whom the supplier has a contract, arrangement or understanding under which contracts or applications for a consumer lease may be signed by persons at the supplier's premises. [Schedule 5, item 24, subsection 179S(1)] 6.72 A tied consumer lease is defined as a consumer lease which is entered into where the goods hired under the consumer lease are supplied by a supplier to the lessor, and the lessor is a linked lessor of that supplier [Schedule 5, item 24, section 179S(2)]. Subdivision B -- Liability of lessors for suppliers' misrepresentations 6.73 Under section 179T, a linked lessor will be held liable for a supplier's misrepresentations about the leased goods, the lease itself or services, supplied or arranged by the lessor, that are incidental to the hire 93


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 of goods under the lease. A lessor is liable for any representations, warranties or statements made by the supplier of the goods to the lessee in relation to the tied consumer lease. Example 6.1 The lessor is a linked lessor with a supplier of computers and software. Consumers sign leases at the premises of the supplier and have no direct contact with the lessor. The supplier misrepresents both the quality of the software and the terms of the service warranty provided with the lease. The consumer would have a remedy against the lessor as a linked lessor. 6.74 The lessor is entitled to be indemnified by the person who made the representation, warranty or statement and any person on whose behalf it was made. Because of their ongoing commercial relationships it is usually anticipated that there would be a contract between the lessor and the supplier which would specifically address the liability of the supplier to indemnify the lessor in these circumstances, and assist enforcement of this right by the lessor. [Schedule 5, item 24, section 179T] Division 10 -- Conduct relating to consumer leases 6.75 The Enhancements Bill also creates two new offences in relation to consumer lease arrangements. These offences are: · making false or misleading representations [Schedule 5, item 24, section 179U]; and · harassing a person into entering a consumer lease arrangement. [Schedule 5, item 24, section 179V] 6.76 Section 179U creates an offence for making false or misleading representations. The offence applies to any person who makes representations about matters material to entry into a consumer lease or a related transaction, or attempts to induce a person to enter such a consumer lease or transaction. It therefore applies to lessees and persons providing credit services, and also to third parties. A maximum fine of 50 penalty units applies. [Schedule 5, item 24, section 179U] 6.77 For example, if a person represented to the consumer that they had the right to purchase the goods at the end of the lease (when this would not be the case because of the definition of a consumer lease) then this would be ordinarily be a representation within both paragraphs (a) and (b) of section 179U. 6.78 Section 179V contains a prohibition on lessors or suppliers harassing a person in attempting to have them apply for, or enter, a consumer lease or related transaction. A maximum criminal penalty of 100 penalty units applies [Schedule 5, item 24, section 179V]. 6.79 The criminal penalties under sections 179U and 179V are consistent with the penalties under sections154 and 155 of the Code, 94


Chapter 6 -- Consumer leases which in turn reflect those that previously applied under State and Territory legislation. Division 11 -- Other Code provisions applicable to consumer leases 6.80 The Enhancements Bill repeals section 177 [Schedule 5, item 21]. Previously, section 177 extended Part 4 Division 3 (except for section 78), sections 98, 99, 100 and 101 and the miscellaneous provisions in Part 12 of the Code to consumer leases. The Enhancements Bill now has provisions in respect of the matters covered by these sections that specifically apply to consumer leases. It is therefore no longer necessary to deem these provisions to apply to consumer leases. Section 179W provides that both Part 12 of the Code, and the definition of `associated' in subsection 204(2), extend to consumer leases. [Schedule 5, Item 24, section 179W] Comparison table 6.81 The table below summarises the provisions that currently apply to credit contracts which are to apply, in similar terms, to consumer leases. Table 6.1 Credit Contracts Consumer Leases Topic Section 14 Subsection 173(1) Form and expression of contract document Section 15 Section 173A Contract documents in a form other than writing Section 18 Subsection 173A(1A) One or more separate documents Section 19 Section 174A Unilateral changes to a contract document Section 31 Section 175A Regulation of fees and charges Section 32 Section 175A Prohibits the overcharging of fees and charges Section 33 Section 175C Obligation to provide an ongoing statement of account Section 34 Section 175D Information to be contained in statements of account Section 36 Section 175E Statement of account on request 95


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Credit Contracts Consumer Leases Topic Section 37 Section 175F Court ordered statement of account Section 38 Section 175G Disputed accounts Section 40 Section 175J Certain transactions not treated as consumer leases Section 71 Section 177A Changes by agreement Section 72 Section 177B Changes on the grounds Section 73 Section 177C of hardship and unjust transactions Section 74 Section 177D Under the old law, Section 75 Section 177E these matters applied to Section 76 Section 177F consumer leases by virtue of the former Section 77 Section 177G deeming provision in Section 79 Section 177H 177(1)(a): Section 80 Section 177J · Changes on grounds of hardship Section 81 Section 177K · Notice of change · Changes by court · Applying for variation of change · Court may reopen unjust transactions · Orders on reopening of transactions · Applications by ASIC · Time limit · Joinder of parties Section 83 Section 179A Obligation to provide statement of amount payable on termination Section 84 Section 179B Court may also determine the amount payable on termination Section 87 Section 179C Obligation to notify about a direct debit default 96


Chapter 6 -- Consumer leases Credit Contracts Consumer Leases Topic Section 88 Section 179D Enforcement Section 89 Section 179E proceedings: · Requirements No equivalent Section 179F before enforcement Section 93 Section 179G · Defaults may be remedied · Extra requirements before lessor can enforce · Enforcing acceleration clauses Section 94 Section 179H Postponement of Section 95 Section 179J enforcement proceedings: Section 96 Section 179K · Postponement of Section 97 Section 179L exercise of rights · Effect of negotiated postponement · Postponement by court · Applying for variation of postponement order Section 98 Section 179M Enforcement Section 99 Section 179N proceedings for goods mortgaged Section 100 Section 179P Under the old law, Section 101 Section 179Q these matters applied to consumer leases by paragraph 177(1)(b) of the former deeming provision: · Information about the location of mortgaged goods · Entry into residential property to take possession of goods · Court may order entry · Order for possession Section 107 Section 179R Recovery of enforcement expenses 97


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Credit Contracts Consumer Leases Topic Section 127 Section 179S Definitions for linked lessor and tied consumer lease Section 128 Section 179T Liability for linked contracts Section 154 Section 179U False or misleading representations Section 155 Section 179V Harassment Part 13 -- Principal definitions General definitions 6.82 Section 204 contains definitions of words and expressions used in the Code. In some cases, the definition expands the usual meaning of the word. The Enhancements Bill will introduce new terms, as well as repeal and substitute existing terms, into the general definitions. These are: · Acceleration clause (item 13 removes the definition from section 92 of the Code, and the definition is reproduced in the general definitions) [Schedule 5, items 13 and 25, subsection 204(1)]; · Bulk electronic clearing system (item 12 removes the definition from subsection 87(6) of the Code, and the definition is reproduced in the general definitions) [Schedule 5, items 12 and 26, subsection 204(1)]; · Consumer lease fees or charges (inserts a new definition into the general definitions) [Schedule 5, item 27, subsection 204(1)]; · Default notice (inserts a new definition into the general definitions) [Schedule 5, item 28, subsection 204(1)]; · Direct debit (item 12 removes the definition from subsection 87(6) of the Code, and it is reproduced in the general definitions) [Schedule 5, item 29, subsection 204(1)]; · Enforcement proceedings (the definition is clarified to take into account consumer leases) [Schedule 5, item 30, subsection 204(1)]; · Hardship notice (inserts a new definition into the general definitions) [Schedule 5, item 31, subsection 204(1)]; · Lessee (the definition is removed from the section 5 dictionary in the NCCP Act and reproduced in the general definitions) [Schedule 5, item 32, subsection 204(1)]; 98


Chapter 6 -- Consumer leases · Lessor (the definition is removed from the section 5 dictionary in the NCCP Act and reproduced in the general definitions) [Schedule 5, item 33, subsection 204(1)]; · Linked lessor (as discussed above in paragraph 6.72) [Schedule 5, item 34, subsection 204(1)]; · On demand facility (the definition is removed from section 92 and reproduced in the general definitions) [Schedule 5, item 35, subsection 204(1)]; · Postponement request (inserts a new definition into the general definitions) [Schedule 5, item 36, subsection 204(1)]; · Tied consumer lease (as discussed above in paragraph 5.72) [Schedule 5, item 37, subsection 204(1)]; and · Unjust (as discussed above in paragraph 5.41) [Schedule 5, item 38, section 204]. The definition of unjust in subsection 76(8) is also repealed [Schedule 5, item 11, subsection 76(8)]. 6.83 These definitions are necessary to reflect the amendments that have been made to the NCCP Act and the Code under this Enhancements Bill. Consequential amendments 6.84 Under items 1 to 10, minor technical amendments are made to the NCCP Act under these amendments. This is to ensure consistency between the provisions of the NCCP Act and the amendments to the Code. item 1 amends the definition of lessor in the NCCP and replaces it with a reference to section 204 in the Code [Schedule 5, item 1, subsection 5(1)]. The Enhancements Bill will amend the text for the definition of value of a credit contract, mortgage, guarantee or consumer lease in subsection 5(1) to ensure consistency in the Code [Schedule 5, items 2 and 3, subsection 5(1)]. Subsection 199(3) will similarly be amended so that the text refers to a credit contract, mortgage, guarantee or consumer lease [Schedule 5, item 9, subsection 199(3)]. 6.85 The Enhancements Bill will also amend subsection 147(7) which outlines a defence for suggesting an unsuitable consumer lease. Paragraph 147(7)(b) is amended to refer to the new sections 177B and 179H which outline the procedures for consumers in hardship, instead of sections 72 and 94 of the Code [Schedule 5, item 4, subsection 147(7)]. Amendments are also made to repeal Note 2 as the reference to sections 72 and 94 is no longer relevant. [Schedule 5, items 5 and 6, subsection 147(7)] 6.86 Items 7 and 8 will make amendments to the table in subsection 199(2) to reflect the new sections introduced into the Code in relation to 99


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 consumer leases [Schedule 5, items 7 and 8, subsection 199(2)]. Similarly, Item 10 amends paragraph 200(1)(b) to include references to sections 177D and 179K [Schedule 5, item 10, paragraph 200(1)(b)]. 6.87 Item 19 will repeal section 176 which relates to further goods and deferrals or waivers under consumer leases [Schedule 5, item 19]. 100


Chapter 7 Application provisions Schedule 6 -- Applications provisions Part 2 -- Schedule 1 (enhancements) to the amending Act 7.1 Schedule 6 of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) sets out the application provisions in relation to the amendments introduced by the other Schedules. 7.2 Schedule 6 provides that the following amendments in Schedule 1 will only apply to credit contracts, mortgages and guarantees (as relevant) that were entered into on or after the commencement of the amendment: · changes to clarify the operation of provisions in relation to prohibited fees and charges (section 32 and 40 of the Code as amended) and to specifying that certain transactions will not be new credit contracts (section 40 of the Code as amended); · changes to the provisions in relation to changes on the grounds of hardship, default notice requirements and postponement requests (sections 72, 73, 74, 88 and 94 of the Code as amended); and · changes to the effect of hardship notices on enforcement proceedings introduced by section 89A of the Code. 7.3 Schedule 6 provides that the following amendments in Schedule 1 will only apply as follows: · changes to section 128 of the NCCP Act (as amended) in relation to the liability of linked lessors for representations made by suppliers will only apply to representations made on or after the commencement of the Schedule [Schedule 6, item 4, section 128]; and · the remedy for unfair or dishonest conduct by providers of credit services introduced in section 180A will only apply in relation to credit services provided on or after the commencement of the Schedule. [Schedule 6, item 4, section 180A] 7.4 Schedule 6 provides that section 124 of the Code (as amended) will apply to applications made on or after the commencement of Part 5 of 101


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Schedule 1 (whether the contraventions occurred before, on or after that commencement date). [Schedule 6, item 4, section 124] 7.5 The effect of the amendment to section 124 is not to make a conduct that was previously not a contravention of the Code a contravention. The effect is to increase the remedies available to a consumer from a contravention, and to also allow ASIC to have standing in relation to conduct that is a contravention of the Code (irrespective of whether the contravention has a civil effect or not). Part 3 -- Schedule 2 (reverse mortgages) to the amending Act 7.6 Schedule 6 provides that the following amendments in Schedule 2 will only apply to credit contracts that were entered into on or after the commencement of the Schedule: · a presumption that under certain circumstances a court must consider orders appropriate if the order will let the plaintiff reside in their residence to prevent or reduce loss or damage suffered or likely to be suffered by the plaintiff vacating the residence (subsection 179(6) and (7)); [Schedule 6, item 4, subsections 179(6) and (7)] · arrangements relating to the residency protections given to a person nominated by the debtor under a credit contract for a reverse mortgage (subsection 17(15A)); [Schedule 6, item 4, subsection 17(15A)] · a reverse mortgage must not prohibit an early repayment of an amount that is more than (or at least equal to) the adjusted market value of a reverse mortgaged property (subsection 26(6)); [Schedule 6, item 4, subsection 26(6)] · purported changes to a credit contract for a reverse mortgage relating to arrangements for nominated residents are void; and · the requirement for credit providers to keep records of a debtor's nominations that another person be allowed to occupy the reverse mortgaged property. 7.7 Schedule 6 provides that section 18A of the Code will only apply to entry into, and changes to credit contracts on or after the commencement of the Schedule. The effect of section 18A is that credit providers are prohibited from entering into a credit contract for a reverse mortgage that provides a basis for enforcement proceeding in certain events such as the debtor breaching another credit contract with the credit provider. [Schedule 6, item 4, section 18A] 7.8 Schedule 6 provides that paragraphs 33(2)(aa) and (ab) of the Code will only apply to credit contracts entered into, before, on or after commencement of the Schedule. The effects of these paragraphs are that 102


Chapter 7 -- Application provisions the maximum period for a statement of account for a credit contract for a reverse mortgage is 12 months. [Schedule 6, item 4, section 33] 7.9 Schedule 6 provides that the following amendments in Schedule 2 will only apply to credit contract and mortgages that were entered into before, on or after commencement of the Schedule: · requirements that apply when a credit provider receives a payment which ends a reverse mortgage; · circumstances under which a notice is not to be taken as a default notice; and · notice requirements a credit provider must provider a debtor of a credit contract for a reverse mortgage if the credit provider seeks to enforce the debtor's liability above the value of the reverse mortgaged property. 7.10 Schedule 6 provides that subsections 88(1) and (2) only applies to credit contracts and mortgage entered into before, on or after commencement of the Schedule. These subsections relate to requirements on credit providers before they can begin enforcement proceedings against a debtor in relation to a credit contract or credit contract for a reverse mortgage. [Schedule 6, item 4, subsections 88(1) and (2)] Part 4 -- Schedule 3 (small amount credit contracts) to the amending Act 7.11 Schedule 6 provides that the following amendments to the NCCP Act apply in relation to short-term credit contracts entered into before, on or after commencement of Schedule 3: · a prohibition on licensees suggesting, or assisting with, credit limit increases under a short-term credit contract (section 124A(1)(b)); and · a prohibition on licensees increasing the credit limit of a short-term credit contract with a consumer who is the debtor under the contract (section 133CA(1)(b)). [Schedule 6, item 4, paragraphs 124A(1)(b) and 133CA(1)(b)] Part 5 -- Schedule 4 (caps on costs etc for credit contracts) to the amending Act 7.12 Schedule 6 provides that the following amendments to the NCCP Act apply in relation to small amount credit contracts entered into on or after the commencement of the Schedule: · a prohibition on providers of a small amount credit contracts from charging fees and charges other than certain prescribed charges (section 31A); 103


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · the prohibition on credit providers from require or accepting payment by the debtor of fees or charge in relation to small amount credit contracts (section 31B); · limits on the application of amount of credit provided under a small amount credit contract (section 39A); · limits in the amount that may be recovered if there is a default under a small amount credit contract (section 39B); and · the regulation-making power that would allow provisions to be introduced directing a credit provider to do specified things, where they are party to a small amount credit contract that is being repaid by a direct debit, and there has been a failure in the direct debit request (and payment has not occurred) (section 39C). [Schedule 6, item 4, sections 31A, 31B, 39A, 39B and 39C] 7.13 The prohibitions on later increases to the annual percentage rate introduced in section 32AA, and the consequent penalty provisions in paragraphs 111(1)(k) and 111(2)(fb) only apply to credit contracts entered into on or after the commencement of the Schedule (on 1 July 2013). [Schedule 6, item 4, sections 32AA and paragraphs 111(1)(k) and (2)(fb)] Part 6 -- Schedule 5 (consumer leases) to the amending Act 7.14 Schedule 6 provides that subsection 199(2) of the NCCP Act only applies to consumer leases entered on or after commencement of the Schedule. This subsection relates to proceedings which can be dealt with under a small claims procedure. [Schedule 6, item 4, subsection 199(2)] 7.15 Schedule 6 provides that the amendments in relation to Part 11 of the Code apply in relation to consumer leases entered into on or after the commencement of Schedule 5. 104


Chapter 8 Lay-by agreements etc Context of amendments 8.1 The Australian Consumer Law (ACL) is Schedule 2 to the Competition and Consumer Act 2010 (CCA). Sections 96 to 99 of the ACL provide for certain requirements that apply to lay-by agreements. Section 103 of the ACL provides for notices to be prescribed that relate to the repair of goods. Sections 188 to 191 of the ACL mirror provisions 96 to 99 of the ACL, to provide for penalties that apply to contraventions of lay-by provisions. 8.2 Sections 96 to 99, 103 and 188 to 191 of the ACL include an erroneous reference to `consumer goods'. This term was incorrectly applied to these provisions when the ACL was enacted. The term consumer goods is defined in section 2 of the ACL as: ... goods that are intended to be used, or are of a kind likely to be used, for personal, domestic or household use or consumption, and included any such goods that have become fixtures since the time that they were supplied if (a) a recall notice for the goods has been issued; or (b) a person has voluntarily taken action to recall the goods. 8.3 The ACL replaced Part V of the Trade Practices Act 1974 (TPA) as the principal consumer protection law in Australia. The term consumer goods was applied within the product safety provisions of the TPA. Provisions of the TPA other than those dealing with product safety used the formulation `supply of goods to a consumer' (or similar). This formulation relies on the definition of `consumer', which was section 4B of the TPA and is now section 3 of the ACL. 8.4 The definition of consumer in section 3 of the ACL differs from the definition of consumer goods. In particular, it applies to all transaction with a value of less than $40,000, irrespective of the nature of the goods or services and applies to goods or services that are ordinarily acquired for personal, domestic or household use or consumption. Detailed explanation of new law 8.5 Schedule 7 is inserted to correct an error in the ACL by removing references to `consumer goods', wherever those references occur in sections 96 to 99, 103 and 188 to 191, and replacing them with `goods' or `goods supplied to a consumer', as appropriate. [Schedule 7, items 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15, subsections 96(1), 96(2), 96(3), 96(4), 97(1), 97(2), 97(3), 103(1), 188(1), 189(1), 189(3), 190(1), 191(1), section 98 and paragraph 190(2)(c)]. 105


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Application and transitional provisions 8.6 The ACL amendments in Schedule 7 to the Enhancements Bill are to commence upon proclamation. 8.7 The ACL is applied as a law of each State and Territory of Australia and amendments are automatically applied in each State and Territory with the exception of Western Australia. The Western Australian Parliament will consider whether to make amendments that mirror these amendments in order to preserve consistency of consumer law across Australia. 8.8 The Commonwealth is likely to delay proclamation until any amendments are ready to also commence in Western Australia. This delayed commencement will also allow businesses time to adjust to the new requirements. 8.9 A new chapter is inserted to Schedule 2 of the CCA to deal with transitional issues that arise from the amendment of sections 96 to 99, 103 and 188 to 191 of the ACL. 8.10 The new section 288 of the ACL would provide that the amendment to the lay-by provisions of the ACL (sections 96 to 99 and 188 to 191) would apply to lay-by agreements entered into on or after the commencement of those items of the Enhancements Bill. [Schedule 7, item 16, section 288]. 8.11 The new section 289 of the ACL would provide that the amendment to the repair notices provision of the ACL (section 103) would apply to repair of goods that are accepted for repair on or after the commencement of that item of the Enhancements Bill. [Schedule 7, item 16, section 289]. 8.12 The new section 290 of the ACL would save regulations made for the purposes of subsection 103(1) of the ACL so that they continue to apply after the subsection is amended. [Schedule 7, item 16, section 290]. 106


Chapter 9 -- Regulation Impact Statement Chapter 9 Regulation impact statement PHASE TWO OF THE NATIONAL CONSUMER CREDIT REFORMS: CONSUMER LEASES AND ENHANCEMENTS TO THE NATIONAL CREDIT CODE JUNE 2011 Executive summary 9.1 In 2008, the Council of Australian Governments (COAG) agreed to transfer responsibility for the regulation of consumer credit from the States and Territories to the Commonwealth under a two phase implementation plan. Phase One of the National Consumer Credit Protection Reforms 9.2 Phase One of the National Consumer Credit Protection Reforms substantially commenced on 1 July 2010, through requirements introduced by the National Consumer Credit Protection Act 2009 (Credit Act). The main features of Phase One were that it introduced: · a comprehensive licensing regime for all providers of consumer credit and credit related brokering and intermediaries in the industry; · responsible lending conduct requirements on all licensees to not provide credit products and services that are unsuitable, either because they do not meet the consumers' requirements or because the consumer does not have the capacity to meet the repayments, either at all or only with substantial hardship; · improved sanctions and enhanced enforcement powers for the sole national regulator the Australian Securities and Investments Commission (ASIC); · expanded redress for consumer protection through universal external dispute resolution membership for licensees, streamlined court arrangements, and remedies for consumers for licensee misconduct; and · a largely replicated version of the key state-based legislation, the Uniform Consumer Credit Code (UCCC), as the National Credit Code (Code). 107


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Phase Two of the National Consumer Credit Protection Reforms 9.3 At its meeting of 19 April 2010, COAG endorsed a two part implementation plan for Phase Two of the credit reforms, under which there is a longer timeframe to consider more complex topics (such as the need to regulate the provision of credit to small business or lending for investment purposes). 9.4 Part One consists of: · changes to the obligations applying to consumer leases; · enhancements to particular provisions of the Code; · extending the regulation of credit for personal use; · small-amount short-term lending; and · improvements to the regulation of reverse mortgages and credit cards. 9.5 It is intended that legislation to give effect to part one will be in place in 2011, and for part two by mid-2012 at the latest. This Regulation Impact Statement (RIS) considers reforms in relation to the first two topics. 9.6 In August 2010, the Government announced election commitments in relation to the regulation of credit cards under the Fairer, Simpler Banking policy, and to the regulation of equity release products under the Delivering for Seniors policy. These commitments will be implemented in Part One of Phase Two of the credit reforms, and have been addressed in separate Regulatory Impact Statements (RISs). The reforms in relation to credit cards have are being progressed through the introduction of the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011, introduced into the House of Representatives on 24 March 2011. 9.7 The following summary analyses the reasons for pursuing reforms in relation to consumer leases and enhancements to the Code. Consumer Leases 9.8 There are significant differences in the application of the Credit Act to credit contracts and to consumer leases. This disparity results in the following problems for consumers: · The lesser obligations applying to consumer leases regulated under the Credit Act has created opportunities for regulatory arbitrage, and contributes to consumers being misled before entering into a contract. - Different regulatory outcomes arise according to whether or not the consumer will be able to own goods at the end of a lease. This creates a tension for lessors between 108


Chapter 9 -- Regulation Impact Statement seeking to avoid regulation (by utilising a lease for this purpose), and not discouraging customers (who may only enter into a contract where they believe they will own the goods at the end of the contract). This causes an inherent structural tendency for consumers to be either actively mislead or not fully informed. · There are information asymmetries in relation to: - whether or not the consumer will have ownership of the goods at the end of the contract, and consequently on the impact this legal distinction will have on the consumer's rights under the contract (as there are no statutory obligations for lessors to disclose this information); and - the capacity of consumers to determine the cost of a consumer lease relative to a credit contract. · Classes of consumers who are particularly vulnerable may be targeted by fringe operators who use leases to finance the provision of goods because of the absence of regulation, and offer leases on terms where the benefit is minimal relative to the costs incurred. - Consumers may be particularly susceptible where they are on pensions or low incomes, and have few or no other alternative sources of finance. · Consumers have more difficulty in obtaining redress (because they either have fewer statutory rights where they enter into a consumer leases rather than a credit product, or because the type of lease is completely unregulated by the Credit Act). 9.9 It is proposed to address these problems by: · amending the Credit Act to ensure greater regulatory consistency between leases and credit contracts (including developing options for allowing more effective comparison on price and disclosing whether or not the consumer will own the goods); and · using existing financial literacy programs to deliver specific information to consumers in relation to the uses of leases as a means of acquiring goods. 9.10 These reforms would make a significant difference for consumers in that: · Consumers will be able to make more effective purchasing decisions, as they will be able to more readily compare the costs of entering into a consumer lease with the cost of 109


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 entering into a credit contracts, and be better informed about whether or not they own the goods at the end of the contract. · Consumers will have greater access to remedies in the event they suffer loss or damage. · Vulnerable consumers will be at less risk of being targeted by fringe operators as those operators will need to hold an Australian credit licence, and therefore meet the standards of conduct applicable to licensees (or else cease offering these products). Fringe operators have been associated with problems such as the use of pressure selling tactics; failure to deliver leased goods or delivery of goods other than those specified in the lease; and the use of itinerant, untrained labour with poor levels of compliance. 9.11 These reforms would have the following impact on industry: · Lessors who currently offer consumer leases (a product already regulated by the Credit Act) would incur relatively low compliance costs. They would find themselves able to compete more effectively with providers of exempt leases, but, in turn, would no longer have the benefit of their current competitive advantages relative to credit contracts (and may have to reduce the cost of their products in order to maintain their market share). · Lessors who currently offer products unregulated by the Credit Act would incur higher compliance costs, and it could be expected some would cease offering these products (particularly those fringe operators who operate without any business infrastructure). · Credit providers who offer regulated products that are more competitive than leases may increase market share due to greater transparency in pricing, and the enhanced capacity of consumers to assess the relative merits of competing products. These providers will not incur any new compliance costs. Enhancements to the National Consumer Credit Protection Regime 9.12 During the course of Phase One of the National Consumer Credit Protection reforms, concerns were raised by various stakeholders about possible improvements to specific provisions in the State-based UCCC, which have been replicated in the National Credit Code.4 It was 4 The Code (and the UCCC before it) regulates credit provided to natural persons for personal, domestic and household purposes. From 1 July 2010, the Code also regulates credit provided to natural persons for investment in residential investment property. 110


Chapter 9 -- Regulation Impact Statement agreed these issues would be considered during Phase Two of the credit reforms and were the topic of Chapter 7 of the Green Paper. The following issues have been identified in relation to the operation of the Code where the UCCC did not adequately address problems for consumers: · The provisions enabling borrowers to request a variation of their credit contracts or consumer leases on the grounds of financial hardship (whether before or after enforcement action) are highly prescriptive, and subject to a restriction in that they only apply to persons who have borrowed up to $500,000. This restricts the capacity of borrowers to obtain a variation, even where they only need a variation to address a short-term change in their circumstances. · There is no general remedy provided for unjust conduct by brokers or other intermediaries (as the Code only provides a remedy where there has been unjust conduct by lenders). This creates a gap as consumers otherwise need to rely on general prohibitions that may not always provide a remedy where they have suffered loss because of the conduct of a broker. · The Code does not prohibit or restrict the use of particular words or phrases. In the credit context, some words or phrases have an emotional resonance with consumers (for example, `impartial' or `interest free'). Consumers may be more susceptible to entering into contracts where brokers or lenders have used these terms in advertising, even where they may not be strictly correct or are subsequently qualified, and where therefore the contract is inconsistent with the use of these words. · The Code only contains a partial prohibition against door-to-door canvassing of credit. The prohibition does not apply where goods are being sold on credit or provided through a lease. Given the range of alternative distribution channels available today, door-to-door selling in this way is largely associated with targeting of vulnerable consumers, and often with high-pressure or manipulative sales tactics. 9.13 It is proposed to address these problems by: · simplifying the procedures for consumers to obtain a variation of the repayments under their contract due to financial hardship, removing the restriction so that a consumer can rely on the statutory procedures irrespective of the amount they have borrowed, and provide borrowers with 111


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 an additional opportunity to rectify defaults prior to their lender being able to take enforcement action; · extending the existing remedy for consumers for unjust conduct by lenders to also include conduct by brokers and intermediaries; · prohibiting lenders and lessors from selling goods and services on finance through unsolicited door-to-door canvassing; and · restricting the capacity of lenders and brokers to use certain words or phrases (for example, claiming to be `independent' where they receive commissions). 9.14 It is expected that consumers will benefit from these changes as: · they will have a reduced the risk of default in the event of a short-term change to their financial circumstances. Therefore, they will not need to refinance (incurring transaction costs) or risk losing security for the debt; · they will have an enhanced capacity to make brokers and intermediaries accountable for unjust conduct; · they will be at less risk of entering into contracts for the supply of goods as a result of high-pressure or manipulative sales tactics, or without actively seeking out credit for financing the purchase of goods; and · they will be at less risk of being misled by advertising claims. 9.15 It is expected that these changes will have the following impact on industry: · Greater and simplified capacity to seek hardship variations: - For those lenders who have voluntarily adopted a code of conduct with similar obligations and are already fully complying with the code -- the change to their business would be minimal; and - For those lenders who are not signatories to such a code, or who are complying inconsistently with it -- the introduction of these obligations in law would introduce greater accountability and responsibility for non-compliance, and could be expected to result in greater internal changes to their practices to ensure they were now meeting these requirements. · Introduction of a remedy for unjust conduct by providers of credit services: - It would have no impact on credit providers or lessors. 112


Chapter 9 -- Regulation Impact Statement - It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct. · Prohibition on door-to-door canvassing: A relatively small number of businesses who engage in unsolicited selling practices may need to change their business practices (noting that only 67 persons who had applied for an ACL with ASIC by 31 December 2010 nominated their function as `Door-to-Door or Phone Sales'). · Restricted use of specified terms: The only class of providers who would be affected would be those who currently use any of these terms, who would need to decide between ceasing to use a restricted term or changing their business model so that they meet the conditions to be able to use it. Consultation 9.16 The Government has conducted extensive consultations in the consideration of issues under Phase Two of the credit reforms through the following consultation groups: · The primary vehicle for consultation with stakeholders was the Industry and Consumer Representatives Consultation Group (ICRCG). Its membership comprised of representatives of the banking, financial services, mortgage and finance brokers industries, consumer credit legal services, consumer advocates, ASIC, and the Department of the Treasury. All major industry bodies are on this group, and are able to disseminate information to their members and provide their feedback. · Consultation with this group has generally occurred on a monthly basis. Between January 2010 and October 2010, seven meetings were held in relation to the Phase Two reforms. The usual structure for these meetings was for Commonwealth Treasury staff to circulate papers on Phase Two topics, with the topics then discussed in detail at the meetings. This format allowed members of the group to provide comments and feedback at all stages of the development of options canvassed in this RIS, and also enabled differences in views to be explored in detail. This structure enabled prompt and detailed exploration of issues with stakeholders and was important in the refinement and development of different options. · The Financial Services and Credit Reform Implementation Taskforce (FSCRIT), comprises 113


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 representatives from State and Territory departments and agencies, ASIC and the Department of the Treasury. Its main role in relation to Phase Two is to ensure proposals are developed in accordance with the COAG timetable. FSCRIT consultations have been conducted on a monthly or bimonthly basis, according to need. 9.17 A full membership list of each of the consultation groups is provided at Attachment A. 9.18 In addition, to ensure a broader level of public consultation, the Government released the Green Paper National Credit Reform -- Enhancing confidence and fairness in Australia's credit law in July 2010. The Green Paper set out a range of options in relation to each of the Phase Two topics. It enabled interested parties to provide their views directly to the Government. Approximately 60 submissions were received, enabling the Government to more fully assess the impact of the options canvassed in the Green Paper in developing its reforms (as noted in this RIS in relation to particular topics). To facilitate consultation with small businesses, the Green Paper was also released on the Australian Government business consultation website. 9.19 Draft chapters of the Phase Two Green Paper were also circulated to the ICRCG, ERCWG and FSCRIT for their comment. Implementation 9.20 Phase Two of the Credit Reforms will be implemented by legislation to be introduced in the 2011 and 2012 sittings of Parliament. Regulations to support the legislation may also be made. ASIC will continue to act as the national regulator of consumer credit and will be responsible for administering and monitoring compliance with the Credit Reforms. 9.21 Changes to deliver financial literacy messages to consumers will need to be developed through those programs. Some of these changes will be contingent on the passage of the legislation to implement the reforms; for example, the ASIC website already has information in relation to consumer leases, but the reforms will enable consistent, simpler and more effective information and messages to be provided. These messages could also include information about possible alternative sources of funding in certain circumstances, such as Centrelink products and non-commercial microfinance schemes. 9.22 The Government will continue to consult with stakeholders regarding implementation timeframes and transitional issues, particularly through the ICRCG and ERCWG groups (as regular meetings of these groups will continue). In addition, the Commonwealth Treasury also has well developed links with ASIC and industry bodies that ensure complex issues can be identified early, allowing prompt responses to be provided. 114


Chapter 9 -- Regulation Impact Statement The effectiveness of these relationships was demonstrated throughout Phase One, where a range of transitional and implementation issues were able to be addressed in relatively short periods of time, resulting in both the registration and licensing processes working smoothly for industry players. Review 9.23 The terms of the National Credit Law Agreement agreed by the Commonwealth and all States and Territories in 2009, require the Commonwealth to commence a review of the operation of the National Credit Law, no later than two years from commencement. Regulation of consumer leases Background 9.24 Differences in the way a lease (a hiring of goods) is structured will determine whether or not it is regulated by the Credit Act, and, if so, the extent of the regulation. There are two threshold requirements that must be met in order for the Code to apply to a lease: · The hired goods must be used predominantly for personal, domestic or household purposes. · The total amount payable by the consumer exceeds the cash price of the goods. 9.25 Assuming these requirements the different categories of leases and their regulatory treatment can be summarised as follows: · Leases deemed to be a sale by instalments: This occurs if the person who hires the goods has a right or obligation to purchase the goods, and where the total amount payable exceeds the cash price of the goods. The lessor is required to meet all of the disclosure and conduct requirements that apply to credit contracts; the rationale being that this type of lease will have the same commercial outcome as a sale of goods by instalments, in that the only difference is whether the consumer will have ownership of the goods at the beginning of the finance contract, or at its end. - This RIS will not examine leases that are deemed to be sale by instalments as they do not present consumers with the problems or risk of harm that can arise in relation to consumer leases and exempt leases. · Consumer leases: The hiring of goods is a consumer lease where the person who hires the goods does not have a right or obligation to purchase the goods and where the total 115


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 amount payable exceeds the cash price and the lease is not exempt. Part 11 of the Code regulates consumer leases and sets out requirements, including disclosure requirements, which are significantly less extensive than the analogous obligations applying to credit contracts. - For example, if a car is rented for six months and the total amount of rental payments is less than the cash price of the car, the lease will not be regulated under the Code. Alternatively, if a television is hired for 36 months and the total rent payable is more than the cash price of these goods, the transaction will be a consumer lease. · Exempt leases: Notwithstanding that some specific categories of leases may otherwise meet the criteria above they have been exempted from the Credit Act, under section 171 of the Code. The categories of exempt leases are leases for four months or less, leases for an indefinite period and employment-related leases. The discussion below primarily concentrates on leases that are exempt because they run for an indefinite period, or where the initial term is for a fixed period of less than four months in order to take advantage of the exemption, but both the lessor and the consumer anticipate that the contract will be rolled over on a regular basis. 9.26 The following table summarises the different types of leases, and their regulatory outcomes. Characteristics of Lease Regulatory Outcome 1. Consumer has a right or obligation Deemed to be a sale of the goods over to purchase the leased goods at the time pursuant to section 9 of the end of the contract. Code, and the provider must meet the same requirements as a person 2. The total amount payable by the offering credit contracts. consumer exceeds the cash price of the goods (that is, the reasonable The cost to the consumer is the market value). amount by which the total amount payable exceeds the cash price. 1. Consumer has no right or Regulated as a consumer lease under obligation to purchase the leased Part 11 of the Code. goods at the end of the contract. More limited disclosure and conduct 2. The contract is for a fixed period obligations apply to the lessor relative of more than 4 months. to leases deemed to be a sale of goods. 3. The total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value). 116


Chapter 9 -- Regulation Impact Statement Characteristics of Lease Regulatory Outcome 1. Consumer has no right or Exempted from regulation under the obligation to purchase the leased Code by subsection 171(2). goods at the end of the contract. 2. The contract is for an indefinite period, or for an initial term of less than four months. 3. The total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value). 9.27 There are two different types of retail outlets that offer consumer leases: · In mainstream retail outlets, including national or multi-store operations that only provide household goods through consumer leases. · Smaller retail outlets, often with only a single store, that largely rely on local custom. 9.28 As at July 2010, 52 entities had registered with ASIC as providing consumer leases. Nearly all of the 52 entities who registered with ASIC as providing leases would fall into the last category, as there are only four major lessors. 9.29 In addition, industry sources estimate that exempt lessors have 20 per cent of the market share (based on the number of contracts rather than the value of those contracts). 9.30 There are a number of situations where leases are regularly used: · In mainstream retail outlets, where consumers may be offered a choice for financing goods between credit contracts, particularly continuing credit contracts, and consumer leases. · Smaller retail outlets where the consumer is only given the choice of financing the acquisition of goods through consumer. These goods include refrigerators, washing machines and other household electrical goods. These leases are often used to finance the provision of goods to lower income consumers (particularly those who are unable to afford to pay either through cash or the use of credit cards). · Consumer leases and exempt leases have been used by a number of different operators in door-to-door marketing of household goods to indigenous communities, particularly in rural New South Wales and the Northern Territory. 117


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · Some car dealerships offer consumer leases rather than credit contracts as a means of consumers obtaining possession of a motor vehicle. 9.31 A significant number of lessors bundle the leased goods with other services. These services include: · Warranties for the service or repair of the leased goods; · Products that address the risk of the goods being stolen while they are in the possession of the lessee. · Products similar to unemployment or disability insurance, where the lessee's liability to make rental payments may be extinguished or reduced if they become disabled or unemployed). 9.32 These products are typically automatically included in the agreement; that is, the consumer is not charged a separate cost for them and the consumer has no choice whether or not to accept them. It is therefore not possible to assess the price being charged to the consumer relative to the value of the services being provided. Problem identification Introduction 9.33 The differences in regulatory treatment between credit contracts and consumer and exempt leases can cause the following problems for consumers: · The current regulatory differences between credit contracts, consumer leases and exempt leases create an information asymmetry in relation to: - The terms of the contract, and, in particular, whether or not the consumer has the right to own the goods, and the consequences this has in respect of their rights under the contract; and - The cost of the contract (with consumers unable to assess the cost of a lease except in dollar terms). · Fringe operators may use the absence of regulation to exploit the vulnerabilities of particular classes of consumers (particularly Indigenous communities). They are more likely to use leases for an indefinite term, where the benefit to the consumer is minimal relative to the costs incurred (as the consumer must pay for the goods as long as they retain possession, even where they are household items such as beds or tables). 118


Chapter 9 -- Regulation Impact Statement · Consumers have more difficulty in obtaining redress (whether because they have lesser rights attaching to consumer leases rather than a credit product, or because the Code does not apply at all). 9.34 Some of the analysis below is based on a 2007 report into consumer leases by the Micah Law Centre, titled `A loan in lease clothing: problems identified with instalment based rent/purchase contracts for household goods' (Micah Report).5 The Micah Report states that the research for the study is based on the direct experience of consumers from 20 case studies sourced from community legal centres and financial counselling services, and from reviews of the operation of lessors in retail outlets in Melbourne. Information asymmetry in relation to terms of the contract 9.35 Leases differ from credit contracts in that the consumer does not have a right to retain ownership of the goods at the end of the contract. Consumers are therefore only paying for the use of the goods during the period of the contract rather than the cost of purchasing them outright over time. 9.36 Where the consumer does not have a right or obligation to purchase the hired goods and the lease is regulated by the Code the following obligations apply: · they are under no statutory requirement to specifically inform the consumer that under the lease the consumer will not own the goods; and · the lessor is only required to provide a copy of the contract document to the consumer after they enter into the contract, and, therefore, after they make a purchasing decision. The consumer may therefore only be informed that they are only renting the goods when they receive a copy of the contract, and when this information does not need to be highlighted in the contract. 9.37 Persons offering leases for an indefinite period are under no statutory obligations as to how they inform consumers about the fact that the payments they make will not result in them owning the goods. 9.38 As noted in the above table in the background section, the distinction between a sale by instalments and a consumer lease is based on a technical distinction, as to whether or not the contract gives the consumer the right or obligation to purchase the goods at the end of the term of the contract. In practice therefore financiers can elect to avoid the 5 The Micah Law Centre is a not-for-profit outreach law firm in Victoria, established to provide advice and advocacy for disadvantaged individuals and groups. 119


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 higher level of regulation imposed on credit contracts by not giving the consumer the right or obligation to purchase the leased goods. 9.39 This dynamic has created two problems for consumers. The first is that consumers will enter into leases because of a regulatory preference of the provider, and will do so in situations where it is reasonable to expect that the consumer's purpose is to own the goods at the end of the contract. 9.40 There are two situations where consumers will prefer to own the goods at the end of the contract, according to: · The nature of the goods being supplied -- the goods are of a type where they usually are used by consumers for a period longer than the term of the (for example, beds or tables, or fridges where the term of the contract may only be a period of three years or less, but where the consumer has paid more than the cash value of the goods). · The financial circumstances of the consumer -- low-income consumers are more likely, because of their financial constraints, to want to continue using the goods at the end of the term, rather than wanting to upgrade to newer or replacement goods. This particularly applies to contracts under which they lease cars for periods such as three years, without having an asset at the end of the contract that they can continue using or can trade in order to be able to upgrade. 9.41 The use of a lease is therefore an economically inefficient way of the consumer having these goods in these circumstances. Generally these consumers would not need to use leases if they were either able to access other mainstream options to pay the relatively modest amounts necessary to own the items outright, particularly either by purchasing the goods for cash, or obtain credit through other retailers utilising the widespread `interest free' options that they can facilitate. Conversely, the smaller retail outlets have a niche market and have broad assessment criteria that that allows leases to be approved to consumers can often be pensioners or Centrelink recipients.6 9.42 Low-income consumers are more likely to use leases to acquire goods because they do not meet the eligibility criteria of lenders who offer credit contracts. However, this class of persons is also more likely to be renting cheap or basic household goods where it is more reasonable to expect them to want to own the goods at the end of the contract (rather than return them or continue paying for them). There is therefore a systemic risk of these consumers being misled or not properly informed, 6 Micah Report, page 12. 120


Chapter 9 -- Regulation Impact Statement and entering into lease contracts where they believe they will be able to own the goods.7 9.43 The second problem that arises for consumers from the use of leases relative to credit contracts is that they receive fewer statutory protections. Consumers are generally unable to make informed choices when choosing between these products as they neither appreciate both the differences between the two types of products and the differences in regulation. 9.44 The key areas in which there are differences are: · The lessor may not be liable for misrepresentations by a third party at the point of supply of the goods -- this is particularly important given, as noted above, the structural risk of the consumer being misled prior to entering into the contract. · The consumer may be charged significant sums of money in order to retain possession of the goods once the contract has expired (either a one-off payment or continued payments until the goods are returned) -- with the consumer not having ownership after meeting the payments specified in the lease contract. · The consumer does not receive any benefit for early payments -- as the contract is a rental agreement the consumer does not receive any financial advantage from making payments in addition to the regular repayments (unlike a credit contract where the amount of interest payable is reduced), nor do they receive any statements or information from the lessor that would alert them to this adverse consequence. 9.45 The problems identified above are exacerbated where exempt or indefinite term leases are used. The extent of the use of this model is significant, and is estimated at 20 per cent of the total lease market. The adverse financial consequences to consumers where they enter into such a lease believing they will own the goods are greater, as in effect they are required to make payments for an indefinite period, as long as they retain possession of the goods. There is no `trigger' to alert consumers to this, unlike consumer leases where payments cease at the end of the term of the contract; consumer groups have reported instances of lessees making payments for items such as beds or tables for five to eight years under 7 Consumer advocates consistently identify individual case studies that demonstrate this dynamic in operation, from situations where retailers were actively misled about the nature of the contract they were entering into two examples of consumers being unaware that they would have to keep making payments once the contract had expired if they wanted to retain possession of the goods. 121


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 these types of leases, and paying several times the market value of the goods. 9.46 Lessors who currently provide exempt leases also do not have to comply with the responsible lending obligations (as these requirements only apply to lessors where they enter into leases regulated by the Credit Act). As a result, these lessors do not need to undertake credit checks or test the capacity of the consumer to meet the payments due under the contract. Consumers are therefore at greater risk of defaulting, and being liable for additional costs and charges. 9.47 Where the consumers are in remote or regional areas, and have entered into the lease as a result of a visit by the lessor to their locality they face an additional difficulty. In practice, returning the goods to the lessor will be impractical, with the result that consumers are required to maintain payments even if the goods are no longer required or perhaps even working. Information asymmetry in relation to price 9.48 The following disclosure requirements in relation to the cost of their products apply to lessors: · If they are providing consumer leases: - The only disclosure the lessor is required to make is the cost in dollar terms of each repayment, and the total amount of the repayments. - The lessor is not required to separately disclose charges for other services (such as warranties for the service or repair of the leased goods or quasi-insurance products, where the lessee's liability to make rental payments may be extinguished or reduced if they become disabled or unemployed). - The information about the cost in dollar terms only needs to be included in the contract (not in any pre-contractual document) and the lessor is not required to provide the contract to the consumer before they enter into it except for the purposes of signing it (or, therefore, make their purchasing decision) but only within 14 days of the consumer entering into the lease. · If they are providing exempt leases -- the timing and content of disclosure is unregulated. 9.49 By comparison credit providers are required to provide pre-contractual disclosure of a range of matters relevant to the consumer's decision, including an interest rate and information in relation to fees and charges payable under the contract. They are also required to use a comparison rate (calculated according to a uniform formula) when 122


Chapter 9 -- Regulation Impact Statement advertising the cost of their products, to ensure consumers compare the cost based on the same assumptions. Credit providers are also required to disclose the amount of credit being provided; this means that a credit provider cannot bundle services with goods in the same way, and the cost of the services would be reflected in the annual percentage rate.8 9.50 These differences in the content and timing of disclosure in relation to cost result in an information asymmetry between lessors and consumers. This creates two distinct problems for consumers: · A cost of finance can be charged that is so high it would be discouraging or prohibitive to consumers if disclosed in a way comparable to an interest rate. · Consumers can be encouraged to use leases because of the availability of services bundled with the goods, without the cost of those services being separately disclosed (or, in some cases, promoted as free). · Consumers cannot readily compare the cost of different finance options, and may choose more expensive finance arrangements, or may be steered towards them by suppliers of goods where their conduct is influenced by commission payments. 9.51 These problems arise because the lessor is only required to disclose the total amount to be repaid in dollar terms. In order to assess the cost of making payments over time relative to purchasing the item for cash the consumer needs to undertake a two-step process. They initially need to determine the cash price of the goods, and then assess the amount being charged in excess of that figure and the time they are being given to pay it. 9.52 Neither of these steps may be straightforward. Determining the cash price of the goods according to the advertised or nominated price by the retailer may not reflect or be broadly consistent with their market value.9 Assessing the cost of paying over time is an even more complex calculation. 9.53 The bundling of additional services with the leased goods, and their promotion as benefits can also make it harder for the consumer to assess the overall cost of the package they are being presented with. This practice reduces the likelihood of the consumer declining to proceed with the transaction because the overall cost is high relative to the market value of the goods. 8 The requirement is in subsection 17(3) of the Code. 9 For example, a small number of dealers inflate the value of cars to make the cost of finance seem low. 123


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.54 These limitations mean that consumers are unable to make informed judgements before entering into a consumer lease, and the absence of such disclosure means that consumers are less likely to reject finance where the cost is high and to seek alternative cheaper finance. 9.55 The impact of this information asymmetry in practice is demonstrated by the charges levied by some lessors; consumers can pay amounts for the use of goods at a cost equivalent or greater than interest rates in excess of 40 per cent (if the cost of the lease was calculated as if the transaction was a credit contract).10 The following table, which summarises information from the Micah report, sets out the total amount payable under the lease by consumers for three common household items, and the equivalent interest rate. Goods and Cash Value Cost-charged by lessor (interest rate) 81cm LCD TV ($1,600) $2,800 over 36 months (41%) 260L Fridge ($700) $1,552 over 36 months (62%) Washing machine ($598) $2,020 over 36 months (109%) 9.56 These interest rates are consistent with the experience of ASIC which has also identified lessors providing finance at rates at over 40 per cent, particularly in relation to leases of goods to remote Indigenous communities. 9.57 By contrast, there are no providers offering credit contracts for the purchaser of goods who regularly charge consumers interest in excess of 40 per cent. It is considered that the ability of some lessors to provide finance at this cost is evidence of a non-competitive market, primarily because consumers are unable to readily discern the cost of the finance, and therefore are prevented from making more efficient purchasing decisions. 9.58 Consumer Credit Legal Centre (NSW) has also identified the use of consumer leases in one business model in order to avoid the UCCC disclosure requirements in relation to the cost of credit. This model was utilised by a financier that, in 2008, had over 30 staff, and over $10 million of finance. This model had the following features: · the consumer would sell goods they owned to the lessor, and receive a lump sum equivalent to their financial needs (rather than the cash value of the goods); · the lessor would then lease these goods to the consumer and receive payments over a period of time greater than the sum paid to the consumers; and 10 The interest rate would be higher where the consumer also has to pay an additional amount to buy the goods at the end of the contract. 124


Chapter 9 -- Regulation Impact Statement · complex documentation was used that disguised the nature of the transaction to the consumer. 9.59 While this model is not indicative of practices in the mainstream it is consistent with these practices in the sense that the use of a lease avoids a need for the more detailed disclosure requirements attaching to credit contracts, and increases. 9.60 The second situation in which consumers are disadvantaged is where they may choose more expensive finance arrangements because they cannot readily compare the cost of different finance options. This risk is particularly likely to arise where an intermediary has arrangements with financiers so that they can offer consumers either a credit contract or consumer lease. The lack of any requirement to disclose costs in a comparable way can allow the lessor to pay higher commissions to the intermediary to promote their product to consumers , even though it may be more expensive (in part because the consumer is paying for the cost of these commissions through the charges on the finance product). This channelling of consumers by intermediaries to higher cost products is known as `reverse competition' where competition among providers for access to distribution channels can drive up the price paid by the consumer. 9.61 It is accepted that there are situations in which a consumer will prefer a lease for reasons other than cost (for example, other features of the contract that may result in a higher price). However, this demonstrates the need for an informed discussion to allow the consumer to assess the competing features of the products, including the cost of other features that may attach to a lease. 9.62 The risk of consequent financial detriment to the consumer is that they will pay a higher amount for the goods. This amount will vary according to the cost of credit under a consumer lease relative to a credit contract. 9.63 The precise extent of steering as a result of reverse competition is not measurable in any way, and is therefore unknown. However, it has been identified as a significant concern in a number of the submissions to the Green Paper, suggesting the commission-driven nature of the conduct means the problem is structural in nature. Where consumers are therefore paying higher amounts to finance goods through a lease, when they would be eligible for alternative forms of cheaper credit, the current regulatory arrangements are lessening competition in markets for the supply of goods. 9.64 Consumers who enter into indefinite leases are particularly disadvantaged in respect of cost, as the cost is potentially both greater than that for a fixed term contract, and not readily comparable with other finance options. Consumers are required to keep making payments for as 125


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 long as they retain possession of the goods. This can be for a period that can be open-ended. Use of leases in targeting vulnerable communities 9.65 Both consumer leases and exempt leases have been utilised by door-to-door traders marketing goods in Indigenous communities. The analysis below is based on information obtained by ASIC and on the reported experience of some consumers.11 9.66 Some operators target these communities in that they only, or almost only, solicit consumers in areas with high Indigenous populations. This practice means they do not have a model in which they need to compete on price or service with mainstream providers, and rely on sales only to a relatively vulnerable group. They are therefore not subject to the same competitive pressures as mainstream providers. 9.67 The communities are commonly located in remote or regional Australia, and its members usually have very few alternatives for finance, or, therefore, for obtaining even basic household goods, such as beds or tables. Individual borrowers are commonly in receipt of Centrelink payments and the operator relies on payment through direct debit arrangements that are rarely cancelled in practice. As a result, the operator will continue to receive payments notwithstanding that it may result in financial hardship for the consumer. 9.68 Further, irrespective of whether a consumer lease or an indefinite lease is used, it will usually be the case that the lessor can continue charging the consumer for hire of the goods until the goods are returned. This can be difficult or impractical for consumers in remote areas. In this situation the lessor has a financial incentive not to advise the consumer, before they enter into the contract, that they will not own the goods or that they will have to keep making payments while they have possession. If the consumer was advised of these matters upfront they would be more likely not to enter into the contract, either at all or on those terms. 9.69 The conduct of these types of operators has been associated with the following problems: the use of pressure selling tactics; incomplete or incorrect documentation (including contracts with no specified terms for the repayments); failure to deliver goods or delivery of goods other than those specified in the lease; failure to service damaged items; and the use of itinerant, untrained agents with poor levels of compliance. 9.70 Consumers suffer financial harm in that: · they enter into contracts as a result of high pressure tactics; 11 See Unconscionable Conduct and Aboriginal and Torres Strait Islander Consumers Research Report, by Indigenous Consumer Assistance Network Ltd. 126


Chapter 9 -- Regulation Impact Statement · they can pay significantly more, particularly where they are required to make ongoing payments because it is not practical to return the goods; and · they are paying for goods they have not received or that are different from those they are contracted for. 9.71 The broader problems resulting from unconscionable or exploitative conduct are an indirect consequence of the use of leases in that operators deliberately elect to use a product which does not require them to meet the entry standards to hold an Australian credit licence (ACL), and where ASIC is unable to ban them from providing those products, irrespective of the nature of the conduct they engage in. They also gain commercial advantages from using leases, as outlined in more detail previously; for example, they do not need to disclose an interest rate (this is particularly relevant where the cost is high enough to discourage purchasers if they were informed of the cost); and there are fewer or no statutory obligations (for example, where exempt leases are utilised the lessor does not need to be licensed or be a member of an EDR scheme, or assess the borrower's capacity to meet repayments without substantial hardship). Inadequate remedies 9.72 As noted above, consumers may enter into leases without necessarily appreciating the differences between leases and other forms of credit. There are particular risks that consumers will only become aware of problems at the end of the lease or after they have been making payments for a significant period of time. Consumer are only likely to identify problems at this time when they realise or are informed, contrary to their expectations, that they will only be able to keep the goods if they make additional payments. 9.73 Where this is the case, or where consumers have suffered financial loss in relation to a consumer lease or an exempt lease, the Code currently provides fewer and less adequate remedies to assist them in seeking compensation, compared to a credit contract. 9.74 Consumers also have fewer remedies against the conduct of an intermediary if they obtain goods by way of a consumer lease rather than a sale by instalment. This is because under the Code, some of the provisions in relation to liability apply only to credit contracts (for example, the remedy for false and misleading representations in sections 128 and 154). 9.75 Lessors who only provide exempt leases are completely unregulated by the Credit Act. In addition to the gaps identified in relation to consumer leases, they also are not required to be a member of an EDR scheme. As a result, consumers can experience significant 127


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 difficulty in resolving complaints unless they take court action. This is often not a viable option, particularly for low-income consumers. 9.76 This lack of accountability can encourage lower standards of conduct and supervision on the part of lessors, as they can deny liability for misconduct by third parties who have arranged the lease with the consumer, or do not even need to respond to complaints unless the consumer instigates court proceedings. Objectives of Government action · To reduce the occurrence of the detriment suffered by consumers that, to a large extent, is unnecessary and avoidable. · To improve consumer choice by ensuring that they are provided with relevant information in a form and manner that increases their capacity be able to make comparisons between consumer leases and other functionally similar products. · To achieve consistency in the regulation of products that are different in form but which have similar commercial outcomes, and further competition between providers of these products. · To minimise the impact of any changes on industry, and reduce the regulatory burden resulting from any such changes. Options Option 1: Maintain the status quo 9.77 Under this option, no changes would be made to the regulation of consumer leases, sale by instalments and exempt leases under the Code. 9.78 This option would also take into account the potential impact that the introduction of new obligations (in respect of licensing and responsible lending) under the Credit Act would have on persons who offer consumer leases (but not those who offer exempt leases). Impact analysis 9.79 There will be no changes to existing practices. 9.80 This option would meet the fourth objective. It would only partially meet the first objective to the extent that the introduction of responsible lending obligations and licensing requirements under the 128


Chapter 9 -- Regulation Impact Statement Credit Act reduce the occurrence of the detriment suffered by consumers from consumer leases. However, this in turn may simply result in a greater use of exempt leases (particularly leases for an indefinite period) to avoid these legal responsibilities completely rather than changing their business models to comply with them. This risk is greatest with fringe operators. 9.81 The risk of continuing consumer detriment appears significant given that the differences and gaps in the current regulatory framework have been in existence since the commencement of the UCCC in 1996 and have been utilised by some operators to facilitate outcomes that benefit them but result in financial harm to consumers. Some providers have demonstrated a specific election to provide finance through leases because of the competitive advantages, which suggests this position is unlikely to change in the absence of regulatory intervention. 9.82 To the extent that consumers who hire goods via consumer leases are generally low income consumers with fewer choices, the impact of poor financial decisions is more pronounced. It is important for persons on limited incomes to be able to make more suitable choices when entering into arrangements to hire goods. This is especially so given that low-income consumers generally have fewer finance choices available for the purchase of basic household items. They are therefore less able to bear or adjust to relatively low levels of loss, which therefore have the capacity to cause significant financial hardship. 9.83 In summary, there are no advantages to consumers under this proposal, while lessors will continue to benefit, particularly through being able to charge higher prices because of the lack of competition. Option 2: Regulate consumer leases and exempt leases in a way that acknowledges the functional similarity of these products to credit contracts 9.84 This option would result in: · New obligations being imposed on consumer leases; and · Leases for an indefinite period being regulated by the Code. Consumer leases 9.85 Under this option the following two categories of new obligations would apply to consumer leases: · extending to leases existing and well understood requirements in the Code that currently only apply to credit contracts, either in their current from where these are applicable to consumer leases and where their introduction would address the problems identified above, or in a 129


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 modified way where the different structure of leases requires this (particularly in relation to the ownership of goods); and · introducing new obligations to allow for disclosure of the cost of finance in a way that allows for comparison with credit contracts. 9.86 The obligations in the Code that, under the first proposal above, would be applied to leases include: · the provisions in the Code applying to mortgages and guarantees where the lessee's obligations under the lease are supported by a mortgage (over goods or property other than the leased goods) or guarantees; · requirements in relation to variations to consumer lease contracts (other than those providing for hardship variations, as these obligations already apply); · requirements in respect of providing statements of account (including enabling a consumer to dispute the contents of these statements) and in relation to enforcement practices (including regulating enforcement expenses); and · extending the liability of a lessor for conduct by an intermediary at the point of sale. 9.87 Disclosure obligations would be introduced that are likely to assist consumers in making a better judgement about consumer lease products before deciding whether to use them. These obligations would include: · providing for a high impact short form disclosure of key information about the contract prior to the contract being entered into (with the details of this requirement to be developed in a further RIS discussing disclosure in respect of all products regulated by the Credit Act); · disclosure of the cost of a lease using consistent assumptions that enable a comparison to be made with credit contracts; · disclosure of the amount in dollar terms required to be paid for each dollar of the market value of the hired goods (which would enable consumers to assess the amount they are paying relative to purchasing the goods for cash or using an interest free option, where this is available); and · disclosure of the cost of services provided with the lease, to enable consumers to make informed decisions of each element of a bundled transaction. 9.88 This RIS also identified an issue in relation to the lack of comparative disclosure where an intermediary has arrangements with 130


Chapter 9 -- Regulation Impact Statement financiers so that they can offer consumers either a credit contract or consumer lease. This issue may be further addressed in a RIS that considers the role of these point of sale intermediaries in detail. Leases for an indefinite term 9.89 Section 171(1) currently exempts leases that are for an indefinite period or that have a fixed term of less than 4 months. This option would result in the removal of these exemptions, so that these categories of leases become regulated as consumer leases under the Credit Act. Persons who currently only offer these types of leases would therefore need to meet all the obligations under the Credit Act, including meeting the requirements to hold an ACL, and also meeting the responsible lending obligations. Impact analysis Consumers 9.90 Consumers would particularly benefit from being able to more readily compare the costs of entering into a consumer lease and a sale by instalments and other credit contracts, and make more effective purchasing decisions. They would also benefit from a reduction in cost, where lessors lower their prices because of the need to meet enhanced competition from persons offering credit contracts. 9.91 They would also benefit from: · greater regulation of indefinite leases, which may result in these products only being offered where they meet the consumer's needs, rather than as a way of committing the consumer to making indefinite payments; · exclusion of players who engage in regular misconduct from the industry; and · having greater access to remedies in the event they suffer loss or damage, and this in turn could be expected to promote better standards of conduct by the lessor (to reduce the costs associated with responding to complaints, particularly complaints to an EDR scheme). 9.92 Consumers who currently obtain goods through unregulated providers are likely to have continued access to some goods through lessors who are currently regulated by the Credit Act. The application of the responsible lending requirements, and the need to ensure consumers have the capacity to meet repayments, may mean that they are unable to access the same volume or quality of goods. That is, as a result of those reforms, those consumers who are on low incomes or unable to access other forms of credit, are still likely to be able to obtain goods through leases, but that either: 131


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · the goods they can lease would be lower in value; · the total cost would be reduced, because the individual repayments would be lower; or · the risk of the consumer defaulting, and incurring consequent costs, will be reduced, as a result. Lessors offering regulated products 9.93 Lessors would incur increased costs, as discussed in detail below. However, consumers will have a better capacity to understand the relative costs of different products and therefore lessors may not be able to pass on any increase in costs where, as a result of the reforms, the lessor will need to compete with cheaper credit contracts. 9.94 The impact on those lessors who are already required to comply with the Credit Act would be relatively low, as they are already required to comply with the Act (including the licensing and responsible lending obligations). The main changes would be: · introduction of new pre-contractual disclosure requirements -- these may result in one off costs of between $10,000 and $20,000 for the lessor to change their existing documents so that they comply with the new requirements; and · changes to their internal procedures in order to comply with obligations in the Credit Act -- these costs would not be significant in that the substantive nature of these obligations is well understood as they have been in force in relation to credit contracts, through the UCCC, since 1996. Lessors offering unregulated products 9.95 Those lessors providing unregulated products would need to decide whether to exit the market or apply for an Australian credit licence (ACL). It could be expected that the majority of these would decide to leave the industry, as the use of exempt leases is particularly prevalent among those who are targeting vulnerable consumers and have no interest in establishing a broader or mainstream presence, or therefore in meeting the range of legal obligations associated with holding an ACL. If they cease offering leases they could still be subject to limited regulation while they are receiving payments under existing leases (adapting the existing regulatory approach in the Credit Regulations 2009 for lenders who choose not to apply for an ACL following the commencement of the Credit Act). 9.96 The lessors who decide to seek a licence will incur costs in relation to entry requirements, ongoing conduct standards and responsible lending conduct obligations. If the lessor sought legal advice for this purpose they could expect to incur costs of $60,000 to $180,000 in order 132


Chapter 9 -- Regulation Impact Statement to be `regulator-ready'. The cost would vary according to factors such as the range and type of products being provided and the extent to which existing procedures need to be changed. 9.97 A lessor would also incur costs to third parties as follows: · Costs payable to ASIC in connection with the licence, that is, an application fee, and an annual fee.12 For lessors, the amount of the fee is based on the amount of rental payments under contracts arranged and can range from $450 to $21,000 (although most lessors are likely to be at the lower end of the scale).13 · EDR membership: application fee $165 -- $220; membership fee (calculated according to membership type and the size and nature of business) and complaint fees.14 9.98 Lessors would also incur costs in changing their practices in order to ensure they are complying with the new obligations. While there would be one off costs in documenting these new practices and training staff, there would be little difference in ongoing costs once the new procedures have been introduced, as they would be replacing existing practices. Providers of credit contracts and government 9.99 Credit providers who offer regulated products more competitive to leases may increase their market share due to greater transparency in pricing. These providers will not incur additional compliance costs. 9.100 The amount of revenue generated for government by fees associated with, in all likelihood, a small number of lessors applying for an ACL is unquantifiable but insignificant. 9.101 In summary, this option would have the following costs and benefits: · Lessors who currently offer consumer leases (a product already regulated by the Credit Act) would incur some compliance costs in relation to changes in documentation; however, these would be significantly lower than the costs they have incurred in obtaining an ACL or complying with the responsible lending obligations. They would find themselves able to compete more effectively with providers of exempt leases, but, in turn, would no longer have the 12 See ASIC Info Sheet 108 How much does a credit licence cost? 13 National Consumer Credit Protection (Fees) Regulations 2010, Schedule 1, item 1.1. 14 See http://www.cosl.com.au/Member-Fees; http://www.fos.org.au/centric/home_page/members/apply_for_membership.jsp. 133


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 benefit of their current competitive advantages relative to credit contracts (and may have to reduce the cost of their products in order to maintain their market share). · Lessors who currently offer products unregulated by the Credit Act would incur significant costs as they would need to meet the standards and obligations applying to all licensees. It could be expected some would cease offering these products (particularly those fringe operators who operate without any business infrastructure). · Credit providers who operate business models in which their products compete with credit contracts would no longer be at a competitive disadvantage and, where their products were cheaper than consumer leases could be expected to benefit through increased market share. · Consumers would benefit in a range of different ways, principally through being able to select the cheapest finance option, and also through better protections from fringe operators. These changes would particularly benefit low-income consumers. Option 3: Use financial literacy programs and materials to educate consumers as to the differences between credit contracts, regulated leases and unregulated leases 9.102 This option would see existing education or financial literacy programs used to provide lease-specific information to consumers, to encourage better decision-making by consumers in relation to the use of credit contracts, regulated leases and unregulated leases. It is noted that ASIC already has information comparing leases and other forms of credit on its website, but that this option contemplates more extensive and targeted information, delivered through additional mechanisms. 9.103 It could include the dissemination of information through existing financial literacy avenues, including school programs and government websites. The differences between these products are, as set out above, largely based on technical features of the contracts between the financier and the consumer, and the educational materials would therefore need to reflect this. 9.104 This approach would not prevent persons from offering consumer leases or exempt leases on the same terms as is currently the case, until any education campaign changed consumer behaviour sufficiently to require them to reassess their products. 134


Chapter 9 -- Regulation Impact Statement Impact analysis Consumers 9.105 It is unlikely that an education campaign would have an immediate impact on consumer behaviour as the use of leases is linked to a desire by the consumer to obtain goods. In these circumstances the consumer's initial concern is on selecting these goods from a retailer, and then responding to the finance options presented by the retailer. The difference between leases and credit contracts, as presented in the abstract, will not necessarily assist a consumer to identify whether the form of finance they are being offered is a lease or a credit contract. 9.106 An education campaign would therefore also need to assist consumers to be assertive in their dealings with the providers of goods, and to specifically inquire what form of finance would be used. This restricts the extent to which an education campaign will be effective, particularly where consumers may have limited choices available to them and are offered a lease as the only source of finance (on a `take it or leave it' basis). 9.107 This option would have no immediate impact on providers of leases or on their competitors. It may have a limited impact over time, as consumers adjust behaviour in response to a greater awareness of the consequences of different choices. This long-time benefit would, however, depend on continued education programmes to inform each new generation of consumers. 9.108 This approach would be unlikely to meet the government's objectives, other than the fourth objective. 9.109 In summary, this option would have the following costs and benefits: · Lessors would not incur any costs, except as over time consumer decision-making changed to indicate a preference for credit contracts over consumer leases. · Some consumers, who assimilate the messages of the education campaign, would either avoid leases or enter into lease contracts with a better understanding of how they work. Consumers who do not respond to these messages or who do not have alternative finance choices available to them would continue to be at risk of suffering the financial disadvantages identified in this RIS. · Credit products who operate business models in which their products compete with credit contracts would continue to be at a competitive disadvantage. 135


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Consultation 9.110 The Government has conducted extensive consultations in the consideration of enhancements to the regulation of consumer leases via the Green Paper and the Industry and Consumer Representatives Consultation Group. 9.111 In addition, the Government has formed a specialist group on this topic, given the technical issues associated with leases. This group comprises lessors (represented directly rather than through an industry body), consumer representatives with significant experience in the area, the Financial Ombudsman Service (FOS) (because of its experience with complaints in respect of leases) and providers of credit contracts. The level of expertise within this group has resulted in a frank and detailed analysis and exchange of information that has informed this RIS and is expected to assist in the implementation of the proposals. 9.112 The views of stakeholders are set out below. Consumer and legal representatives 9.113 The option of applying the protections provided to consumers using credit contracts under the Credit Act to users of consumer leases is supported by a range of consumer and legal group stakeholders, including the Brotherhood of St Laurence, Consumer Action Law Centre, National Legal Aid, and the Wesley Community Legal Service. In particular, these stakeholders agree that providing consumers with disclosure regarding the cost of the consumer lease and being provided with enhanced disclosure that improves the consumers' ability to compare the cost of a consumer lease with a credit contract are key necessary reforms. 9.114 These groups also agree that the different levels of regulation applying to credit contracts and consumer leases creates regulatory arbitrage and is allowing lease providers to reduce disclosure and other requirements under the Code by structuring their products as a lease, rather than a credit contract. Industry representatives and professional bodies 9.115 Several industry and professional body representatives including GE Capital, the Mortgage & Finance Association of Australia and Min-it Software have expressed various concerns regarding practices under current regulation including competitive bias and regulatory arbitrage. These stakeholders agree that greater regulation of consumer leases is required. 9.116 Several industry and professional body representatives including Flexigroup, the Australian Finance Conference and the Finance Brokers Association of Australia consider that there is insufficient evidence to determine that additional regulation of consumer leases is warranted. 136


Chapter 9 -- Regulation Impact Statement 9.117 To the extent they acknowledge there may be regulation their primary concern is that leases are not regulated in a way in which ownership of the goods passes to the consumer. This approach has not been contemplated in this RIS. Dispute resolution provider 9.118 The Financial Ombudsman Service considers that consumer leases should be subject to the same disclosure requirements as sales by instalments and credit contracts. Recommended option 9.119 Options 2 and 3 are the preferred options. It is considered the combination of these two options will operate in a complementary way to deliver both benefits to consumers both in the short-term and the medium-term. ENHANCEMENTS TO THE NATIONAL CONSUMER CREDIT PROTECTION REGIME Background 9.120 During Phase One of the National Consumer Credit Protection reforms, stakeholders raised concerns about certain aspects of the UCCC which have been replicated in the Code.15 9.121 It was agreed that improvements to the Code would be considered during Phase Two of the credit reforms and were the topic of Chapter 7 of the Green Paper. The following issues have been identified: · The provisions allowing borrowers to request a variation of their credit contract on the grounds of financial hardship (whether before or after enforcement action) are highly prescriptive, and subject to a restriction in that they only apply to persons who have borrowed up to $500,000. This restricts the capacity of borrowers to obtain a variation, even where they only need a variation to address a short-term change in their circumstances. Three different aspects of this topic are considered below. 15 The Code (and the UCCC before it) regulates credit provided to natural persons for personal, domestic and household purposes. From 1 July 2010, the Code also regulates credit provided to natural persons for investment in residential investment property. 137


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · There is no general remedy provided for unjust conduct by brokers or other intermediaries (as the Code only provides a remedy where there has been unjust conduct by lenders). This creates a gap as consumers otherwise need to rely on general prohibitions that may not always provide a remedy where they have suffered loss because of the conduct of a broker. · The Code does not prohibit or restrict the use of particular words or phrases. In the credit context, some words or phrases have an emotional resonance with consumers (for example, `impartial' or `interest free'). Consumers may be more susceptible to entering into contracts where brokers or lenders have used these terms in advertising, even where they may not be strictly correct or are subsequently qualified, and where therefore the contract is inconsistent with the use of these words. · The Code only contains a partial prohibition against door-to-door canvassing of credit. The prohibition does not apply where goods are being sold on credit or provided through a lease. Given the range of alternative distribution channels available today, door-to-door selling in this way is largely associated with targeting of vulnerable consumers, and often with high-pressure or manipulative sales tactics. Issue One -- Types of hardship variations that can be requested Background Rights of Borrowers under the National Credit Code 9.122 Under the Code borrowers have a statutory right to request certain variations to their contract where they are unable reasonably, due to illness, unemployment or other reasonable cause to meet their obligations where the value of their contract is under the monetary threshold.16 This right is subject to a number of limitations, primarily that the borrower must specifically ask their credit provider to change the contract in one of the three following ways: · extending the period of the contract, and reducing repayments accordingly; · a repayment holiday (without extending the period of the contract); or 16 Section 72 of the Code. 138


Chapter 9 -- Regulation Impact Statement · a repayment holiday and extending the period of the contract. 9.123 If the borrower formulates the request in some other way (for example, they simply ask for a variation without putting forward any proposal of their own) this will not be a `request' within the meaning of the Code, and therefore the credit provider is under no statutory obligation to respond in accordance with the Code. 9.124 The wording of the current provision therefore focuses attention on a relatively narrow set of options for varying the contract, rather than directing the parties involved to consider the substantive issue, namely whether a variation (of any type) would resolve the borrower's situation and void them defaulting, while still being able to repay the amount borrowed. 9.125 In relation to a request that falls within one of the three categories above, a lender must a respond in writing within 21 days, and set out the reasons for denying the request (if this is the outcome). A request can be legitimately denied where the credit provider does not reasonably expect the consumer to be able to meet their obligations despite a variation. 9.126 A debtor can apply to the court to change the contract if the credit provider refuses a hardship request. If successful, a court has power to order a variation as described above.17 Consumers may also apply to the credit provider's external dispute resolution (EDR) scheme to reconsider a request for a hardship variation. 9.127 Changes to a contract can also be negotiated by agreement between the parties.18 There are no limitations on what variations can be made under this provision. However, if a request to amend a contract which is made outside of the hardship provision in the Code is refused by the credit provider, the consumer has no statutory recourse to a court (or EDR) for review. These variations are therefore within the discretion of the credit provider. 9.128 Some credit providers have elected to become signatories to a voluntary industry code.19 These types of codes include requirements that signatories will assist consumers in financial hardship beyond meeting the statutory obligations required by the Code. While there is no statutory recourse to a court for review, the jurisdiction of EDR schemes can include monitoring compliance with industry codes. 17 Section 74 of the Code. 18 Section 71 of the Code. 19 Such as the Australian Bankers' Association Code of Banking Practice, the Mutual Banking Code of Practice and the Mortgage & Finance Association of Australia Code of Practice. 139


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.129 In April 2009 the Treasurer announced an agreement between the Government and the four major banks, to assist borrowers who are experiencing financial difficulty as a result of the global financial crisis by temporarily adopting expanded principles on hardship. By June 2009, all 144 retail banks, building societies and credit unions had agreed to adopt the expanded principles. Under the expanded principles, these institutions work with borrowers, irrespective of the value of their loan, to determine the most appropriate assistance option. In practice, nearly all of these institutions were already signatories to a voluntary code containing similar obligations, and this agreement therefore did not significantly change the way in which they operated. However, there are differences in approach between lenders in relation to compliance with these voluntary obligations (as discussed in detail below). 9.130 In the discussion of this issue below the term `credit' is used to refer to both credit contracts and consumer leases. Levels of debt and financial hardship in Australia 9.131 Between March 2000 and March 2010, total outstanding consumer credit (owner-occupied housing credit and other personal credit) increased from $277.2 billion to $913.5 billion. This equates to an average annual growth rate of 12.7 per cent. Total outstanding credit in the economy, which includes consumer credit, grew at an average rate of 11.1 per cent over the same period.20 9.132 The growth in the volume of consumer credit has also resulted in an increase in the level of debt stress amongst Australian households (exacerbated in the last two years by the global financial crisis). This has resulted in a greater number of borrowers at risk of defaulting under their credit contracts, and an increase in the number who need or are seeking variations to their credit contracts on the grounds of financial hardship.21 The Treasurer's announcement from April 2009 was a reflection of this situation. 9.133 During 2008-09 there were 6,731 new disputes relating to credit lodged with the Financial Ombudsman Service (FOS), an ASIC-approved EDR scheme. This was `up 36 per cent on the previous financial year and reflects the deteriorating economic condition of 2008-2009 and the hardship experienced by many consumers'.22 20 Reserve Bank of Australia, Financial Aggregates, March 2010 . 21 www.vedaadvantage.com/news-and-media/article.dot?id=509973; www.couriermail.com.au/money/banking/families-gripped-by-financial-hardship/story- e6freqox-1225767439923; http://www.rba.gov.au/speeches/2010/sp-ag-300310.html. 22 FOS 2008-09 Annual Review. 140


Chapter 9 -- Regulation Impact Statement 9.134 The Credit Ombudsman Service Ltd (COSL), another ASIC approved EDR scheme, reported that `enquiries increased by 21 per cent in 2008/2009' while `complaints increased by 19 per cent in 2008/2009'. `Issues relating [to] financial hardship alone accounted for a significant 22 per cent of all enquires and complaints we received. Applications for a variation to a credit contract on grounds of financial hardship are likely to increase further in the next financial year'.23 9.135 The following graph shows the percentage of home loan provided by banks in arrears by greater than 90 days between 1994 and 2010.24 Although the arrears rate is low in percentage terms, it remains elevated in historical terms (with this trend consistent with that for home loans provided by lenders other than banks). The need for a hardship variation is most pronounced in relation to mortgages as, first, this debt is likely to be a borrower's largest commitment (and therefore the one they will have most difficulty in meeting), and, second, the consequences of default are greater relative to other debts (including potentially loss of the family home). 23 COSL Annual Report 2009. 24 Financial Stability Report, March 2011 Reserve Bank of Australia. 141


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Problem Identification 9.136 The discussion above indicates that borrowers only have a right to seek a variation to address short-term hardship on relatively narrow grounds, and where their request conforms to precise legal requirements. This creates a risk of two distinct problems for borrowers: · the lender may refuse to consider a variation of their contract because the borrower's request did not conform to the requirements under the Code; or · lenders may only provide a variation that is one of the three options set out in the Code, when a different response would more effectively address the borrower's situation. 9.137 In both cases the consequence for the borrower is the same, namely that they may default under their credit contract and face enforcement action when, in some situations, this could have been avoided. 9.138 There is evidence from a number of different sources that some lenders are not properly meeting the obligations in their voluntary code in relation to hardship, and that they are only complying with the requirements in the Credit Act. They therefore have practices which mean 142


Chapter 9 -- Regulation Impact Statement they do not actively seeking to resolve, in a broader way, the position of borrowers who are in financial hardship. 9.139 The first source is a Bulletin issued by FOS in March 2007 which set out its concerns that some member banks were not complying with the requirement in the Code of Banking Practice to actively inform customers in financial difficulty about the hardship provisions of the UCCC (rather than only responding to requests made in accordance with the UCCC).25 FOS stated that: `It has become apparent that across a number of banks the material provided to customers and the internal processes applied focus almost entirely on the matters arising under section 66 of the UCCC and do not pay adequate regard to the fact that financial difficulty could arise from circumstances other than illness, unemployment or another cause; and the ways in which a subscribing bank may respond to those circumstances are potentially broader than by the express changes described in section 66'. 9.140 Secondly, in 2009, ASIC conducted a review of hardship practices by 15 major lenders. The key relevant findings in the report were that: · One lender would only consider an application made in accordance with the statutory requirements, and that otherwise it would not offer any assistance. All the other lenders did not differentiate in their responses. · Lenders preferred to provide a similar response irrespective of the borrower's situation; typically this was short term assistance such as a three month payment moratorium. This response did not require an assessment of the consumer's circumstances and needs and then varying the contract to match those needs. · Lenders generally have a far wider range of options for responding to hardship than those set out in the Code, but in practice tend to provide a much narrower range of options. 9.141 The results of the ASIC survey also raise an inference that the FOS Bulletin did not result in all lenders reviewing their level of compliance with a voluntary code to ensure they were meeting its standards of conduct. 9.142 Further, both EDR schemes, FOS and COSL, have reported high rates of negotiating variations between lenders and borrowers where the lender initially refused a request for a variation. In its Green Paper submission FOS noted that over 80 per cent of disputes in the period 25 Banking and Finance Bulletin 53, Customers in financial difficulty - Code of Banking Practice and UCCC Obligations (March 2007). 143


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 1 January to 20 July 2010 were resolved successfully, with agreements made on grounds not necessarily available under the Code. COSL reported a similar experience, and also noted in their Green Paper submission that their experience was that negotiated agreements often involved variations outside the Code. 9.143 The outcome of complaints to EDR schemes clearly indicates that a significant percentage of lenders are rejecting applications for hardship when in fact the consumer is in a position to continue making payments under a variation to their contract. It suggests that lenders are taking a narrow or technical view of whether to provide a variation, rather than considering the overall position of the borrower. 9.144 Finally, it is also noted that fringe or predatory lenders who provide `equity stripping' loans have no interest in providing hardship variations, and could be expected to rely on any legal technicalities to avoid doing so. This is because the intention of these lenders is to maximise the debt incurred by the borrower in as short a period as possible, and particularly through default or penalty interest and enforcement expenses. While only representing a very small segment of the market these lenders cause significant losses to individual consumers. 9.145 It would generally be expected that it would be in the interests of lenders to provide a hardship variation where appropriate, as it would be preferable for the contract to remain on foot and for the lender to receive ongoing payments without the costs of enforcement action. Both the ASIC report and the experience of both FOS and COSL indicate that this is not always the case. Possible reasons for this include: · Compliance procedures are developed to meet the requirements imposed by the law, rather than being applied more flexibly (notwithstanding that this may be in the interests of the lender). · It is administratively simpler for lenders to adopt a standard response to requests for hardship (such as providing a three month moratorium) rather than assessing each application on its merits. · Another reason may be that some lenders, particularly smaller lenders, are reluctant to defer payments, and prefer to receive payments as early as possible. 9.146 It is also noted that not all borrowers who have an application for a variation rejected will pursue a complaint to an EDR scheme, and that there will be a percentage of borrowers therefore who end up facing enforcement action or selling their home, when they would be very likely (given the FOS resolution rate of 80 per cent) to avoid this outcome if they did complain. 144


Chapter 9 -- Regulation Impact Statement Objective of Government action 9.147 The objective of government action is to support sufficient flexibility in the hardship variation provisions to enable the most mutually beneficial outcomes for lenders and consumers. Options Option 1.1: Maintain the status quo 9.148 Under this option, the existing limited range of variations that can be requested under the hardship provisions will be maintained. This presupposes that the existing mechanisms for requesting variations to contracts when consumers find themselves in financial hardship are already sufficiently flexible. Impact analysis 9.149 Under this option, there would be no additional impacts on consumers or credit providers. Some consumers would therefore continue to be disadvantaged, particularly by losing the opportunity to retain possession of their homes where the lender, adopting a strict but legally correct approach to hardship variations, refused to change the terms of the contract even where doing so would result in the borrower being able to make repayments. Option 1.2: Broaden the types of variations that can be requested 9.150 Under this option the types of variations that can be requested will be broadened. Rather than establish additional prescriptive types of variations, it is proposed that the provision be written as a principles based right to request a variation when experiencing hardship, which should only be granted where the debtor reasonably expects to be able to comply with their obligations, as altered. Credit providers would not be obliged to agree to a variation that sees them receiving a lower amount than would otherwise be due under the contract. 9.151 This approach would be driven by an underlying policy objective that, as far as possible, borrowers who can meet their financial obligations through a variation, should be assisted to seek such changes to their contract through a flexible response adapted to their individual circumstances. Impact analysis Consumers 9.152 Consumers will benefit from the additional flexibility in the types of variations they can request, and their requests will not be declined for technical reasons, thereby increasing their ability to keep their contract 145


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 on foot or recover from default. The most substantial benefit will accrue to those borrowers who are able to remain in their own homes, and who will avoid significant costs (particularly enforcement costs and legal expenses) and consequent social dislocation. 9.153 Avoiding default means that consumers will not be liable for default fees and charges and enforcement expenses which would otherwise be incurred by their credit provider. In addition, it would avoid a default listing being placed on their credit file, which could see them unable to obtain additional credit or having to pay a higher price for it. 9.154 It is expected that a number of requests will also be resolver quicker (based on the experience of the extent to which requests for hardship variations that are initially rejected by the credit provider are then resolved through the intervention of an EDR scheme). Consumers will benefit from the likelihood that requests are resolved quicker and have improved confidence that reasonable variations are likely to be made. 9.155 If the options in the statutory right were broader, there would be improved reviewability of lender's decision through internal mechanisms and external oversight, as compared to the current reliance on changes by agreement. 9.156 Consumers whose financial position is irretrievable would still face enforcement action, as is currently the case. Credit providers who are not signatories to a code of conduct 9.157 This class of lenders are likely to incur additional compliance costs in changing the way in which they respond to requests for hardship variations, as they are not already covered by industry codes (noting that some may nevertheless already currently adopt a flexible response to hardship). 9.158 The cost of a lender reviewing one aspect of their systems in relation to hardship variations is likely to be quite low, given that it is estimated that it could cost a lender currently unregulated by the Act as little as $60,000 to comply with the Code in its entirety. 9.159 These costs could also be partially offset by a better performance of their overall lending portfolio, with reduced enforcement expenses and fewer bad debts. Notwithstanding that these advantages could be expected to encourage all lenders to already act in this way, it is noted that this is not the case (as discussed above). 9.160 In addition, it is likely that over time more hardship disputes would be resolved internally, as lenders adapted to the new requirements and became more effective in identifying and providing the appropriate response to an individual's circumstances. This would result in minor 146


Chapter 9 -- Regulation Impact Statement savings for credit providers, as EDR schemes charge a fee for each dispute received. Credit providers who are signatories to a code of conduct 9.161 This option has a more limited impact on those lenders who are signatories to a code of conduct in which they have voluntarily agreed to be more responsive in their dealings with consumers who are in financial hardship, irrespective of the value of the credit contract. This would include all ADIs, and would cover the majority of credit contracts. 9.162 The nature of the impact would be: · For those lenders already fully complying with the code -- the change to their business would be minimal; and · For those lenders not complying with the code, or complying inconsistently (as suggested by the ASIC report and the FOS bulletin) -- the introduction of these obligations in law would introduce greater accountability and responsibility for non-compliance, and could be expected to result in greater internal changes to their practices to ensure they were now meeting these requirements. 9.163 In relation to those lenders who are ADIs, APRA has advised that there may be more loans which, because of delays in repayment or variation in terms, may need to be classified as impaired (and therefore provisioned). However, to the extent the terms of a loan are renegotiated under hardship provisions (which should not be done in circumstances where an inevitable default by the customer is probable) there would be no impact on the estimated future cash flows of the financial asset and therefore no impairment charge. The impact of broadening the statutory grounds on which a variation could be sought would therefore be expected to have a minimal impact on APRA-regulated entities. 9.164 This option could be expected to have the following costs and benefits: · A significant percentage of consumers who currently have requests for hardship variations refused would be provided with changes to their contract that avoid them going into default, or enable them to remedy a default in a relatively straightforward way. · Lenders would incur minimal compliance costs, and could be expected to have lower default rates overall (noting that these costs may vary according to whether or not the lender was a signatory to a code of conduct with similar obligations, and, where it was a signatory, whether or not the lender was already meeting the standards of conduct in that code). 147


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Stakeholder views 9.165 This option was supported by EDR schemes, consumer groups and some lenders in their Green Paper submissions. Expanding the types of variations available provides greater flexibility and access to review thereby increasing the potential to stay out of default. It also addresses the concern that consumers' requests could be declined for technical rather than substantive reasons. 9.166 Although MFAA, ABA and ABACUS did not support any further regulatory intervention in their Green Paper submissions, they noted that adopting this recommendation codifies their codes of practice and should have only a minimal impact on their members. 9.167 APRA has considered the prudential implications for the proposed expansion of the circumstances under which borrowers can ask lenders to vary loans under the hardship provisions. They acknowledge that the effect of the broadened ambit of the provisions means that there may be more loans which, because of delays in repayment or variation in terms, may need to be classified as impaired (and therefore provisioned). However, APRA does not believe the proposals raise significant prudential concerns as: · the proposals only give consumers a right to request a variation, as opposed to a right to a variation; · a credit provider will not be obliged to provide a variation that sees them receiving a lower amount than would otherwise be due under the contract; and · a variation should continue to be granted only where it is expected the consumer will be able to meet their obligations after the variation. Recommended option 9.168 Option 1.2, broadening the types of variations that can be requested, is the recommended option. Avoiding a narrow or prescriptive approach to hardship variations will assist consumers and lenders to negotiate the most beneficial outcome. It would remove unnecessary inflexibility from the statutory right to request a variation and increase access to independent review of the lender's decision. A variation would be provided according to whether or not the borrower can meet their liability to the lender through the variation, rather than whether the request meets relatively technical procedural requirements. 9.169 As this recommendation codifies leading industry codes of conduct and EDR rules, it should have minimal compliance cost implications for lender while delivering significant protections to consumers (in terms of greater flexibility in keeping contracts on foot). 148


Chapter 9 -- Regulation Impact Statement Issue Two -- changing the monetary threshold above which a consumer does not have a statutory right to request a hardship variation or postponement of enforcement proceedings Background 9.170 The right of borrowers to seek a variation of their credit contract under the Code is subject to a constraint, in that it is only applies to borrowers where the maximum amount of credit available under the contract did not exceed a prescribed figure. 9.171 The way in which this figure was determined has changed as follows since the introduction of the UCCC: · In 1996, when the UCCC first came into force, the statutory right for consumers to request a variation to their contract only applied to contracts under $125,000.26 · Changes to the State regulations between November 2004 and July 2005 resulted in the introduction of a floating threshold linked to equal to 110 per cent of the average loan size for the purchase of new owner occupied dwellings in New South Wales. The threshold changes monthly, and has varied significantly, from $295,790 (Aug-Sept 2005) to $387,420 (Sept-Oct 2010). Since July 2009, the threshold for these contracts has been around $350,000. This threshold continues to be relevant for pre-1 July 2010 contracts only. · As part of Phase 1 of the national credit reforms, the threshold for contracts entered into after 1 July 2010 was increased to $500,000 (or higher as specified in regulations).27 This threshold is not indexed, and as a result it can be expected that over time an increasing number of credit contracts will be over the threshold 9.172 This threshold is also relevant to the right to request a postponement of enforcement proceedings (discussed below in Issue Three).28 26 In 1962 the Molomby Committee recommended that consumers be given a statutory right to seek changes on the basis of hardship for secured debts. Such rights have been included in various hire-purchases and credit Acts since then. 27 http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2009/036.htm&pageID =003&min=njs&Year=2009&DocType=0. 28 Section 94 of the Code. 149


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.173 This discussion only applies to contracts entered into after 1 July 2010. For constitutional reasons, the basis for calculating the threshold for contracts entered prior to 1 July 2010 cannot be altered. Problem identification 9.174 The existence of a monetary threshold (of any amount) necessarily creates a class of borrowers who will be denied access to a statutory right to seek a variation. This creates a risk for these borrowers that the lender may refuse to provide a variation of their contract, even where the variation would allow the borrower to avoid defaulting. Where these persons are in short-term financial difficulties, their options are then limited to refinancing (with transaction costs, and assuming that a new lender is prepared to lend to the borrower), or facing enforcement action (and consequent costs). 9.175 The evidence of lender conduct set out in detail in Issue One above indicates that some lenders: · take a technical approach to responding to requests for hardship variations, and will only assess them in accordance with the law, resulting in requests in respect of loans over $500,000 being rejected; · respond to requests in a formal rather than substantive way, for example, by providing a short term moratorium (which may only exacerbate the problem for the consumer after this period, when the amount outstanding has increased and their underlying financial situation has not changed); and · reject requests for hardship variations when, following complaint to an EDR scheme, a repayment scheme is negotiated that enables the consumer is meet their obligations under the contract. 9.176 Loans which exceed the threshold would generally be home loans secured by a mortgage, and, in the majority of cases, the lender would be an ADI or RFC. The number of contracts which exceed the threshold are concentrated in high cost metropolitan areas and are expected to increase in line with increasing house prices. There is no evidence to suggest that these consumers differ in some way from persons who borrow less than $500,000; while they may earn more money in order to be able to service a higher level of repayments there is no clear distinction between the two classes of borrowers. 150


Chapter 9 -- Regulation Impact Statement 9.177 Table 1 shows that, based on a mortgage of 95 per cent29 of the median sale price of all dwellings (strata and non-strata) in certain Sydney metropolitan areas as at December 2009, the value of a significant number of consumers' home loans could exceed the current $500,000 monetary threshold. Table 9.1: Housing New South Wales, A8. Median Sales Prices -- Greater Metropolitan Region by statistical sub-divisions/postcodes -- December 200930 Location 95% median sale price Per cent annual change Inner Sydney $551,000 16 % Eastern Suburbs $760,000 26.4% St George -- Sutherland $519,650 20.2% Inner Western Sydney $584,250 25% Lower Northern Sydney $665,000 26.4% Central Northern Sydney $643,150 15.7% Northern Beaches $752,400 18.2% 9.178 Similarly, Table 2 shows that based on a mortgage of 95 per cent of the median sale price of houses in metropolitan Melbourne, the value of consumers' home loans could exceed the current threshold. Table 9.2: Real Estate Institute of Victoria, Metropolitan Melbourne Median Prices.31 Dwelling type 95% median sale Median sale Per cent price price June Qtr change 2010 Jun-09 to Jun-10 Houses $531,050 $559,000 26.8% 9.179 Although the average loan size remains well below the current threshold, it is expected that the number of loans in excess of $500,000 will increase, as house prices increase. Based on data from the Australian Bureau of Statistics, Treasury estimates that more than 35,000 home loans in excess of $500,000 are written each year, and that the total number of such loans on foot will increase with each year (as more loans of this type 29 Many credit providers will lend up to 95 per cent of the value of a residential property when secured by a first mortgage. 30 http://www.housing.nsw.gov.au/NR/rdonlyres/C56898FB-D99E-4013-835A- B88188793AA7/0/Sales_Metro_PcodeSSD_2009q4.pdf. 31 http://www.reiv.com.au/home/inside.asp?ID=1048&nav1=1226&nav2=165&nav3=1048. 151


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 will be provided than are discharged).32 It is not known how many of these loans are varied or default because the consumer experiences financial hardship. Objective of Government action 9.180 The objective of government action is to support access to the hardship variation provisions to enable the most mutually beneficial outcomes for lenders and consumers. Options Option 2.1: Maintain the status quo 9.181 Under this option, the existing monetary threshold above which a consumer does not have a statutory right to request a hardship variation of $500,000 would be maintained. Consumers with contracts in excess of the threshold would continue to lack access to the statutory right to request hardship variation and to have that decision reviewed. Those consumers would need to rely on other mechanisms to obtain hardship variations, such as industry codes (where they apply). Impact analysis 9.182 Under this option, there would be no additional impacts on consumers or business. Some consumers would continue to lose the opportunity to retain possession of their homes where the lender refused to vary the terms of the contract even where doing so would result in the borrower being able to make repayments. The number of consumers in this category would increase over time as the value of contracts increases relative to the threshold. Option 2.2: Increase the threshold under which a consumer has a statutory right to request a hardship variation 9.183 Under this option, a threshold would be maintained but would be increased. Possible models for this approach would be: · to increase the threshold to a fixed figure such as $1 million; · to adopt a new higher floating figure (for example, using a figure equal to 110 per cent of the average loan size for the purchase of new owner occupied dwellings in inner Sydney, rather than greater New South Wales); or 32 Australian Bureau of Statistics Survey of Income and Housing 2007-08 and 5609.0 Housing Finance, Australia Tables 9a and 12, August 2010. 152


Chapter 9 -- Regulation Impact Statement · to set increments after certain periods of time (for example, increased by $10,000 every year or $50,000 every three years). 9.184 Further consultation on the method of determining the appropriate level of the threshold would need to be undertaken. Possible methods of increasing the threshold include annual indexation or linking to movements in the median house price. In certain market conditions (for example deflation) use of these methods would result in the threshold decreasing unless expressly preserved. 9.185 For example, if the hardship threshold was linked to equal to 110 per cent of the average loan size for the purchase of new owner occupied dwellings in Inner Sydney (rather than greater New South Wales as it was prior to 1 July 2010) the threshold would have been $638,000 in December 2009 (as opposed to $364,210). If the hardship threshold was linked to equal to 110 per cent of the average loan size for the purchase of new owner occupied houses in metropolitan Melbourne the threshold would be approximately $614,900 in June 2010, rather than $361,790 (based on the old threshold). 9.186 Although some consumers would gain access to the statutory right to request variations, others would continue to be excluded and have to rely on other mechanisms to request hardship variations. 9.187 This option would need to be justified either by evidence that above the threshold: · consumers are assumed to possess a level of financial literacy or sophistication that means they do not need statutory rights -- however, there is no evidence this is the case, given the majority of the loans of this value are for a primary place of residence rather than part of an investment strategy.33 · lenders are at greater risk in respect of high value loans -- as noted in Issue One, APRA did not identify any such risks in respect of this type of lending generally. 9.188 Regular adjustments to the threshold may lead to uncertainty about coverage and increase the monitoring and compliance cost for those businesses who maintain different procedures for contracts on the basis of whether or not they were below the threshold. 33 Note: contracts for credit for investment other than in residential properties are currently not regulated by the Credit Act. The need to regulate other loans for investment purposes is being considered separately during Phase 2. 153


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Impact analysis Consumers 9.189 Some consumers will gain statutory access to the right to request variation to their contract, increasing their ability to keep their contract on foot or recover from default. Any additional compliance cost incurred by lenders may be passed on to consumers. 9.190 A limited number of consumers are likely to be confused about whether or not they have a statutory right to request a hardship variation (particularly where their loan exceeds the threshold by a small amount), and may seek a remedy when they have no such right. Credit providers who are not signatories to a code of conduct 9.191 This class of lenders are likely to incur additional compliance costs in changing the way in which they respond to requests for hardship variations above the threshold (noting that some may nevertheless already currently adopt a flexible response to hardship). 9.192 These costs are likely to be quite low, and could also be partially offset by, first, a better performance of their overall lending portfolio, and, second, simpler and consistent internal procedures. Credit providers who are signatories to a code of conduct 9.193 This option has a more limited impact on those lenders who are signatories to a code of conduct in which they have voluntarily agreed to be more responsive in their dealings with consumers who are in financial hardship, irrespective of the value of the credit contract. This would include all ADIs, and would cover the majority of credit contracts. 9.194 In summary, this option could be expected to have the following costs and benefits: · Fewer consumers who enter into contracts under the increased threshold would go into default and lose their home (because they would be able to use the statutory right to request a hardship variation to be provided with changes to their contract that avoid this outcome). · Lenders would incur minimal compliance costs, and could be expected to have lower default rates overall. Option 2.3: Remove the threshold under which a consumer has a statutory right to request a hardship variation 9.195 Under this option, the threshold would be removed, and all consumers would have a statutory right to request a hardship variation. 154


Chapter 9 -- Regulation Impact Statement Impact analysis Consumers 9.196 All consumers will have statutory access to the right to request variation to their contract, thereby increasing their ability to keep their contract on foot or recover from default. Additional compliance cost incurred by lenders may be passed on to consumers. Credit providers 9.197 This option would have the same impact on credit providers as Option 2.2, except that lenders would incur slightly lower compliance costs in that: · they would not need to monitor the monetary threshold; and · they can apply internally consistent procedures across all contracts, eliminating the need for different processes. 9.198 This option could be expected to have the following costs and benefits: · Even fewer consumers than under Option 2.2 would go into default and lose their home (because they would be able to use the statutory right to request a hardship variation to be provided with changes to their contract that avoid this outcome). · Lenders would incur minimal compliance costs, and could be expected to have lower default rates overall. Stakeholder views 9.199 Removing the threshold was supported by EDR schemes, consumer groups and some lenders in their Green Paper submissions. Consumer groups supported increasing the threshold as an alternative (if removing the threshold altogether was not recommended). 9.200 Although MFAA, ABA and ABACUS did not support any further regulatory intervention in their Green Paper submissions, adopting this recommendation codifies their codes of practice and should have minimal impact on their members. 9.201 APRA did not believe this proposal raised significant prudential concerns. The reasons are the same as discussed above in relation to Issue One above, namely that: · the proposals only give consumers a right to request a variation, as opposed to a right to a variation; · a credit provider will not be obliged to provide a variation that sees them receiving a lower amount than would otherwise be due under the contract; and 155


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · a variation should continue to be granted only where it is expected the consumer will be able to meet their obligations after the variation. Recommended option 9.202 Option 2.3, removing the threshold, is the recommended option. This would not mean that a borrower has an automatic right to a variation, but rather a right to request one. Lenders would not be required to agree to receive less than what they are rightfully owed, and a variation should only be granted where it is reasonably expected that the borrower could discharge their obligations. 9.203 As this recommendation codifies leading industry codes of conduct and EDR rules, it should have minimal compliance cost implications for lenders while delivering significant benefits (in the form of increased protection and access to review for consumers and the likelihood additional contracts would be kept out of default) to consumers with have large debts who are experiencing difficulty in making their repayments. Issue Three -- Enhancements to the postponement of enforcement provisions Background 9.204 A credit provider can generally commence proceedings where a consumer is in default and the credit provider has served the borrower a notice specifying the nature of the default, and allowing them an opportunity to rectify the default.34 The notice contains information on the hardship variation and stay of enforcement provisions and EDR contact details. 9.205 The Code does not require credit providers to specifically consider whether the consumer could continue to meet their obligations if their contract were varied before commencing enforcement proceedings. However, some industry codes of conduct and the rules of both FOS and COSL35 prohibit lenders from commencing or continuing enforcement proceedings once they have received, and are considering, a request for a hardship variation. 9.206 In this context, enforcement proceedings include taking legal action; repossession (unless the security is at risk); listing of a default on a 34 Section 88 of the Code. 35 COSL, Position Statement Issue 2: Financial Hardship, May 2010; FOS, The Financial Ombudsman Circular Newsletter, Edition 3, Update 1, August 2010. 156


Chapter 9 -- Regulation Impact Statement consumer's credit file; and selling the debt or otherwise assigning any right to recover the debt. Problem Identification 9.207 Some borrowers do not seek solutions to their financial hardship by actively approaching their lender prior to going into default, and the lender commencing enforcement action (by sending them a notice under Section 80 of the Code). Nevertheless, some of these borrowers would still satisfy the requirements for a hardship variation by being able to repay their liability to the credit provider (notwithstanding that the debt has increased in size relative to if they had sought the variation earlier). 9.208 Consumer advocates suggest that a significant number of borrowers do not approach their lender to seek a hardship variation until the credit provider has commenced enforcement action. The reasons for this include: · Consumers are not always aware themselves of their right to seek a variation until they seek out advice from a third party, and a percentage of consumers only seek this advice when faced with enforcement action. · Consumers who may be aware of this right nevertheless believe that telling their credit provider they are in financial difficulties will precipitate enforcement action (irrespective of whether this is true or not). 9.209 Where the borrower makes a request the Code currently does not prevent lenders from commencing enforcement action. Therefore, some lenders may commence enforcement proceedings before giving proper consideration to consumer's ability to remedy the default, such as responding to their request for a hardship variation, or proactively making enquires with the consumer to determine the source of the problem and whether it can be resolved without resorting to formal enforcement proceedings. 9.210 There is evidence that the scale of the problem is significant. Firstly, COSL, in its submission to the Green Paper, stated that in more than 90 per cent of the complaints it receives from borrowers seeking hardship variations the borrower has either been served with a default notice or legal proceedings have commenced. This number does not represent all borrowers who have had hardship applications rejected as not all these persons will pursue their complaint to an EDR scheme. 9.211 It is noted that the COSL membership includes the overwhelming majority of non-ADI lenders, micro lenders, promoters of non-bank residential lending programmes, aggregators and mortgage managers. 157


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.212 Secondly, a recent survey of homeowners facing enforcement action found that `Nearly half the respondents initiated attempts with their lenders to [re-schedule mortgage repayments in order to deal with mounting arrears and forestall possession or forced sale] but only 4 per cent were successful'.36 Where credit providers initiate court action it is likely they will have incurred legal costs (and may continue to do so while any hardship variation or request for a stay is being considered). Under court rules the borrower would usually be liable for these costs, which increase their debt. In some cases, these costs could have been avoided by consideration of such measures earlier. Objective of Government Action 9.213 The objective of government action is to support sufficient flexibility in the hardship variation provisions to enable the most mutually beneficial outcomes for lenders and consumers. Options Option 3.1: Maintain the status quo 9.214 Under this option, the current arrangements regarding when enforcement proceedings can be commenced, would be maintained. 9.215 Measures implemented in Phase 1 of the credit reforms should assist in raising awareness about the existence of the right to request hardship variations and stays of enforcement and encourage consumers to be more proactive in approaching their lender when they experience difficulty. In addition, improved access to independent review by EDR should raise the quality of decisions made by lenders. Impact analysis 9.216 Under this option, there would be no additional impacts on consumers or business. Option 3.2: Requiring lenders to consider whether a hardship variation is appropriate before commencing enforcement proceedings 9.217 Under this option, credit providers would be required to specifically consider whether a variation should be given to a defaulting borrower before commencing enforcement proceedings. This would require a lender to contact any defaulting consumers to establish the cause of the default and then assess whether a variation should be provided (in 36 Berry, Dalton & Nelson, Mortgage Default in Australia: Nature, Causes and Social and Economic Impacts, March 2010, p.4 AHURI Final Report No. 145. Melbourne: Australian Housing and Urban Research Institute, RMIT Research Centre. 158


Chapter 9 -- Regulation Impact Statement order to keep otherwise viable contracts on foot and avoid incurring unnecessary enforcement expenses). 9.218 Requiring lenders to initiate consideration addresses the risk that consumers did not apply because they did not know or were hesitant to raise the issue with their lender. Enforcement proceedings should only be commenced when other options are exhausted; exceptions would apply where, for example, security is at risk or it is clear that the contract cannot be completed satisfactorily, Impact analysis Consumers 9.219 Requiring lenders to initiate consideration of a variation before commencing enforcement action may reduce the incidence of avoidable and costly enforcement action. However, there is a risk that inappropriate variations may granted, leading to further financial hardship and worse outcomes. 9.220 There is also a risk that the implementation of this proposal could encourage credit providers to consider commencing proceedings earlier, to compensate for any perceived risk of delay which may arise as a result of the time required to consider a variation. 9.221 There is also a risk that delaying enforcement proceedings which eventually proceed could result in borrower being liable for a much greater debt as a result of a greater shortfall. Where such provisions are used as a delay tactic to artificially extend the period before enforcement action, neither the consumer nor lender would ultimately benefit. Credit providers 9.222 As this proposal goes beyond what is currently contained in industry codes and the rules of EDR schemes, it is likely to have significant impacts on credit providers, in terms of the cost and time required to contact all defaulting consumers to determine the cause of default and the appropriateness of a variation. 9.223 These costs may be partially offset by savings in avoidable enforcement expenses and reduced number of defaults that are written off as bad debts. However, it is expected that the cost would exceed those savings, as it is likely that a variation would not be provided in most cases, including where the lender could not make contact the borrower or could not obtain sufficient information about the borrower's financial situation to be able to assess the application. The costs of contacting borrowers individually (possibly on multiple occasions) and seeking a level of detail, through documentary evidence of the borrowers' circumstances, are likely to considerable. Where a variation was not provided these contracts would proceed to enforcement. 159


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.224 This option could be expected to have the following costs and benefits: · Some consumers who are facing enforcement action would be provided with changes to their contract that avoid them going into default. · Lenders would incur significant compliance costs in contacting all borrowers who have defaulted, and where enforcement action is being considered. This may result in lenders passing on these costs to all consumers (through higher interest charges). Option 3.3: Require lenders to finalise consideration of any outstanding requests for a variation before commencing enforcement proceedings 9.225 Under this option, credit providers would not be able to progress enforcement proceedings until they had considered a consumer's request. Making this an upfront requirement in the law, rather than relying on industry codes or only having it apply to cases which are taken to EDR, would provide certainty and encourage confidence in the process. 9.226 Where the request was refused, credit providers would be required to allow the borrower time (for example, 10 working days) to consider the response and take further action (for example, request review from an EDR scheme, seek other sources of credit or sell assets). 9.227 There would need to be restrictions about the number of applications a consumer could make, in order to avoid the risk that multiple applications of little or no merit were made, simply to delay enforcement action. Impact analysis Consumers 9.228 Requiring lenders to determine a request for hardship before commencing enforcement action is likely to reduce the incidence of avoidable enforcement action. It will particularly assist the following classes of consumers: · Borrowers who are hesitant or reluctant to confront their financial problems. These persons may only seek assistance when they are confronted with the prospect of enforcement action, through the lender sending them a default notice. · Borrowers who pursue hardship variations because the introduction of a statutory right gives them greater awareness of, and confidence in pursuing, their rights. 9.229 There is a risk that delaying enforcement proceedings which eventually proceed could result in some borrowers becoming liable for a 160


Chapter 9 -- Regulation Impact Statement larger debt as a result of a greater period during which repayments may not be made. Credit providers 9.230 Additional compliance costs are expected to be minimal, as this proposal would only affect credit providers in relation to a smaller class of borrowers relative to Option 3.2 (those borrowers in default who have lodged a hardship variation rather than all borrowers in default where enforcement action is being considered). These costs may be offset by savings in avoidable enforcement expenses and reduced number of defaults that are written off as bad debts. 9.231 The evidence from COSL suggests the impact is likely to be higher on lenders who are not ADIs. 9.232 This option could be expected to have the following costs and benefits: · A percentage of those consumers who have defaulted and would otherwise face enforcement action would be provided with changes to their contract that avoid them going into default. · Lenders would incur minimal compliance costs, and could be expected to have slightly lower default rates. Stakeholder views 9.233 Consumer groups supported Option 3.2. However, a majority of lenders responded that without access to information about the totality of a consumer's financial situation at the time of the default or an indication on the consumer's willingness to meet their obligations, a lender would not be able to properly consider the appropriateness or feasibility of a variation. 9.234 FOS suggested it was appropriate for lenders to attempt to contact consumers to determine the reason for default, and if possible consider if a variation would be appropriate, before commencing recovery action. 9.235 There was support for Option 3.3 from NFSF, EDR schemes and consumer groups. ABA, ABACUS, MFAA and FBAA did not support additional regulatory action. Recommended option 9.236 Option 3.3 is the recommended option. Where a consumer has exercised their right to request a variation, they should be given the opportunity to have it properly considered before the lender commences enforcement action. A beneficial outcome is mostly likely to be achieved when both parties are willingly and actively participating in the process. 161


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.237 However, consumers would be prevented from forestalling enforcement by regularly applying for hardship variations where their circumstances have not changed and it is unlikely to result in a beneficial outcome. Issue Four -- Provision of a general remedy for misconduct by providers of credit services Background 9.238 The implementation of Phase One of the credit reforms has maintained in the Code the right for consumers to be able to have a credit contract, consumer lease, mortgage or guarantee reopened on the grounds that it is unjust. This provides a general remedy beyond those existing in other legislation. A remedy of this type in respect of credit contracts has been long-standing, and previously been included in money-lending legislation. The remedy has recognised the desirability of industry-specific protections that encourage higher standards of conduct by credit providers. 9.239 However, the Credit Act does not provide any equivalent general remedy in relation to providers of credit services. There are two classes of such persons, those who provide credit assistance by arranging or suggesting a particular or identified contract (and are therefore required to comply with the responsible lending requirements in Chapter 3 of the Credit Act), and other intermediaries who only play a lesser role in the provision of credit or leases. 9.240 The Credit Act currently only provides a consumer with a remedy where a person has breached a specific provision of the Act, and the consumer has suffered loss or damage as a result.37 This means that the ability of consumers to obtain a remedy under the Credit Act varies according to the function of the person they are dealing with, as follows: · Where the person provides credit assistance -- they are subject to a number of specific obligations in Chapter 3 of the Credit Act (including obligations to ensure the contracts they arrange or suggest are not unsuitable, and disclosure requirements, particularly in relation to fees and commissions) and will be liable to consumers for breaches of these requirements, but not otherwise. · Where the person does not provide credit assistance -- they are not subject to specific obligations under the Credit Act in 37 Section 178 of the Credit Act. 162


Chapter 9 -- Regulation Impact Statement respect of their dealings with consumers and as they are under no requirements, they therefore cannot breach them. 9.241 Following the introduction of the Commonwealth legislation consumers in New South Wales, Victoria and Western Australia who use the services of brokers no longer have rights that they previously enjoyed under State legislation in relation to the conduct of brokers. For example, in New South Wales, Section 4J of the Consumer Credit Administration Act 1995 (NSW) (the Administration Act) provided consumers with a remedy for unjust conduct in relation to contracts regulated by the UCCC. Section 3 defined unjust conduct as conduct that: (a) is unfair, dishonest or fraudulent, or (b) consists of anything done or omitted to be done in breach of contract, whether or not proceedings in respect of the breach have been brought, or (c) consists of a contravention of any consumer credit legislation. 9.242 The legislation in force at a State level has been effective in regulating the conduct of brokers in a way that reduces the risk of adverse conduct that can cause harm to consumers. For example, the New South Wales Office of Fair Trading considers that the Administration Act was effective in reducing the level of disputes between consumers and brokers in relation to fees, but that these types of problems continued to occur where the contract was unregulated by the UCCC, and the Administration Act therefore did not apply. Problem identification 9.243 There are two related problems for consumers: · Existing remedies under the Credit Act and other Commonwealth legislation do not adequately address common situations where consumers are at risk of financial detriment from brokers and other intermediaries. · In New South Wales, Victoria and Western Australia the situation is exacerbated in that consumers have suffered a loss of rights in their dealings with brokers, from the repeal of legislation regulating their conduct. 9.244 The absence of any remedy means that consumers will be unable to obtain a remedy against a provider of credit services where they have not breached other legislation (such as the ASIC Act).38 There are a number of relatively common situations where consumers are at risk of 38 Consumers who suffer loss in relation to a credit contract because of the conduct of a broker will usually not have any recourse against lenders in these circumstances, as lenders will generally not be responsible or accountable for the conduct of these third parties. 163


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 loss or detriment from conduct of brokers that is either unjust or unfair without other remedies being available. These practices are largely adopted by persons who operate on the fringes of the industry, and who are conscious of the limits of existing regulation. This class of persons will deliberately seek to avoid infringing specific statutory obligations by techniques such as: · using a number of different parties, to make it harder to attribute fault to any single party; · exploiting technical gaps in legislation (in the credit context, by constructing their business in such a way that they do not provide credit assistance and are therefore subject to a lower level of regulation); · formal compliance with the law (for example, providing necessary disclosure but that is designed not to alert consumers to particular risks); or · making the consumer sign documents that contain false statements or information (for example, verifying that they understand a particular transaction or consequences), that make it harder for the consumer to then deny the version of events recorded in those documents. 9.245 The first situation where this type of conduct is likely to occur is in `equity stripping' scenarios. Currently, the responsible lending provisions in the Credit Act impose an obligation on a broker who provides credit assistance (typically, by suggesting the particular credit contract) to assess the capacity of the borrower to meet repayments. However, this requirement does not extend to other persons involved in the transaction who do not provide credit assistance; for example, in some equity stripping practices three or four parties may be involved each of whom charges a separate and large fee to the consumer. National Legal Aid specifically referred to this situation in its response to the Green Paper and stated: `Equity stripping, without any consequences for third parties who have financially benefited from such practices, ... is of significant concern'. 9.246 A second area of concern is fees charged by intermediaries who do not provide credit assistance.39 The Credit Act does not include any specific requirements regulating the way in which these persons disclose or charge fees. It is noted that COSL (the EDR scheme that the majority of brokers belong to) has identified disputes about fees as a significant source of complaints in its recent Annual Reports of Operations; in 39 The disclosure of fees charged by persons providing credit assistance is now regulated by Chapter 3 of the Credit Act, with these fees needing to be disclosed both in a quote and a proposal document. 164


Chapter 9 -- Regulation Impact Statement 2008-09 227 complaints (or 22 per cent) were about fees, and in 2009-10 244 complaints (or 19 per cent) were about fees. There is therefore considerable potential for ongoing disputes about fees (for example, about the amount or the circumstances in which a person is liable to pay those fees). 9.247 A third situation is where intermediaries charge fees or earn commission, where the cost to the consumer may be inflated to cover payments to the broker (directly or indirectly). For example, the broker may also be involved in the sale of real property and fix the price of the property according to the maximum amount the consumer can borrow, in order to earn a higher commission from the sale of the property. 9.248 This practice is illustrated by the facts in the decision of the NSW Supreme Court in Investmentsource Corporation Pty Ltd v Knox Street Apartments Pty Ltd & Others [2002] NSWSC 710. The case concerned the marketing and promotion of inner city units by a Henry Kaye company, Investmentsource Corporation Pty Ltd (Investmentsource). Henry Kaye held wealth creation seminars in which he encouraged consumers to purchase these units and that Investmentsource assisted consumers to arrange finance. 9.249 Separately, Investmentsource had negotiated with the owner of the units to obtain exclusive rights to market them. Investmentsource had negotiated to receive a commission from the owner for the sale of each unit; the amount of commission received by Investmentsource was not fixed but was the amount by which the purchase price exceeded a minimum sale price set by the owner. There was no evidence that the consumers were told about these arrangements and it can be presumed that they were unlikely to have agreed to purchase the units if this was the case. 9.250 Investmentsource sold 31 units and earned commission of $1,330,589. This equates to a profit of $42,922 on each sale through inflation of the property price. Assuming that the consumers borrowed money to finance the purchase of a unit with a loan at an interest rate of 6.5 per cent and that the liability was discharged over a period of 15 years, the additional interest paid by a consumer on the sum of $42,922 would be $24,379.41. The total loss to consumers, through paying a higher cost for the properties, can be estimated as $2,086,343.70 ([$42,922 + $24,379.41] x 31). 9.251 The extent of these practices is not precisely known. However, given that brokers and intermediaries can earn significant financial benefits from these practices they are likely to create a continuing incentive for persons to continue to engage in this type of conduct. 165


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Objective of Government Action 9.252 The objectives of government action are to improve public confidence in the conduct of brokers and intermediaries by providing consumers with appropriate access to remedies in relation to loss or damage from misconduct by credit service providers. Options Option 4.1: Maintain the status quo 9.253 Under this option there would be no change to the current remedies available to consumers for loss or damage suffered as a result of conduct by brokers and intermediaries in relation to credit contracts, consumer leases, mortgages and guarantees. 9.254 Consumers would need to seek remedies for loss or damage under the existing, and more limited, provisions of the Credit Act (where applicable) or other legislation. Consumers in NSW, Victoria and Western Australia would have lost protections by comparison with the remedies which were available under legislation such as the Consumer Credit Administration Act 1995 (NSW). Impact analysis 9.255 Under this option, there would be no additional or new impacts on business. Consumers in NSW, Victoria and Western Australia would find their rights reduced when engaging the services of brokers. Option 4.2: Provide a general remedy against providers of credit services by extending the existing remedy for unjust conduct 9.256 The existing remedy allows an unjust contract to be reopened, but usually only allows for orders to be made against the credit provider, rather than third parties. This would entail a change to the procedural aspects of the existing provisions, to enable an application to be brought against a broader range of parties (so that the consumer can obtain redress against both brokers and lenders, either individually or jointly). 9.257 Changing the existing nature of the remedy in this way would mean that misconduct by a third party may enable the consumer to obtain a remedy which would allow the court to rewrite the terms of a credit contract or lease (irrespective of whether the conduct was known to the lender). 166


Chapter 9 -- Regulation Impact Statement Impact analysis Consumers 9.258 Consumers will be able to obtain a remedy that is currently not available where they have suffered loss or damage as a result of unjust conduct by a person providing credit services. They may also benefit from improved standards of conduct by providers of credit services, where they change their practices to mitigate the risk of engaging in unjust conduct. 9.259 In some situations the unjust conduct by the provider of credit services causes loss or damage that results in the consumer defaulting on the payments due under their contract. Where this is the case, enhancing the capacity of the consumer to seek compensation may mean they can use the money awarded to them from a broker to rectify this default, and thereby avoid enforcement action by the credit provider or lessor. Credit providers or lessors 9.260 Some risk averse financiers may no longer arrange transactions involving third parties where they assess there is a high risk of unjust conduct that could result in the contract being reopened (to avoid incurring additional compliance costs in monitoring this risk). Alternatively they may increase the cost of credit charged to the borrower to cover this contingent risk. However, this is unlikely to involve significant new costs as it is considered most financiers would already be undertaking these assessments for other reasons (for example, reputational risk). Credit service providers 9.261 Providers of credit services may need to review their practices to identify situations where they are at risk of engaging in unjust conduct, and make appropriate changes after identifying any areas where they consider their conduct both may be unjust or unfair and may cause loss to consumers. For example, brokers who earn commissions from related transactions may need to take extra steps to disclose to consumers their commercial arrangements with third parties other than lenders.40 Brokers who previously operated in NSW would not need to do so, as it is generally expected that they would have already undertaken this task in order to address similar risks under the Consumer Credit Administration Act 1995. 9.262 Some brokers may therefore incur additional compliance costs as a result of this review. These costs are unlikely to be significant for those who have reviewed their practices prior to applying for an 40 The requirements to disclose commissions from lenders are specifically addressed in the Credit Act. 167


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Australian credit licence (or in making any changes required under their professional indemnity insurance). These costs may need to be absorbed internally where the person providing credit services does not charge borrowers a fee. 9.263 There is a small class of brokers who are likely to incur more substantial costs, namely those brokers operating on the fringes who deliberate engage in conduct that may be unjust (for example, brokers who charge fees in ways that may be unfair or who earn secret commissions). It is not possible to assess the impact on these persons solely in terms of compliance costs as there is a threshold question as to whether or not they are prepared to risk non-compliance with the requirements of the Credit Act in order to gain additional financial benefits. In practice therefore they will need to decide whether to exit the industry rather than change their overall business model. 9.264 In summary this option would result in the following costs and benefits: · Some lenders may charge consumers higher costs or may reduce the extent to which they use broker distribution channels. · It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct. · Consumers would have a higher level of protection, and greater access to remedies, particularly when using the services of those fringe brokers, but may be charged higher costs by some lenders. Option 4.3: Provide a specific remedy against providers of credit services 9.265 This option would see a new and separate remedy created for unfair conduct by providers of credit services. The consumer would only be able to seek a remedy against a provider of credit services, and this remedy would be separate to the existing remedy in the Credit Code available against credit providers or lessors in relation to the credit contract. The consumer's rights would be limited to remedies from the provider of credit services, and would therefore not result in any adjustment of the rights of the consumer under any credit contract or consumer lease to which they are a party. 168


Chapter 9 -- Regulation Impact Statement Impact analysis Consumers 9.266 The impact on consumers would be largely equivalent to that under Option 4.2. Some consumers may incur costs of time and money because they initially pursue a complaint against the lender when the remedy should have been pursued against the broker. This is not expected to have a significant impact on consumers as: · Where the complaint is made to an EDR scheme -- these schemes already have in place procedures to efficiently identify and resolve this issue. As there are only two such schemes, the EDR scheme would either treat the complaint against the lender as a complaint against the broker (where they are a member of the same scheme), or refer the complaint to the other EDR scheme under existing protocols. · Where compensation is sought through court action -- the consumer's lawyers could be expected to accurately identify the person against whom a remedy should be sought, so that the problem would not arise. 9.267 The costs to the consumer can therefore be expected to be minimal, and are balanced in that these costs are only incurred because the consumer is seeking a remedy which would otherwise not be available. Credit providers or lessors 9.268 This option would not affect credit providers or lessors, as their rights under existing contracts would not be affected. It would see a more efficient allocation of responsibility where the appropriate person is accountable for conduct that causes loss or damage, rather than third parties being made liable. Credit service providers 9.269 The impact on providers of credit services would be equivalent to that under Option 4.2, in that some of these providers may consider it necessary to review their practices and identify any areas of their conduct where they may be at risk of claims. The costs are not quantifiable as they will vary according to the size, market and existing practices of the provider. 9.270 Again, however, the main class of brokers who would be affected is those who are targeting vulnerable consumers in systematic ways through unfair or unjust conduct in a systemic way and therefore causing financial harm to a relatively large number of consumers. These persons would need to decide whether to cease these practices or face a greater risk of liability. 169


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.271 In summary this option would result in the following costs and benefits: · It would have no impact on credit providers or lessors. · It is not expected brokers or intermediaries would incur additional costs directly, except for a relatively small class of brokers who deliberately and consistently engage in unfair or unjust conduct. · Consumers would have a higher level of protection, and greater access to remedies, particularly when using the services of those fringe brokers. Stakeholder views 9.272 The status quo was supported by the ABA and the FBAA. 9.273 The ABA, the MFAA and the AFC specifically opposed Option 4.2 on the basis that lenders and their contracts should not be affected by the misconduct of a third party. The MFAA's key concern was that under Option 4.2 the credit contract could be set aside or varied because of the conduct of the broker. This could encourage lenders not to distribute through brokers, and the result would be a reduction in competition and the assistance for borrowers. The MFAA was, however, quite comfortable about brokers being liable for their own conduct under Option 4.3. 9.274 Option 4.3 was supported by the NFSF, COSL, CALC, CCLC (NSW) and National Legal Aid. CCLC (NSW) and National Legal Aid saw the introduction of a remedy of this type as particularly significant in relation to equity stripping practices (where a number of legal actions they have been involved in have failed because brokers avoid liability through invoking technical restrictions in the scope of other remedies. 9.275 In its Green Paper submission, COSL stated that the creation of a new and separate remedy for unjust conduct by providers of credit services would allow the remedy to be specifically tailored to address the role of third parties who are not the credit provider or lessor, and would allow relief to be attributed to the appropriate person. Recommended option 9.276 The recommended option is option 4.3 that is providing a general broad remedy against providers of credit services. The creation of a separate remedy would allow the remedy to be specifically designed to address the role of third parties who are not the credit provider or lessor. It would also avoid any impact on credit providers or lessors. 9.277 The model in the Consumer Credit Administration Act 1995 (NSW) could be largely utilised, to ensure consistency with a known standard of conduct. The result would be to introduce a general remedy 170


Chapter 9 -- Regulation Impact Statement for `unfair conduct', rather than a remedy being available only within the precise terms of other legal concepts (for example, conduct that is unfair may not be unconscionable, as the latter concept requires demonstrating that the borrower's decision and judgement is adversely affected). Implementation 9.278 It is proposed to implement this reform as follows: · The remedy for unjust conduct would be modelled on the existing approach in the Administration Act. This has been in force for a number of years, and would therefore provide greater certainty as to when conduct will or will not infringe such a provision. Some of the contingent elements developed for the remedy in the draft Finance Brokers Bill also need to be included in the remedy (for example, where they provide clarity about the circumstances in which the remedy applies). · The court would be given broad powers to provide relief similar to those available for unjust conduct under the Credit Act, including by awarding compensation for loss or damage or relieving the consumer of liability under any contract with the provider of credit services. · As a technical issue, the remedy would not extend to a situation where a credit provider or lessor was acting as a provider of credit services in respect of their own products., and would therefore have an appropriate limitation to this effect (similar in effect to those in sections 112 and 135 of the Credit Act where lenders and lessors have been exempted from other requirements, in relation to their own products). 9.279 Implementing the reform in this way would principally address the conduct of fringe operators who deliberately construct transactions in ways that cause financial harm or loss to consumers, principally through: · charging excessive or disguised fees; · earning inflated profits through transactions related to the credit contract or lease (particularly the sale of other products or services); and · being involved, directly or indirectly, in equity stripping arrangements or other situations where the credit provider or lessor can be misled as to the financial position of the consumer. 9.280 These persons would be at greater risk of having to compensate consumers. 171


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Issue Five -- Restricting the use of certain words or expressions Background 9.281 Under the financial services regime, sections 923A and 923B of the Corporations Act 2001 (Corporations Act) restrict the use of the words independent, impartial or unbiased, and other words or expressions, for example insurance broker or stockbroker, unless the person holds appropriate authorisations under their Australian financial services licence. The Credit Act does not include any equivalent provision restricting the use of certain words or expressions by persons engaging in credit activities. Problem identification 9.282 A small number of key words or phrases can have an emotive force, and a power to connect with or engage consumers. Allowing the unrestricted use of these terms raises the prospect of consumers being misled, either deliberately or inadvertently. This risk has been identified as arising in respect of the following particular terms. 9.283 `Pre-approved'. This term has been used in the context of lenders sending out applications for new credit cards or offers to increase the credit limit on an existing credit contract. The Consumer Action Law Centre conducted a review of the terms of these invitations. It found that the use of the phrase `pre-approved' conveyed to the consumer a message that the lender endorsed the increase in credit limit, and was an effective means of encouraging the consumer to apply.41 The risk is that consumers will therefore increase their credit limit unnecessarily, and will do so partly in the belief that the lender considers this is a sensible or appropriate course of action (rather than the lender being motivated by their own commercial interests).42 9.284 `Independent, impartial or unbiased'. These terms can be extremely influential in attracting consumers who are seeking assistance from a broker who will not choose products on the basis of commissions. The risk for consumers is that they will be placed in a credit contract that may be more expensive than other products because the broker will earn commissions in respect of that product. ASIC has previously had to use its powers under the ASIC Act powers to prevent brokers from using these terms in a way that was misleading (but only after promotional materials 41 Harrison, Paul and Massi, Marta 2008, Congratulations, you're pre-approved!: an analysis of credit limit upselling letters Consumer Action Law Centre, Melbourne. 42 The responsible lending obligations in Chapter 3 do not address this risk directly. 172


Chapter 9 -- Regulation Impact Statement had been published given the limitations in the way that Act regulates this type of conduct).43 9.285 It is proposed that this term would be restricted in a way similar to the analogous requirement applying to holders of an Australian financial services licence (AFSL) under the Corporations Act; this would mean that there can be no confusion as to whether `independent' means the broker will never receive commissions, or whether this is a general approach subject to qualifications or exceptions. 9.286 It would also avoid brokers being able to use these terms when they have entered into volume bonus agreements, where the broker is under a financial incentive to meet targets, and where the consumer is at risk of being placed in a product that may be slightly more expensive as a result. For example, a difference of 0.5 per cent in the interest rate on a home loan of $175,000 can result in the consumer paying an additional $15,547 over the life of the contract. 9.287 Limiting the use of these terms will therefore also be important in encouraging the development of brokers who do operate using an independent (or non-commission based) business model. They can have greater certainty that the use of these terms cannot be appropriated or abused by brokers who will receive commissions (and therefore limit the effectiveness of their capacity to promote themselves). 9.288 AFSL holders are already subject to restrictions in relation to the use of the words `independent, impartial and unbiased' in the financial services context, and this would ensure consistency in the way in which they describe themselves, where they hold both an AFSL and an ACL. 9.289 `Reverse mortgage'. The term `reverse mortgage' currently has some popular currency, but can be used to refer to a broad range of products with different characteristics. As discussed in detail in the RIS for equity release products it is proposed to introduce a technical definition of `reverse mortgages' in the Credit Act, and to require lenders offering this class of products to meet a number of specific requirements (for example, having a statutory guarantee of no negative equity). 9.290 It is intended to assist the class of potential borrowers to more readily identify products with these characteristics by limiting the use of this term. In the absence of such a restriction there is a risk that consumers will be attracted to other providers and may enter into contracts that are less suitable for their needs (for example, where they must repay a lump sum at a fixed point in time, and therefore face the risk 43 Press Release 05-36: ASIC acts against misleading and deceptive advertising, 24 February 2005. 173


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 of having to sell the family home involuntarily rather than at a time of their choosing).44 9.291 The risks are exacerbated because of the characteristics of the class of borrowers likely to use these products, in that they tend to be more vulnerable and have a limited understanding of how these contracts work (as a result of factors such as poor financial literacy skills, lack of income and reduced capacity due to health problems).45 9.292 This approach will enable these borrowers, over time, to more easily identify the products that provide offer appropriate protections, and protect them from advertising materials that would otherwise use the term `reverse mortgage' to attract them, when the product has fewer or none of these protections. 9.293 `Financial counselling/financial counsellor'. These terms are typically used to describe persons who are funded by government or on a not-for-profit basis, and who have been accredited by their professional association as meeting appropriate standards of training and competency (by holding particular qualifications such as a diploma and, in some States, meeting work experience requirements). However, there is no restriction on the use of these terms, and they can be used by other persons. This includes commercial businesses that can use these terms to attract consumers who by definition are likely to be in financial difficulties with limited income. 9.294 There are two significant differences between these commercial enterprises and government or not-for-profit services. First, they are free, and, secondly the assistance provided by government funded financial counsellors involves a more thorough and patient relationship with the consumer as it includes: · A detailed assessment of their overall financial position. · Identifying all possible options to address their problems (both external options -- negotiating with creditors, and internal options -- changes to lifestyle and budget). · Ongoing support to the client in implementation of these options (which is particularly important where changes to their use of money and behaviour are required). 9.295 The terms financial counselling or financial counsellors are currently used by a number of commercial fee-charging businesses, particularly in webpages. Typically these businesses provide a more 44 ASIC has identified this risk previously with providers using the term `reverse mortgages' to promote lines of credit. 45 These factors are discussed in more detail in the RIS prepared in relation to the regulation of equity release products. 174


Chapter 9 -- Regulation Impact Statement restrictive range of services (for example, they may only assist with arranging Part IX bankruptcy agreements) so that consumers who approach them may only be offered this solution; by comparison, a financial counsellor will spend time analysing all the different aspects of the consumer's financial problems and then identify the most appropriate response. 9.296 There is also a risk that these persons may not perform their services with adequate levels of skill, as they do not need to meet any accreditation requirements and there are therefore no controls over their competency levels. 9.297 For example, ASIC is aware of one operator who would make requests for hardship variations without obtaining the necessary documentary evidence from borrowers to support their claims, and where those applications were therefore routinely dismissed. Borrowers who have used the services of this person are in a worse position financially as they have not only incurred costs charged by the business, but the size of the debt owed to their lender has increased during these failed negotiations, reducing their scope to negotiate a variation once the appropriate evidence of future income had been obtained. 9.298 There is a significant number of consumers who may be affected, given that financial counsellors see a maximum of 100,000 clients a year. 9.299 It is noted that the use of certain words or phrases may be misleading or deceptive or contain false and misleading representations, depending on the context in which the statement is made, and therefore infringe the prohibitions in sections 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (ASIC Act). Under this provision, consumers may recover loss or damage. ASIC has standing to take these actions, and may intervene in proceedings brought by consumers. 9.300 The existing remedies for misleading or deceptive conduct or making false and misleading representations are inadequate to address this situation for two reasons: · They do not address situations where a phrase does not have an accepted or specific meaning (for example, reverse mortgage or financial counsellor). In these situations the use of the phrase in other contexts will not be misleading or deceptive (as this can only arise because of confusion between an accepted meaning -- where one exists -- and the actual way in which it is used). · They do not act as an automatic prohibition in all circumstances. A person may still use these terms in a way that is false or misleading (either inadvertently or because of 175


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 their effectiveness), and continue to use them until challenged by ASIC. They may also be able to raise technical defences, or use qualifications or contexts that may create ambiguity as to whether a matter is misleading or deceptive, so that ASIC would have to prove that the use of words is misleading or deceptive in court on a case by case basis. Objective of Government Action 9.301 The objective of government action is to mitigate the risk of consumer detriment caused by the use of certain potentially misleading words or expressions in relation to credit. Options Option 5.1: Maintain the status quo 9.302 Under this option, no specific restrictions on the use of certain words and expressions would be introduced, and consumers would rely on the existing prohibition on false and misleading conduct and remedies available under the ASIC Act. Impact analysis 9.303 Under this option, there would be no additional impacts on consumers or business. Option 5.2: Restrict the use of certain words or expressions 9.304 Under this option the use of the terms described above would be restricted so a person could only use them in situations which met particular criteria: · `Pre-approved' would not be able to be used in invitations to apply for credit or a consumer lease, or to increase an existing credit limit where the lender has not received an application form or conducted an initial assessment of the borrower's eligibility. · `Independent, impartial or unbiased' would only be able to be used by brokers and intermediaries where they exclusively operate a model in which they do not receive any remuneration from commissions (but including where all commissions are rebated to the borrower). · `Reverse mortgage' would be limited in use to describe products that are consistent with the definition to be introduced in the Credit Act. 176


Chapter 9 -- Regulation Impact Statement · `Financial counselling/financial counsellor' and other similar phrases would be used to describe persons who are funded by government or on a not-for-profit basis, and who are accredited by the relevant professional association. The approach would be based on the existing definition used to exempt this class of persons from the need to hold an ACL in the National Consumer Credit Protection Regulations 2009. Impact analysis Consumers 9.305 Persons would be unable to use the restricted term inappropriately, and consumers would therefore benefit as follows: · `Pre-approved': They are unlikely to apply for credit unnecessarily, and more likely to make informed choices about credit according to their needs, rather than responding to invitations for credit. This is particularly relevant to credit cards where the consumer can incur higher interest charges than on other credit products. · `Independent, impartial or unbiased': Consumers would be able to more clearly identify and select those brokers who are not remunerated by way of commission. Where they use brokers who do receive commissions they would also be at less risk of being confused about whether or not they are acting independently, and therefore of entering into a contract where the cost of the credit was more expensive than other contracts (because the product selection was influenced by the payment of commissions). · `Reverse mortgage': Consumers, especially elderly or retired borrowers, would be at less risk of entering into contracts that are less suitable for their needs than reverse mortgages (for example, because they do not include a no negative equity guarantee). · `Financial counselling/financial counsellor': Borrowers in financial difficulties would be less likely to be attracted to use the services of persons who will charge them for their services, and where there are no requirements in respect of their skill or competency levels. These consumers may otherwise find themselves both liable to pay fees and in further financial distress. Credit providers and credit services providers 9.306 The only class of providers who would be affected would be those who currently use any of these terms, or who propose to do so in the near future. Credit providers and lessors do not use the terms 177


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 `Independent, impartial or unbiased' or `Financial counselling/financial counsellor', as these are used by either brokers or persons seeking to attract persons in financial hardship. 9.307 Some businesses are therefore likely to consider whether, rather than ceasing to use a restricted term, they should change their business model so that they meet the conditions to be able to use it. They would presumably only do so where there was a commercial or financial advantage to them taking this course of action. 9.308 It is not expected this cost would be significant as it is intended the reform would be quite specific and unambiguous about when the terms can be used. 9.309 This measure would enhance competition by promoting an even playing field, where one party cannot unfairly attract more customers by misrepresenting themselves. 9.310 In summary this option would result in the following costs and benefits: · It would have a small impact on a relatively small number of persons or businesses. These persons would incur low one-off costs in changing their marketing or promotional materials, and may incur more substantial costs where they relied on these terms to a significant extent to attract customers. · Consumers would be at less risk of being confused or misled by advertising, and could be expected to make better decisions about which service or lender to use. This has the potential to save them money, as discussed above (for example, by not paying for financial counselling services). Stakeholder views 9.311 The status quo was supported by the ABA and AFC, who claimed that the prohibition on false and misleading conduct under the ASIC Act was sufficient. The MFAA claimed there was no evidence of misuse to justify further regulation. 9.312 The FBAA noted that it had not received negative feedback as to the misuse of certain words or expressions. It also stated that the restriction on the term `pre-approved' is consistent with existing practices, in that its members can only use the term `preapproved' where a formal approval in principle by the lender has actually occurred and any conditions specified by the lender have been met. 9.313 FOS recommended the use of `ombudsman' be restricted. 9.314 Consumer groups supported the proposals in the Green Paper. 178


Chapter 9 -- Regulation Impact Statement 9.315 The Australian Financial Counselling and Credit Reform Association (AFCCRA), the peak body for government and not-for-profit financial counsellors, supported the restricted use of the terms `Financial counselling/financial counsellor', and provided a range of examples where the terms were currently used by commercial businesses. Recommended option 9.316 Option 5.2, restricting the use of a limited number of terms, is the recommended option. It is considered this option will reduce, in a number of key areas, the potential for confusion and therefore improve consumer choice in relation to both credit and credit services. The reforms could be expected to provide them with financial benefits by reducing the extent to which: · They take up invitations for credit that are not necessary (particularly in respect of credit cards where higher interest rates can be charged relative to other mainstream credit products). · Enter into more expensive credit contracts where the broker was remunerated by commission. · Enter into contracts that do not contain the statutory protections that will apply to reverse mortgages. · Use fee-charging alternatives where financial counselling services would be more appropriate, and where the lack of any training or competency levels for those alternative services may exacerbate existing level of financial hardship or distress. 9.317 The financial impact on persons engaging in credit activities is minimal in that, first, it does not affect all persons but only a relatively small class, and, second, the compliance costs are not significant. Given the outcomes for consumers above, the cost-benefit analysis supports this reform. Issue Six -- Canvassing of consumer credit at home Problem identification 9.318 The detailed analysis below is based on two substantial studies of the psychology of door-to-door selling. The first report is a 2010 Australian research project by Deakin University and Consumer Action 179


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Law Centre, `Shutting the gates'46 (`CALC Report'), which examined the sale of educational software programs door to door. The report is particularly relevant as it includes information from interviews with former salespersons, who articulated the way in which they would use the nature of the home environment to manipulate the consumer into agreeing to the purchase. 9.319 The second report is a 2004 English study prepared by the University of Sussex for the Office of Fair Trading, `Psychology of buying and selling in the home'47 (`OFT Report'). It is considered to be relevant to the Australian market given the similar cultural and behavioural dynamics in Australia and the United Kingdom. 9.320 In this RIS the term `unsolicited selling' is used to describe selling arising from both door-to-door canvassing by the salesperson and from situations where the consumer is initially approached by telephone and an appointment in the consumer's home is arranged, including scenarios where the consumer has provided their contact details for another purpose (for example, from entering a competition48 or by misrepresenting that the purpose of the visit was not to sell the item but to give the consumer a chance to win it for free).49 Overview 9.321 There are significant differences for a consumer between the sales interaction in a standard retail environment and one in their own home: · The consumer has not expressed an interest in the goods or services, and must be convinced that they have a need for them in the course of the visit, in order for a sale to be secured. The salesperson is driven by a greater need to sell to the consumer they are dealing with relative to a person in retail premises who can rely on a regular supply of potential customers. 46 Consumer Action Legal Centre and Deakin University, `Shutting the Gates: An analysis of the psychology of in-home sales of educational software', March 2010. 47 University of Sussex for Office of Fair Trading, `Psychology of buying and selling in the home, Annexure F of the doorstop selling report', May 2004. 48 Consumer Action Legal Centre, 4. 49 ACCC News Release, `Door to door sellers must clean up act after ACCC action against Craftmatic', 19 June 2009 (reporting the results of court action by the ACCC against Craftmatic Australia Pty Ltd (Craftmatic), in which Craftmatic admitted that its in-home sales process had subjected senior citizens to unfair tactics and pressure to buy a bed, which could cost up to $15,000). 180


Chapter 9 -- Regulation Impact Statement · The fact the transaction is being negotiated in the consumer's home makes them susceptible to psychological manipulation in a number of ways that are not present in a traditional retail sales context (or only present to a lesser degree). These can range from implicit factors (for example, people tend to treat persons invited into their home as guests, making it an environment for reciprocity, that is, responding more positively to requests50) to overt tactics (for example, the salesperson can tell the consumer they need to `sign the contract now', as they will not be visiting this area again). · The consumer is usually unable to compare the cost of alternative or similar goods or services, except by asking the salesperson to leave and return later. The limitations in making comparisons are exacerbated where either the goods are unique so that exactly the same product cannot be purchased elsewhere, or the goods are complex or unfamiliar so that consumers have more difficulty relying on their previous experience of knowledge of the goods. · The consumer may also be unable to access alternative or cheaper sources of finance. This is a particular issue for low-income consumers who, should they decide to purchase the goods or services, do not have a credit card or cash available and must depend on the finance offered by the retailer (irrespective of the cost of this option). · The consumer cannot simply walk away from the transaction by leaving the retail store. Instead they have to ask the salesperson to leave, and depend on them complying with that request. This requires a level of assertiveness by the consumer, and also establishes a dynamic in which the salesperson can manipulate this situation (for example, by deflecting the request or indicating they intend to finish their presentation). 9.322 The different dynamic in the relationship between the consumer and the supplier where the transaction is being negotiated in the home of the consumer means that the consumer may enter into a contract as a result of the operation of factors rather than being based on the price or quality of the goods or services being offered, or the terms of any finance arrangement. 9.323 It can be expected that retailers would target consumers where their sales practices are more likely to be effective, and where therefore the consumers are more susceptible to manipulation, and who are more 50 Office of Fair Trading, 9. 181


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 likely to ultimately acquiesce to a purchase. This class of consumers can be broadly defined as persons who are either on low incomes or are otherwise at a disadvantage in their dealings with the retailer. The correlation between unsolicited selling practices and the targeting of more vulnerable consumers has been identified in a number of reports as follows: · A 2002 National Competition Policy review of the NSW Door-to-Door Sales Act 1967 found direct selling practices were directed towards and were more effective in respect of vulnerable groups in society, including the elderly (especially older women living alone), consumers with poor understanding of English and the disadvantaged. Many direct selling firms were also found to target particular suburbs or areas, including those with a high percentage of public housing.51 · The Financial Counselling Resource Centre undertook a study in 2009, based on 81 case studies from current and recent clients involving electricity, gas and water issues.52 It found door-to-door marketing techniques to be the largest source of consumer detriment for low income consumers, including the vulnerable such as newly arrived immigrants, people with language or literacy difficulties, those experiencing mental health issues and the disabled. · The CALC report found a statistically significant relationship between the consumer entering into a contract and their level of education; door-to-door selling is more likely to be effective the less educated the consumer was.53 Given the relationship between education and earning power, it also follows that low-income consumers are more likely to enter into these contracts. 9.324 The proportion of sales that can be made to more vulnerable consumers is higher for the following reasons: 51 National Competition Policy Review: Fair Trading Act 1987 and the NSW Door-to-Door Sales Act 1967, p. 49 http://www.fairtrading.nsw.gov.au/pdfs/About_us/ftadtdreport.pdf. 52 FCRC (2009) Still an Unfair Deal? Reassessing the impacts of energy reform and deregulation on low income and vulnerable consumers, see http://www.fcrc.org.au/files/YIDOUVF93M/FCRC_Still_an_Unfair_Deal_- _FINAL_REPORT.pdf. While the study is based on the selling of services other than credit it is still relevant because of the analogies between the two services (in that both involve regular payments over time). 53 Consumer Action Legal Centre, 92. 182


Chapter 9 -- Regulation Impact Statement · They are may be less likely to have access to other ways of purchasing items, for instance online retail sales.54 They are less likely to be resistant to sales tactics (either because they are less assertive or confident, or have less commercial sophistication) and may have less knowledge about alternative and cheaper options. 9.325 State regulatory agencies report relatively high and consistent levels of complaints in relation to unsolicited selling, reflecting the risks for consumers inherent in this type of conduct. The December 2009 RIS prepared for the Australian consumer law reported the following levels of complaint:55 · over the previous two financial years, CAV received 1,056 complaints and enquiries about unsolicited selling; · over the previous three financial years, NSW Fair Trading received 2,015 complaints and 3,229 enquiries about door-to-door selling and telephone sales; · over the previous two financial years, the South Australian OCBA received 872 complaints and enquiries annually about unsolicited selling generally; and · the Queensland OFT received over 125 enquiries per month, on average, about door-to-door sales. A. Psychological factors present in door-to-door sales 9.326 Consumers tend to interact differently with a salesperson when they are present in their own home, compared to the interaction in a store. Consumers can experience a different range of psychological factors that are more likely to prompt behavioural responses that result in them being more likely to buy the goods or services being offered. The nature of these factors means that consumers cannot readily identify or address the factors triggering particular reactions or prompting them to act in a particular way. 9.327 The CALC Report summarised the effect of these factors as follows: `while the macro-objective of the whole process is the purchase, each phase of the process is structured to achieve a micro-objective. The sale process should be seen as a succession of progressive steps, which incrementally seek a larger commitment from the consumer, as such, the sum of psychological effects (rather than a single factor) will influence the consumer's response and reaction'.56 54 Consumer Action Legal Centre, 92. 55 Page 12. 56 Consumer Action Legal Centre, 100. 183


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 9.328 There are seven significant behavioural tendencies commonly present in the door to door context (that are not present in a retail sales environment, or only present to a much lesser degree). 1. Consistency and commitment. People are strongly motivated to appear consistent due to a tendency to believe that their behaviour is correct where it is consistent with a prior commitment,57 and a fear that if they act inconsistently with previous behaviour they will present themselves as either two-faced or confused.58 Studies show that an initial commitment to a baseline (often irrefutable) proposition will lead them to incrementally agree to a request that is presented as consistent with that proposition.59 This is particularly significant in the door-to-door context, in that once a consumer has agreed to the salesperson entering their home they will consider it is either inconsistent or rude to ask them to leave, at least without hearing their presentation. This technique is also used to gain the consumer's consent to a visit where the approach is made by way of telephone, described as a `foot in the door'. For example, one method is to disguise the effect of the initial approach along the following lines: `Thank you for answering our short survey. We note your interest in your children's education and would like to make an appointment to speak to you about it'. This technique is exemplified by sellers of educational software for the children of the consumer. The baseline agreement will be obtained through seeking affirmative responses to propositions such as: `So education is important to you then? It sounds like, as a parent, you want to provide as much opportunity as you can to reach [your children's] potential?'.60 The salesperson will then seek further agreements with statements that make it progressively more inconsistent and psychologically difficult for the consumer to ultimately refuse to buy the product, as it will imply they are parents who are unconcerned about their children's future, when they have previously agreed they are. One salesperson of an educational software product described this process as follows: 'the sales routine ... was often described as a sheep paddock, where you would go around shutting the gates as you went through your routine. So that at the end, the only gate left open was to buy'.61 The sale would then be concluded by the salesperson not giving the consumer a choice as to whether or not they want to sign the contract but rather by presenting it as a consistent and inevitable outcome of the earlier 57 Consumer Action Legal Centre, 34. 58 Office of Fair Trading, 19. 59 Office of Fair Trading, 19. 60 Consumer Action Legal Centre, 43 (take from actual sales script). 61 Consumer Action Legal Centre, 117. 184


Chapter 9 -- Regulation Impact Statement discussions, through framing the request as `... so if you could just sign here?'.62 2. Reciprocity: This is a norm leading people to feel the need to repay a favour, gift or concession.63 A concern about being viewed as a `freeloader' leads to a deep sense of unease when feeling indebted, and the need to demonstrate in a clear way their recognition of the generous nature of the person offering the gift by a similar response to `equal the score'.64 In the door-to-door context the need to reciprocate can arise simply through the visit of the salesperson; persons who have purchased items via doorstep selling have stated that they felt indebted to the seller for the time had spent with them65. The provision of small gifts, samples or price reductions are techniques that a seller can use to further engage this norm66. The OFT Report found gift-giving to be the most common theme in consumer accounts about behaviour of sales representatives, with one salesperson telling OFT that gift-giving `works quite nicely because then you get an emotional attachment and the client is then obligated to you'.67 3. Scarcity, the endowment effect and anticipated regret: Making a product or service appear scarce has been shown to have two behavioural effects. Firstly it enhances the perceived value of the product, with its scarcity providing visible social proof that other people think the product is valuable.68 Secondly it can induce fear or a sense of anticipated regret if the consumer will be unable to choose the product in the future.69 The mere fact of being prompted to imagine ownership may also lead to the consumer experiencing a sense of pre-emptive loss in forgoing the product.70 This characteristic of human behaviour is known as the endowment effect. It is an inherent feature of door-to-door selling in that the availability of the product is dependent on the presence of the salesperson in the 62 Office of Fair Trading, 20, Consumer Action Legal Centre, 41. 63 This heuristic exists in every know society that has been investigated. A Gouldner, `The norm of reciprocity: a preliminary statement', American Psychology Review 1960, 25 in Consumer Action Legal Centre, 45. 64 Office of Fair Trading, 16 - 17. 65 Consumer Action Legal Centre, 46. 66 Cialdini (2001, 29) reports the `incredible success of a company called Amway, whose door-to-door sellers had an `unbelievable increase in sales' when they left a free collection of Amway products... in the consumer's home'. Office of Fair Trading, 17. 67 Office of Fair Trading, 59. 68 R Cialdini, `Influence: Science and Practice' (1st Ed) 1985 in Consumer Action Legal Centre 36, 65. 69 Office of Fair Trading, 22 -23. 70 Office of Fair Trading, Page 22- 23. 185


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 consumer's home. The salesperson can then deliberately heighten its effect by statements that emphasise the limited availability of the product; for example, that the deal is only available `right now -- during this visit'.71 These types of comments can encourage a consumer to anticipate the possible regret they may feel if they do not accept the offer. The sales script for one provider of educational software programs trained salespersons to use the following statements: `In each area we take no more than 100 enrolments. Just like a school, once we reach our 100 quota, we close enrolments and move to the next area'.72 Techniques such as these are designed to both preempt responses that the consumer will `think about it', and create a sense of urgency, through potential loss of access to the product, that can be entirely controlled by the salesperson. 4. Anxiety: Individuals who are more anxious by nature are more likely to be influenced by appropriate prompts in their decision-making.73 They are also more likely to make decisions in favour of an option perceived to address that anxiety.74 The creation and alleviation of anxiety is therefore an important aspect of door-to-door selling, with products more likely to be promoted successfully where they have characteristics that allow for this dynamic to be articulated by the salesperson in their presentation. Three of the most common products marketed door-to-door in the last decade -- security alarm systems, water filters and educational software -- all had features that enabled the salesperson to initially engage the consumer by discussing matters likely to make them anxious. These examples illustrate that the pressure created by anxiety is not simply an incidental feature of door-to-door selling but is a constant aspect because of its power to induce consensus from an otherwise reluctant purchaser. A salesperson of education products succinctly expressed this approach: 'the first half of the presentation was to generate anxiety; the second half was to solve the anxiety'.75 Security alarm systems were a product that could be readily marketed through techniques designed to elicit a sense of fear in the consumer. 71 For example, Craftmatic would offer reluctant or hesitant consumers a number of discounts that were described as being `special discounts' only available to limited consumers and only available that day. In reality, the discounts were offered to every consumer who resisted the sales process. ACCC News Release, `Door to door sellers must clean up act after ACCC action against Craftmatic', 19 June 2009. 72 Example of sales script `In each area we take no more than 100 enrolments. Just like a school, once we reach our 100 quote, we close enrolments and move to the next area'. Consumer Action Legal Centre, 65. 73 Consumer Action Legal Centre, 37. 74 R Raghunathan and M Pham, `All negative moods are not equal: motivational influences of anxiety and sadness in decision making', Organizational Behaviour and Human Decision Processes, 1999, 79 in Consumer Action Legal Centre, 68. 75 Consumer Action Legal Centre, 110. 186


Chapter 9 -- Regulation Impact Statement Selling practices consistently sought to personalise the potential sense of harm the consumer was at risk at through, first, statistics about the level of violent crime in their local area, and, second, visual images (both through photos and DVDs) of persons after they had been attacked. Water filters have been actively marketed on the basis of the health risks resulting from drinking unfiltered water. Marketing tactics can include the salesperson `testing` tap water to reveal that it is polluted or contaminated; referring to government initiatives to give a false legitimacy to claims about the nature and extent of problems; and suggesting that impure water is responsible for causing a range of illnesses (from skin problems to cancer and deformities in babies 76). Educational software programs for children are promoted on the basis that otherwise the borrowers' children will fall behind in school, and that their education will be compromised, seeking to trigger a parent's natural desire for their children not to be disadvantaged. One of the techniques used in some presentations was to have the children undertake a ranking assessment on a program provided by the salesperson, with the difficulty of the assessment deliberately understated by the salesperson. The effectiveness of the sales techniques that can be employed with these types of programs has resulted in a recent proliferation of these types of schemes, and in consequent warnings in every Australian jurisdiction.77 5. Trust, liking and similarity: Salespersons can use their presence in the consumer's home to encourage the consumer to develop a sense of trust in their relationship. This trust is initiated by the invitation to the salesperson to enter their home, but can be fostered through techniques such as commencing the interaction with a conversation with the consumer, the disclosure of personal information, or pointing out similarities between themselves and the consumer (using the information visually available in the consumer's home). Studies show that a `dialogic' conversation as opposed to a monologue can lead to an increased compliance with requests by simulating the type of relationship one might have with a friend.78 For example, one sales scripts for in-home sales requires that, prior to discussing a product, a seller create 'small talk, expand on every question, 76 Consumer Affairs Victoria, Consumer Alert, `Salespeople playing dirty tricks with clean water', 13/02/2003 and Brisbane Times, `Qld "cancer water" company fined', 04/05/2009. 77 Consumer alerts have been issued by every State and Territory fair trading authority with the exception of one in relation to educational software products. It was reported in WA Hansard that in the 12 months to 20 September 2007 the WA Department of Consumer and Employment Protection received 26 complaints about 5 separate maths-tutoring software companies (WA Hansard, Assembly, 20 September 2007, 5492 - 5493). 78 Dolinski, Nawrat, and Rudak, Dialogue involvement as a social influence technique, Personality and Social Psychology Bulletin, 2001, 27 in Consumer Action Legal Centre, 44. 187


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 create a 10 minute conversation...build rapport with the whole family ... show empathy in their answers, particularly the older children`.79 In the words of a salesperson the intimacy and familiarity this interchange `makes it very difficult for that person to then, sort of -- slap you in the face, and say no'.80 6. Authority and expert endorsement: Studies have demonstrated that deference to perceived authority is a strong social norm, and that the expression of an opinion perceived as expert opinion can therefore be influential in the formation of a person's opinion and behaviour.81 Products being marketed door-to-door are usually not readily available elsewhere, as otherwise the consumer is less likely to be attracted into making a purchase (because they can easily obtain them from alternative sources). The salesperson is therefore able to present themselves as having a detailed and superior knowledge of the product relative to the consumer, and position themselves as an expert, where either the goods are unique and have no mainstream retail counterpart (as in educational software) or the goods are complex or not readily available (burglar alarm systems). It is typical for door-to-door operations to use a range of techniques to bolster their perceived expertise. These techniques include: references by third parties who endorse their products, to generate a higher level of trust in the product (noting that consumers are unlikely to question the legitimacy or independence of the endorsement82); the use of brand names to give an impression of expert impartiality or credibility (through, for example, titles such as the `Australian Institute' to suggest, without being misleading, that the organisation is associated with the government83); the use of statistics to provide a heuristic shortcut for the consumer in relation to the product's quality84; or, in relation to educational software programs, taking on the role of a teacher by conducting assessment exercises on the children of the consumer. It is noted that Consumer Affairs Victoria warned consumers in an alert of door-to-door salesmen selling water filter products who were implying an 79 Consumer Action Legal Centre, 44 (actual sales script). 80 Consumer Action Legal Centre, 108 ( from interview). 81 S Chaiken, `The Heuristic model of persuasion', Papers from the 5th Ontario Symposium on Personality and Social Psychology, 1984, 3 - 39 in in Consumer Action Legal Centre, 35 see also S Milgram, `Obedience to Authority. An experimental view' 1974, 26 in Office of Fair Trading, 9. 82 Office of Fair Trading, 27. 83 Consumer Action Legal Centre, 52, note also Consumer Affairs Victoria, Consumer Alert `Sales tactics to seniors', 11/10/2010 `one tactic used to create the impression that the salesperson is associated with a health or welfare organisation is to offer the older consumers free, in-home health appraisals'. 84 Consumer Action Legal Centre, 58. 188


Chapter 9 -- Regulation Impact Statement affiliation to government by both using the `Target 155` water conservation campaign logo, and labelling their flyer as a `Public Notice' and part of an `Annual Water Quality Review'.85 7. Intimidation: The fact that the salesperson is present in the residence of the consumer means they can refuse to leave until the consumer has entered into the contract. The refusal is rarely explicit in nature, with the salesperson rather deflecting the request to leave or continuing the presentation until the consumer is worn down and sees no other option available. Complaints of this type are a regular feature of door-to-door sales; it is believed that the level of complaints underreports the extent of the conduct, given the embarrassment to the consumer in having to admit they were unable to have any control in their relationship with the salesperson. It is also necessarily the case that the class of consumers most likely to be affected in this way will be vulnerable and unable to protect their own interests by being assertive enough to have the salesperson respond to requests to leave. They are therefore also unlikely to complain once the retailer has left. B. Particular Issues in relation to Indigenous communities 9.329 In some Indigenous communities, the door-to-door supply of whitegoods and household furniture on finance is relatively common. These contracts are often structured as leases for an indefinite term, and are therefore unregulated by the Credit Act. The particular difficulties associated with the use of this type of contract discussed in detail in the RIS on consumer leases. 9.330 There are a number of distinct issues for these communities that make them more susceptible to entering into contracts to purchase goods sold door-to-door, irrespective of the price or quality of the goods, or whether or not they are needed, and to suffering loss or damage as a result. 9.331 These issues are: · There is a documented cultural tendency for `gratuitous concurrence' -- this manifests itself as a propensity to agree with a person to avoid offending them (commonly by saying `yeh, yeh'), and is not a positive reply that reflects actual concurrence.86 85 Consumer Affairs Victoria, Consumer Alert, `New tactics by water filter salespeople' 03/08/2010. 86 Indigenous Consumer Assistance Network, `Unconscionable Conduct and Aboriginal and Torres Strait Islander Consumers', 2010, 19. 189


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · This tendency can be more pronounced for Indigenous women in these communities. The case of ACCC v Keshow87 involved a trader selling educational materials in remote communities with no written contracts and securing payment through direct debits (timed to coincide with Centrelink payment dates) with no end date.88 The court found that natural `reticence, diffidence'89, limited commercial experience, geographic isolation, lack of education and low income all were factors that demonstrated the dealings to be unconscionable. · Many of the people in these communities will experience language difficulties, as English may be only their second or third language. · For communities in Far North Queensland or the Northern Territory there may be no means of reasonably accessible advice, severely limiting the capacity of borrowers to seek assistance or remedies. · As discussed in more detail in the RIS on leases, consumers may be provided with goods by operators who have no other markets or infrastructure, and who operate, in effect, as distributors of the goods only, so that consumers cannot obtain repairs for defective goods or have complaints addressed. · Low levels of financial literacy, language barriers and limited economic experience mean that for Indigenous consumers in regional and remote areas of Australia the contracts and documentation associated with the purchase of goods and services sold door-to-door on finance are complex and difficult to comprehend.90 C. The role of finance in door-to-door selling 9.332 Businesses selling goods or services door-to-door usually have an existing arrangement with a financier who will provide finance to consumers. These arrangements are essential as they enable the salesperson to increases the class of consumers to whom the products can be sold. Otherwise, irrespective of whether the outcome of the sales presentation was agreement by the consumer to purchase the item, there 87 ACCC v Keshow [2005] FCA 558 at 85. 88 The lack of documentation meant that these contracts, while functionally similar to credit contracts, were not regulated as credit under the UCCC. 89 ACCC v Keshow [2005] FCA 558 at 108. 90 Indigenous Consumer Assistance Network, 7 -8. 190


Chapter 9 -- Regulation Impact Statement would still be some consumers who could not afford to pay for it, or would use this as an easy method of refusing to buy it. 9.333 Door-to-door selling through these types of linked finance arrangements creates additional risks to consumers, because they are entering into two transactions with two different parties, and taking on a greater liability through the finance contract than if they were paying cash. 9.334 This creates the following problems for consumers, where they use the finance arranged by the salesperson. 1. Flexible pricing. Regulators and consumer advocates consistently report that there is a significant degree of flexibility in the cost of products sold door-to-door, and that the salesperson can increase the cost of the product according to the circumstances of the person they are dealing with. For example, the price of largely similar educational software can vary from between less than $500 to more than $6,000, with credit charges then also payable.91 Similarly, water filters (that have only a nominal value) have been sold for $3,000 with the price increased through the addition of maintenance services.92 This results from the dynamics of the relationship in the door-to-door context, where the decision to purchase is not primarily based on the cost or quality of the goods, and where therefore the price does not need to be competitive. The availability of linked finance arrangements can result in consumers paying more in two ways. First, the cost of the product can be increased and matched to the amount of credit the consumer can afford. The CALC Report found that people who used finance provided by the sales representative were significantly more likely to be charged a higher amount for the educational software programs.93 This suggests that the availability of 'on the spot' finance is an integral part of these transactions and that it can increase the cost of the goods to the consumer. Secondly, the presence of two separate transactions allows for costs to be moved between the finance contract and the sale contract, to suggest the consumer is obtaining a benefit when this is not the case. For example, in the door-to-door context, significant use has been made of `interest free' finance deals where the supplier paid an amount equivalent to interest to the financier and included this cost in the amount charged to the consumer (necessarily increasing the cost of the product significantly above its retail price).94 91 Consumer Action Legal Centre, 93. 92 Consumer Affairs Victoria, Consumer Alert, New tactics by water filter salespeople, 03/08/2010. 93 Consumer Action Legal Centre, 93. 94 Australian Finance Direct Limited v Director of Consumer Affairs Victoria [2007] HCA 57 191


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 2. Lack of remedies against financier for conduct of retailer. While the consumer enters into a contract with a financier they usually do not have any direct contact with this entity. Accordingly, the consumer will not necessarily find it easy to obtain a remedy against the financier because of the conduct of the salesperson. This problem was discussed in detail by National Legal Aid in its submission to the Green Paper. It commented that: 'by the time the consumer feels confident enough to complain about the quality of the goods purchased the company selling the products is usually un-contactable or no longer financially viable. As a consequence, vulnerable consumers, who in many instances suffer from poor English and financial literacy, are often left with a product that has little value and a finance contract paying for the goods that has two to five years still to run on the product'.95 It is noted that the Credit Act does make the financier liable to the consumer for the conduct of the supplier in some situations. However, the way in which these remedies are currently structured means that consumers cannot easily use EDR schemes to provide them with compensation. In practice the consumer's only avenue for obtaining redress may be court action, which is often not a viable option. 3. High cost of credit and lack of competition. The cost of credit charged by financiers in door to door transactions is typically high relative to other forms of credit (and, in particular personal loans or credit cards which are the alternative products available to finance these purchases): · Educational software programs were often financed through credit contracts with interest rates at 24 per cent.96 · The `interest free' finance arrangements discussed above had underlying exchanges of money between the supplier and the financier that resulted in the consumer paying effective interest rates up to 24 per cent. · As discussed in more detail in the Chapter on leases, consumers were charged a cost of finance equivalent to interest rates of 109 per cent. 9.335 These costs are the result of the context of the decision-making process in the door-to-door environment. The analysis of the psychological factors set out above indicates that the decision to purchase goods or services will be made separately from and prior to the decision in relation to the finance arrangements to pay for the purchase. The consumer will give little separate consideration to the finance decision as 95 National Legal Aid, Response to Green Paper on National Credit Reform, 44 - 45. 96 Consumer Affairs Victoria, Consumer Alert, `Parents warned about aggressive sales techniques', 03/02/2008. 192


Chapter 9 -- Regulation Impact Statement they are already committed to the purchase. There is therefore an absence of competitive pressures, in the sense that the cost of credit will not affect whether or not the consumer enters into the contract. Objective of Government Action 9.336 The objective of government action is to promote the operation of fair and efficient markets by providing appropriate consumer protection in situations where the consumer is subject to an added vulnerability or disadvantage due to the nature of the sales process. Options Option 6.1: Maintain the status quo 9.337 Under this option, there would be no change to the current regulatory arrangements. Niche businesses would continue to sell goods or services door-to-door via linked credit and these practices would continue to be associated with the same problems. Impact analysis 9.338 Under this option, there would be no new impacts on consumers and business. The detriment caused by these types of sales is likely to continue to fall disproportionately on low-income consumers, and to therefore have a greater impact on them relative to someone who has a greater disposable income. Option 6.2: Prohibit the unsolicited financing of goods door-to-door, through credit contracts or leases 9.339 Under this option: · The unsolicited selling of credit and leases door-to-door would be prohibited, even where it was provided incidentally to the sale of goods and services. · The prohibition would only apply where the salesperson acts as an agent for the financier or has arrangements with a financier (for example, a consumer could still make a purchase using their current credit card). · The prohibition would apply where the salesperson contacts the consumer without prior arrangement, and `prior arrangement' would be defined so that it does not include situations such as a consumer giving their contact details for another purpose (such as a competition) or when returning a missed call. 193


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Impact Analysis Consumers 9.340 As noted above, there is a significant correlation between whether or not a consumer enters into a credit contract or lease as a result of unsolicited selling and their income, with door-to-door selling more likely to be effective to low-income consumer. The benefits of a prohibition will therefore have a significant impact on this class of persons, and enable them to make more effective purchasing decisions with relatively limited income. 9.341 Consumers who wish to purchase items currently being sold door-to-door via linked credit would have the alternative option of purchasing the goods through cash, using their own credit card, or arranging their own finance. This would enable them to make separate decisions in respect of the goods or services, and the means of finance, and this should result in: · consumers not being pressured into more expensive finance options through unsolicited selling; and · being able to refuse to purchase or acquire the goods because they cannot afford them, with the salesperson having to accept this as a legitimate reason, without then being able to offer their own finance arrangements. 9.342 They could also choose to actively seek out these goods or services and purchase them directly from retailers. The proportion of the population that lives in very remote communities, with limited access to retail outlets will need to make other arrangements, consistent with the current practices of those persons who obtain goods and services other than through unsolicited selling. Credit providers, lessors and credit service providers and door-to-door retailers 9.343 67 of the 6,836 persons who had applied for an ACL with ASIC by 31 December 2010 nominated their function as `Door-to-Door or Phone Sales'. This figure provides a reasonable estimate of the maximum number of businesses that may be affected, noting that these persons would self-identify their functions when applying to ASIC. It is possible that not all of the 67 persons use a business model that would constitute unsolicited selling. 9.344 It is considered that the majority of these persons will be providers of credit services rather than credit providers or lessors, as there are only a small number of financiers operating in the unsolicited selling sector. 194


Chapter 9 -- Regulation Impact Statement 9.345 Door-to-door selling of goods and services can continue to happen, but goods and services will not be able be purchased (on the spot) with linked finance. Purchases will continue to be possible via cash, direct debit, or a person's own (pre-existing) credit card. A person will also be able to choose to seek finance themselves to fund the transaction. For a door-to-door salesperson this means that there may be a reduction in `immediate' sales where a person could not otherwise afford the product but for the credit. This may require some businesses to adopt different business models, where they are required to offer goods or services that are of a quality or nature that will attract custom in themselves, rather than the salesperson being able to rely on the psychological advantages available when operating in the home environment. 9.346 The impact on credit providers, lessors and credit service providers will therefore be proportionate to the extent their practices rely on psychological manipulation; those who are most dependent on it to achieve sales will have to make greater adjustments to their business, while those already offering goods or services that are attractive will have to make minor adjustments. This would be an intended consequence of any regulation. 9.347 In summary this option would result in the following costs and benefits: · A relatively small number of businesses who engage in unsolicited selling practices may need to change their business practices, in particular by changing the nature of the goods or services they are retailing. · Consumers, disproportionately those on low income, would be able to make better purchasing decisions in respect of both goods and services being offered door to door, and the type of finance used to acquire those goods. This could be expected to save consumers thousands of dollars, either because they do not enter into contracts in the first place, or because they use cheaper options to finance the purchase. Option 6.3: Educate consumers about the risks associated with door-to-door selling 9.348 This option would see the use of education or information campaigns to encourage consumers to be more assertive in their dealings with door-to-door retailers, and more selective in their choice of goods and services. 9.349 It would operate by: · utilising education campaigns to provide short messages to consumers, for example informing them of their rights in 195


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 relation to unsolicited selling, and advising them to shop around for better deals (with these campaigns potentially targeted at `high risk' categories of consumers); and · allowing credit providers, lessors and providers of credit services to continue offering products as a result of unsolicited selling practices. Impact analysis 9.350 This approach would have the following impact: · It would only have an impact on those consumers who receive and absorb the message. · It would require these consumers to be able to use the information in a way that overcomes the psychological factors associated with selling in the home. · Credit providers, lessors and providers of credit services would only change their business models if the results of the education campaign were effective in changing consumer behaviour. 9.351 This option would result in limited benefits to consumers relative to the other options, in that the factors above suggest only a relatively small class of consumers can be expected to respond to the education campaign. Credit providers and lessors, and retailers, would not be required to incur any upfront costs. They would only need to make changes, particularly in relation to the types of goods and services they market, where there is a significant change in consumer behaviour resulting from the education campaign. 9.352 In summary this option would result in the following costs and benefits: · There would be no immediate impact on those businesses who engage in unsolicited selling practices. Some may need to change their models over time, where consumer education is particularly effective. · Consumers who absorb the education messages would be better able to refuse to enter into contracts as a result of unsolicited selling practices. However, this is still likely to result in continuing levels of sales to some consumers (and by definition to a more vulnerable class, who do not understand or appreciate these messages). Stakeholder views 9.353 Of the 56 formal submissions to the Green Paper, nine provided comments on this issue. Five were supportive or not opposed to further 196


Chapter 9 -- Regulation Impact Statement regulation. One was neutral on the proviso that it did not impact on legislation regulating the privacy of individuals in relation to credit matters. One was directly opposed to further regulation, and two believed that there was insufficient evidence to support further regulation. Supportive of further regulation 9.354 The Brotherhood of St Laurence, supported expanding the anti-hawking provisions to credit, including credit offered incidentally for the financing of goods and services in a persons' home, noting that `the decision to enter into a consumer credit contract is a significant one--and one that could result in financial hardship--there is no reason to see why consumer credit products should be treated any differently from other financial products and services'. 9.355 Good Shepherd Youth and Family Service was of the view that there is need to consider further regulation of credit sold door to door to finance the sale of goods and services. 9.356 Similarly, the National Financial Services Federation view was that that hawking provisions in the Code should reflect that hawking provisions elsewhere. 9.357 National Legal Aid agreed with the concern that the provision do not adequately cover telemarketing and forms of unsolicited contact such as `invited' home visits or the sale of linked credit, and argued that all should be further regulated. 9.358 Door-to-door selling is not generally a distribution channel used by mainstream credit providers. However, the ABA noted it would be comfortable with the government considering reform if market failures warranting regulatory intervention have been identified. 9.359 Both CALC and CCLC supported the extending the current prohibition on doorstep canvassing of credit to credit that is incidental to the unsolicited sale of goods or services. CALC notes that the availability of credit is often a powerful tool in a range of high pressure selling situations, and such availability can enable expensive sales to proceed where they may otherwise have not. CCLC suggests that section 156 should be widened to there should be a prohibition on consumers entering into credit contracts by signing them in their home when a sales person, broker or credit provider is present, on the basis that the consumer is always vulnerable to hard selling in their home. Not supportive of further regulation 9.360 Both GE Finance and the AFC stated that they were not aware of evidence that would justify additional regulation. 197


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Qualified support 9.361 The Office of the Privacy Commissioner noted that `any changes to the regulation of unsolicited sales of credit that are inconsistent with the privacy protections in the Privacy Act 1988 would be a departure from current policy. The Office believes that any such departure would need to demonstrate significant community benefit and be accompanied by strong privacy protections'. It is not envisaged that the Options would be inconsistent with the Privacy Act 1988. Recommended option 9.362 Option 6.2, prohibiting the unsolicited selling of credit and leases door-to-door, is the recommended option. 198


ATTACHMENT A -- MEMBERS OF CONSULTATION GROUPS Members of the Industry and Consumer Representative Consultation Group Industry representative Consumer group and legal representatives Australian Finance Conference CHOICE Australian Bankers' Association Consumer Credit Legal Centre (NSW) ABACUS Australian Mutuals Consumer Action Law Centre National Financial Services Law Council of Australia Federation Mortgage and Finance Association of Dispute resolution providers Australia Finance Brokers Association of Credit Ombudsman Service Ltd Australia Financial Services Council (formerly Financial Ombudsman Service Investment and Financial Services Association) Financial Planning Association Government GE Commonwealth Treasury Australasian Retail Credit Australian Securities and Association Investments Commission New South Wales Office of Fair Trading (as observer for the States and Territories) 199


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Members of the Financial Services and Credit Implementation Taskforce Commonwealth Western Australia Treasury Department of Commerce ASIC New South Wales South Australia Office of Fair Trading Attorney-General's Department Department of Premier and Cabinet Victoria Tasmania Consumer Affairs Victoria Office of Consumer Affairs and Department of Treasury & Finance Fair Trading Queensland Northern Territory Department of Justice and Department of Justice Attorney-General Department of Employment, Economic Development and Innovation Australian Capital Territory Office of Regulatory Services Department of Justice and Community Safety 200


Chapter 10 Regulation impact statement DELIVERING FOR SENIORS -- EQUITY RELEASE PRODUCT REFORMS Election commitment 10.1 This section relates to an election commitment announced on 7 August 2010 to extend protections for older Australians accessing the equity in their homes via reverse mortgages and home reversion schemes (the election commitment). The election commitment announced that the Government has committed to protecting older Australians by: · introducing specific protections in relation to both reverse mortgages and home reversion schemes, including greater disclosure of the features and fees on these products; and · establishing a statutory protection against negative equity. 10.2 The election commitment will be progressed as part of Phase Two of the National Consumer Credit Protection Reforms and were announced to be in place by mid-2012. 10.3 Establishing a statutory protection against negative equity can only be achieved via a legislative requirement for reverse mortgage lenders to not seek more than the sale proceeds of the secured property as repayment for the loan. Extending protections to seniors using either a reverse mortgage or home reversion scheme product may be achieved by several options, including specific reverse mortgage responsible lending conduct obligations, improving pre-contractual disclosure or regulation of certain product features. Summary 10.4 Reverse mortgages carry unique risks and complex financial and legal impacts for borrowers that are significantly different from those associated with other more traditional credit products. This disparity results in the following problems for consumers: · Fluctuations in interest rates and house prices make it impossible for a borrower to assess how much equity they may have left in their home at any given time during the life 201


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 of the loan. They may find themselves in a position where they owe the lender more than the value of their home, or their future choices (particularly relating to aged care accommodation) are constrained by the depletion of the equity in their home. · The characteristics of the class of borrowers who use reverse mortgages (including limited financial literacy, lack of income and reduced capacity due to health problems) can create particular risks in relation to the use of these products. These risks include a limited understanding of how they operate, and an inability to respond promptly or appropriately to defaults under the contract. 10.5 It is proposed to address these problems by: · establishing a statutory protection against negative equity; · requiring providers of equity release products to comply with specific responsible lending conduct obligations, before the consumer enters into the contract; · requiring providers of equity release products to provide consumers with improved pre- and post-contractual product information; · requiring providers who do not offer tenancy protections for non-title holding residents to disclose this to borrowers before they enter the contract. If providers do offer tenancy protections for non-title holding residents, they will be required to offer this in a mandated way; · excluding certain matters from being able to be a default under the Code, or therefore as triggering enforcement action; and · requiring providers of equity release products to meet additional procedural requirements before they can take enforcement action in the event of default by the borrower, with these requirements adapted to the characteristics of this class of borrower. 10.6 These reforms would make a significant difference for consumers in that: · Consumers will be assisted to make more informed choices in respect of the balance between current access to credit and the future restrictions on lifestyle choices from reduced equity. · Consumers will have protections that reduce the risk of them being evicted from their home. 202


Chapter 10 -- Regulation Impact Statement 10.7 These reforms would have the following impact on the equity release industry: · The obligations are largely consistent with existing industry practice under a voluntary code of practice for reverse mortgage providers and equity release consultant accreditation for brokers. It is therefore not expected that the equity release industry would incur significant additional compliance costs, although all credit licensees would need to review their practices to ensure they comply with statutory requirement. · The introduction of standardised requirements in relation to matters such as no negative equity guarantees and default clauses and non-title holding arrangements will reduce the need for third parties to be familiar with a range of products with minor variations in terms. This will simplify the task for those giving advice on these products, reducing their time and cost, and making advice more accessible. Problem identification Background 10.8 An equity release product allows a consumer to access the equity of a property, whilst still retaining ownership over it. In Australia, the most common forms of equity release products utilised by seniors are reverse mortgages and home reversion schemes. For the purposes of this RIS, the term `equity release product' is used to describe both these types of equity release transactions. 10.9 A reverse mortgage is a credit product under which a consumer, who is usually at least 60 years or above, borrows money against the equity in their home, in return for a lump sum, line of credit or regular payment. The debt does not need to be repaid until the home is sold (usually when the borrower dies or voluntarily vacates the home), with interest compounded until this time. 10.10 Reverse mortgages are currently subject to regulation under the Credit Act and self-regulation under the Senior Australians Equity Release Association (SEQUAL). SEQUAL's self-regulation measures include a Code of Conduct and Guideline's which include a requirement for members to include a no negative equity guarantee (NNEG) in its products. Membership of SEQUAL is voluntary, with nine providers of reverse mortgages currently members. These providers lend the vast majority of reverse mortgage and therefore, the majority of borrowers are offered SEQUAL self-regulation protections. However, at least two small lenders who offer reverse mortgages are not SEQUAL members. 203


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Although the nature of their market share in uncertain, it is estimated that at a maximum non-SEQUAL members offer no more than 5 per cent of reverse mortgage loans. 10.11 Currently, borrowers take out reverse mortgages for a variety of personal purposes. The most common uses include supplementing retirement income and paying off other debts. Reverse mortgages are also used to fund home renovations, which may allow a borrower to improve the value and use of their home, and allow them to remain in their home longer than they otherwise could.97 10.12 A home reversion scheme allows a consumer to sell a portion of their home to a reversion company for a fixed lump sum payment (usually less than its market value), with the consumer retaining title over the home. As a home reversion scheme product is a part sale of the consumer's home, it represents a property transaction regulated by the states and territories. Therefore, it is not a credit product regulated under the Credit Act. Currently, the only provider of a home reversion product in Australia is Homesafe Solutions Pty Ltd, which is a member of SEQUAL. 10.13 With the ageing of Australia's population, the demand for equity release products is expected to increase, resulting in an increased market of potential consumers being exposed to the risks inherent to the products.98 The unique risks these products pose to seniors seeking to use these products are set out in detail below. Difficulty in managing the risk of negative equity 10.14 Negative equity occurs when the debt repayable under the reverse mortgage exceeds the value of the borrower's property. In such a situation, without intervention, the entire risk of negative equity is borne by the borrower who could be required to pay more than the proceeds from the sale of their property as repayment for the loan. The potential impact of this is that unexpected increases in interest rates or falls in house price values could result in consumers having to exhaust all their available assets to pay the debt. The risk is that these borrowers could be left severely impoverished and facing eviction from their home, at a stage in their life when they are unable to generate any income. If the debt is repaid due to the death of the borrower, repayment may require the sale of other assets from their estate, impacting their executors and beneficiaries. 97 SEQUAL Media Release 28 May 2010. Australia's reverse mortgage market reaches $2.7 billion at 31 December 2009. 98 The Australian Bureau of Statistics has reported that by 2056 Australia's population is projected to increase to around 23 per cent - 25 per cent being 65 years or older. In 2007 Australia's senor population consisted of 13 per cent being 65 years or older. 204


Chapter 10 -- Regulation Impact Statement 10.15 There are several factors which mean borrowers face a significant information asymmetry which make it difficult for them to understand and manage the risk of negative equity, including: · if interest rates rise and/or house prices fall, the effect of compounding interest on the loan can result in the total amount owing increasing exponentially relative to the value of the security; and · it is difficult for a borrower to assess how much equity they may have left in their home at any given time during the life of the loan, or at the time they enter into the contract, as this will depend partly on future movements in interest rates (unless the loan is for a fixed rate) and property prices, as well as the period of the loan. 10.16 Since the risk of negative equity depends on the future movements of interest rates and house prices, it is not possible to determine the proportion of borrowers who may find themselves at risk of incurring negative equity. 10.17 Negative equity has been identified as a significant risk to borrowers by the Australian Securities and Investments Commission 99 (ASIC) and State consumer agencies. 10.18 Negative equity has also been identified as a risk to consumers in the United Kingdom, United States and New Zealand where measures have been introduced to address the problems created by the absence of a guarantee. For example, in the UK the equity release industry body Safe Home Income Plans (SHIP) requires its members to offer protection against negative equity. This requirement flowed from experiences in the late 1980s during which thousands of retired people took out variable rate reverse mortgages to invest in stock market related investment bonds. The income from these bonds was expected to be sufficient to pay the interest on the mortgage and provide additional regular income. However, due to poor market performance, coupled with increasing interest rates and decreasing property values, many consumers' debts exceeded the value of their properties, with many borrowers being evicted.100 This demonstrates that, in the absence of a no negative equity guarantee, lenders can be less conservative in their lending practices and more 99 ASIC Report 59. Equity Release Products. November 2005. See also ASIC Report 109: `All we have is this house' Consumer experiences with reverse mortgages. November 2007 (ASIC's second report). Also, a statutory protection against negative equity was included in the draft National Finance Brokers Bill 2007 and would have applied across all State and Territory jurisdictions. 100 ASIC report 59, Equity Release Products report, November 2005. These events occurred before the industry was bought under regulation from the Financial Services Authority or self-regulation by the UK equity release body SHIP. 205


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 aggressive in enforcement actions, with significant impacts on borrowers who have no means of repaying the debt other than by selling their home. 10.19 SEQUAL has responded to concerns about the risk of negative equity by including a requirement in its Code of Conduct that its members must include a No Negative Equity Guarantee (NNEG) as part of their reverse mortgage lending policy. This guarantees that the amount the borrower owes on their loan will be capped so that the maximum amount recoverable cannot exceed the net realisable value of their property, except in a limited range of circumstances. 10.20 The majority of reverse mortgages in Australia are provided by SEQUAL members who offer this NNEG. However, since not all reverse mortgage providers are members of SEQUAL; this requirement is not mandated across the whole of the reverse mortgage industry. There is also no requirement for new market entrants who do not elect to become members of SEQUAL to provide borrowers with any form of negative equity protection (although they may choose to offer their own form of negative equity protection). Inadequate information 10.21 Taking out a reverse mortgage can involve major financial implications and create new legal rights and obligations for a borrower. Reverse mortgages are very different from more traditional credit products and their risks are therefore unique. Also, they are a relatively new loan product to the Australian market with borrowers generally taking out only one reverse mortgage in their lifetime, leaving them unfamiliar with its risks and implications. 10.22 The financial implications include: · the risks of insufficient equity being available for future requirements such as inheritances to children or meeting aged care costs; · the possible application of large break fees on fixed interests loans which cannot be calculated at the time the borrower applies for the loan; and · potential impacts on pension entitlements. 10.23 The legal implications include: · the application and effect of default clauses and procedures; and · potential loss of tenancy rights for non-title holding residents. 10.24 For these reasons, it is essential that borrowers make fully informed decisions regarding taking out a reverse mortgage. However, 206


Chapter 10 -- Regulation Impact Statement there are several sources of evidence which indicate that consumers are particularly vulnerable to the risk of entering into a reverse mortgage without adequate understanding of its risks and implications. The most significant findings are: · It has been noted that the demographic of reverse mortgage borrowers currently have relatively poorer financial literacy than other demographics. Reverse mortgage lenders usually limit their eligibility requirements to seniors aged 65 years and over, with the average age of new borrowers being 73 years.101 The latest ANZ survey of adult financial literacy has reported that adults aged between 60 and 69 years have relatively poorer financial literacy than other age groups older than 24 years. People aged over 70 were reported as having the poorest financial literacy of any adult age group with females 70 years or older having the poorest financial literacy of any demographic subgroup, including those whose education did not go beyond year 10, those who speak a language other than English at home and those who are unemployed. · There is a lack of borrower awareness of the features of a reverse mortgage, its long-term costs and how they will affect the borrowers long-term financial circumstances. For example, ASIC's second report on reverse mortgages found that: - only two out of 29 reverse mortgage borrowers interviewed indicated that they had considered the implications of taking out the reverse mortgage in terms of their longer-term future needs of aged-care accommodation, inheritance for their children or possible health care requirements; and - almost half of the reverse mortgage borrowers interviewed did not know how much the loan was likely to cost them over time. · The SEQUAL-RFI reverse mortgage survey of 1000 seniors reported that: - 22 per cent of survey respondents were completely unfamiliar with reverse mortgages. Only 40 per cent of all survey respondents had heard of reverse mortgages and recognised the basic features of the product.102 101 SEQUAL Delliotte survey June 2009. 102 SEQUAL-RFI Reverse mortgage Survey `It's on the house: A consumer study into the attitudes and perceptions of Australians aged over 60 years'. 207


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 - on average younger borrowers utilise the maximum loan-to-value ratio (LVR) available to them. This leaves them more likely to deplete their equity before the end of their life expectancy, compared to borrowers who use a lower LVR; and - 45 per cent of respondents did not know how much they could expect the entry costs of aged care to be.103 This indicates that many consumers may access the equity in their homes without making any conscious decision about how to meet such costs in the future. 10.25 In summary, the class of borrowers who are likely to utilise a reverse mortgage tend to be less financially literate than other borrowers and more susceptible to the risks associated with having inadequate information regarding these loans. 10.26 These risks are present irrespective of whether the borrower enters into a reverse mortgage through an intermediary or directly with a provider. Currently, approximately half of new reverse mortgage borrowers source their loan via intermediaries such as finance brokers and financial planners. Such intermediaries may be under certain statutory obligations according to the services they provide. For example, under the Corporations Act, licensed financial planners are required to ensure that the product would be suitable for their client. Also, under the Credit Act, a licensed broker would be required to ensure that the product would not be unsuitable for the borrower. Certain disclosures, such as the cost of the loan, fees, charges and commissions, must also be provided to consumers. 10.27 However, the use of intermediaries does not necessarily resolve all issues associated with a borrower's lack of information. For example, within the financial planning and credit intermediary professions, beyond the obligations mentioned above, there is no consistency in standards for the provision of financial advice and information to reverse mortgage borrowers concerning the unique characteristics and impacts of the product. SEQUAL provides training to members of the Financial Planning Association of Australia (FPA), the Mortgage and Finance Association of Australia (MFAA) and CPA Australia, for industry accreditation as an equity release consultant. However, the training is not mandatory for all professionals who provide information and advice to borrowers104, which increases the risk that borrowers may receive advice 103 SEQUAL-RFI Reverse mortgage Survey `It's on the house: A consumer study into the attitudes and perceptions of Australians aged over 60 years'. 104 The only professional body which requires its members to have SEQUAL accreditation before providing services to reverse mortgage applicants is the Mortgage and Finance Association of Australia. 208


Chapter 10 -- Regulation Impact Statement from professionals who are not equipped to identify all the financial issues consumers face which are unique or inherent in taking out a reverse mortgage. 10.28 Within the legal profession, there are currently no mandatory standards for legal advice specific to reverse mortgages and no accreditation programs offered by legal representative bodies for reverse mortgage and personal finance specialist lawyers.105 Inadequate equity 10.29 Borrowers may face a situation where the equity they have in their home is depleted to the extent that it may limit their ability (and options) to fund what can be very significant long term financial needs (including medical care and aged accommodation expenses). 10.30 This is because the long term financial implications of the loan largely depend on variables such as future movements in interest rates and property values and how long the borrower will have the loan (that is how long they may live or decide to live in the property). It is difficult for a borrower at the time they are considering taking out the loan to assess how these variables will impact the amount of equity remaining in their home at any point in the future. However, the effects of this could be severe. For example, a borrower may not be able to fund other crucial requirements, such as medical and/or aged care. Also, many borrowers who find themselves in this type of situation may have little to no ability or time to reverse, or mitigate it. Default procedures 10.31 The Code contains requirements that lenders must comply with, before they can enforce a contract where the borrower defaults, including that they send the borrower a written notice of default.106 However, default procedures in the Code are not specifically tailored to reverse mortgage borrowers and may not be appropriate to their age. For example, borrowers have an increased risk of being incapacitated due to illness and have relatively poorer financial literacy than other age cohorts. This increases the risks of borrowers not having the ability to address the default and prevent enforcement action. 105 However, the Law Council of Australia, SEQUAL and some law societies are progressing plans to implement specific reverse mortgage training, education and guidance materials aimed at improving the quality of legal advice to consumers. 106 Section 88 of the National Credit Code requires a lender to give the borrower a default notice before commencing enforcement proceedings. 209


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 10.32 This risk has been identified by SEQUAL which has provided a guideline for its members to follow in relation to default conditions. This contains requirements in addition to those under the Code for members, including that they personally contact (or make a reasonable attempt to contact) the borrower prior to the expiry date of a default notice and ensure the borrower has received the notice and understands the consequences of not rectifying the default. However, these requirements are not mandated across the industry and may not apply to a new lender which enters the market. Default clauses 10.33 Default clauses under a reverse mortgage usually do not relate to non-payment of the loan. This is because a reverse mortgage does not require ongoing repayment. Rather, most default clause relate to other conduct by the borrower, such as non-payment of council rates. However, there is a risk that borrowers could be forced to sell their homes and required to repay the loan, due to default clauses which: · are too broadly drafted, creating uncertainty for the borrower about their obligations and what circumstances would trigger a default (for example, a default clause may require a borrower to maintain the home in a sound condition, however, what level of maintenance this requires may not be clear); · may include default triggers involving minor oversights such as failure to inform the lender that another person is living in the home, or failure to pay for a property valuation; and · may bear no relationship to the risk to the lender from the default, such as being in default under another credit contract with that lender (for example a credit card). 10.34 SEQUAL has recognised the risk of borrowers being impacted by such default clauses by requiring its members to only include default clauses which are `fair and reasonable'. This is, however, a high level obligation, not mandated across the industry and may not apply to any new lender which enters the market. Lack of tenancy protections for non-title holding residents 10.35 Reverse mortgage contracts require repayment either when the borrower dies or permanently vacates the property. In the event of a borrowers death any surviving non-title holding resident may not have the right to remain in the property. This can cause detriment to, for example, a surviving spouse. 10.36 Some lenders have acknowledged this problem and addressed it by allowing a non-title holding resident to be designated as a nominated 210


Chapter 10 -- Regulation Impact Statement resident, affording them protection of residency. However, such protection is not uniform across the industry, nor are lenders required to disclose pre-contractually whether or not they provide protections to non-title holding residents. Home reversion scheme products 10.37 Home reversion schemes are commonly used by consumers of the same demographic and for similar purposes to borrowers of reverse mortgages, with the two products often considered competitive products. 10.38 However, being a property transaction which does not involve repayment of a capitalised interest debt, some of the risks associated with reverse mortgages do not apply to home reversion schemes. For example, a reverse mortgage borrower may incur negative equity. However, a home reversion scheme user sells a fixed portion of the equity in their home, and retains ownership of the remaining portion, meaning that they can never incur negative equity. Similarly, a home reversion scheme user does not face the risk of eroding the equity in their home over time like a reverse mortgage borrower does, since the portion of equity they have in their home is fixed for the life of the contract. Also, a home reversion scheme user cannot be in default, unlike a reverse mortgage borrower. 10.39 However, home reversion scheme transactions involve complex legal and financial impactions for consumer which may impact a consumer's ability to meet future needs. Therefore, consumers making fully informed decisions before entering into a home reversion scheme is essential. Inadequate information 10.40 There is a risk that consumers enter into a home reversion product without adequate access to information regarding its legal and financial implications. Currently, as a SEQUAL member, Homesafe does require consumers to obtain legal advice and recommend that they obtain financial advice before entering into the contract. They also provide applicants with a pre-contractual disclosure document which sets out the features of the product. However, this is only a voluntary requirement and would not apply to any new providers of home reversion schemes who do not elect to become SEQUAL members. 10.41 The above discussion in relation to the risks arising from inadequate information still apply broadly to consumers as the different structure only addresses one variable, namely the percentage of the equity in the house they will retain but still does not let them determine the dollar figure they will receive at a future point in time. 10.42 The issues in relation to a lack of protection for any non-title holding residents are still applicable to home reversion schemes. In the absence of a clear statement or provision of information it is still possible 211


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 that the indefinite nature of this type of product will mean that proper consideration is not given to the future position of this class of residents. Objectives of election commitment 10.43 The objectives of government action are to: 1. Provide a statutory protection against negative equity. 2. Introduce measures which protect consumers against the specific risks associated with equity release products. 3. Improve decision-making by consumers, to the greatest extent possible, via better access to adequate information regarding the features, costs and implications (both current and future) of equity release products. 4. Facilitate competitive neutrality between reverse mortgages and home reversion schemes. 5. Reduce the risk of regulatory arbitrage and avoidance mechanisms. 6. Ensure that reforms minimise, as far as possible, the regulatory burden on the market and market participants, especially in regard to compliance costs and impacts. Options Option 1: Statutory protection against negative equity 10.44 As part of the election commitment, the Government has announced it will implement a statutory protection against negative equity. As this commitment is a statutory protection, non-regulatory implementation options are not considered in this RIS. This option would be implemented under the first part of Phase Two of the consumer credit protection reforms, and in place by mid-2011. 10.45 This option would see the introduction of a statutory requirement that lenders be unable to recover amounts from the borrower which exceed the net sale value of the property (except under limited circumstances). If the lender provides for a certain percentage of protected equity under the loan, lenders could not seek to recover amounts from the borrower which exceeds the net sale proceeds of the property minus the amount of the protected equity. 10.46 This option would create a universal standard of protection for borrowers across the industry and also clarify for both borrowers and lenders the circumstances in which the protection against negative equity would not apply. This recognises that there are legitimate circumstances 212


Chapter 10 -- Regulation Impact Statement under which lenders should be able to protect their security in the mortgaged property. Such conditions would only result in the recoverability of negative equity to the shortfall the breach of such a condition has caused, rather than allowing lenders to recover the full amount of accumulated negative equity. 10.47 The conditions which would void the statutory protection include: · sale of the property in a non arms-length transaction or other transaction not based on commercial terms; · fraud or misrepresentation by the borrower at the time they enter into the contract or relating to the terms and conditions of the loan; or · significant wilful damage to the property by the borrower, or a nominated resident. 10.48 This option would also provide ASIC with options for enforceability with appropriate penalties and sanctions available. Consumer redress for non-compliance would also be introduced. Impact on consumers 10.49 This option would completely eliminate the risk to borrowers of negative equity, preventing the financial stress and impacts its causes to borrowers, their estate and estate administrators. As this benefit is preventative in nature, it is not possible to quantify its impact. 10.50 Consumers will also benefit from enhanced certainty regarding what conditions could void this protection. 10.51 Reducing the complexity of the product will also reduce the cost to consumers of obtaining advice on these products. 10.52 Since providing negative equity protection constitutes approximately 0.25 to 0.5 percentage points of the interest rate, this cost will be passed onto the borrower. The amount of this cost will vary on a case-by-case basis (depending upon movements in interest rates and house prices and the length of the loan). However, this amount could be in the tens of thousands of dollars.107 10.53 However, since most lenders already include either the SEQUAL NNEG, or their own negative equity protection as a part of their 107 For example, if a 65 year old borrower with a property valued at $500,000 takes out a reverse mortgage at an LVR of 15 per cent, at an interest rate of 8 per cent, their total debt at age 85 would be approximately $370,000 (exclusive of ongoing charges). The same borrower, with an interest rate at an additional, 5 per cent, would have a total debt at 85 years old of approximately $410,000 (a difference of $40,000). 213


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 reverse mortgage products, the cost of this protection is already incorporated into their lending policy and will not be passed on to consumers. New entrants may be affected, but they could address this when establishing their business model, rather than changing an existing model. To this extent, borrowers using such lenders will not have any additional cost passed on them as a result of Option 1. Impact on industry 10.54 Industry will benefit from increased confidence in the integrity of the equity release market as the risk of new entrants marketing aggressive products with risks of negative equity is eliminated. 10.55 Since most current reverse mortgage providers already include some form of no negative equity guarantee as part of their lending policy, it is expected that a statutory protection against negative equity will have a limited cost impact. 10.56 It may affect new entrants, but they could address this when establishing their business model, rather than changing an existing model. This impact is also further offset, since the recoverability of negative equity is uncertain for any lender and a margin is likely to be factored into the price of the loan product regardless of whether a lender provides a negative equity protection or not. Option 2: A range of regulatory measures for borrowers of reverse mortgages 10.57 Under this option, a range of protections would be provided for reverse mortgage borrowers as described below. No option will ever completely eliminate the risks and information asymmetries borrowers experience with equity release products since there will always be some consumers who enter into a reverse mortgage based solely on meeting the short-term need of obtaining immediate access to credit, regardless of any long term impacts. In these circumstances, the best protections would be those which are most effective for most consumers whilst minimising compliance costs on the equity release industry. 10.58 This option would be implemented under the first part of Phase Two of the consumer credit protection reforms, and in place by mid-2011. 10.59 Applying a range of protections for borrowers using reverse mortgages will create the risk of avoidance and regulatory arbitrage. The circumstances in which the obligations apply will need to be defined in such a way that they cannot be avoided through minor changes to product design or features. 214


Chapter 10 -- Regulation Impact Statement Option 2.1: Reverse mortgage specific responsible lending conduct obligations 10.60 Phase One of the credit reforms introduced a requirement on holders of an Australian credit licence to observe responsible lending conduct obligations. These obligations apply to reverse mortgage lenders and persons providing credit assistance such as finance brokers. 10.61 These responsible lending conduct obligations prohibit licensees from entering into a credit contract with, or suggesting a credit contract to a consumer, or assisting a consumer to apply for a credit contract that would be unsuitable for the consumer's requirements. A contract will be unsuitable where either it does not meet the consumer's requirements and objectives, or the consumer does not have the capacity to repay the loan, either at all or only with substantial hardship. To determine if a loan meets these requirements, licensees will need to make reasonable inquiries as to the consumer's requirements, objectives and financial situation and take reasonable steps to verify the consumer's financial situation. 10.62 Under this option, responsible lending conduct obligations tailored to reverse mortgage products would be introduced. The following matters would be included as part of the licensee establishing the suitability of a reverse mortgage for a consumer's requirements and objectives: · making the consumer aware that there are alternatives to a reverse mortgage (such as downsizing, Centrelink's pension loans scheme, utilising existing assets, other credit products); · making the consumer aware that taking out a reverse mortgage may affect their entitlement to government benefits; and · mandating specific high-level inquiries about the borrowers future objectives (such as aged care, desire to leave equity to their estate, etc). 10.63 These additional responsible lending conduct requirements would also introduce two measures which would specifically require credit licensees to canvass with borrowers the long terms costs of the loan and its implication on borrowers. Firstly, licensees would need to provide personalised examples to a borrower of the potential effects of the loan on the equity they have in their property (including changes in house prices and interest rates). This could be achieved by a requirement for licensees to demonstrate specific scenarios to prospective borrowers using a calculation tool through an ASIC reverse mortgage website. Licensees would be required to input certain variables (such as the consumer's age, approximate house price and potential LVR) and the calculation tool would automatically generate a range of scenarios to reflect the specific outcomes in a way that is personalised. The details of the scenarios would 215


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 be developed through further consultation with stakeholders, but would be intended to demonstrate the impact over time of different choices as to the amount borrowed, and whether it is borrowed as a lump sum or by way of regular instalments. 10.64 Currently, the majority of intending borrowers have a face to face meeting with a lender or broker, meaning that the provision of this information would be largely consistent with existing practices. 10.65 Secondly, a point would be introduced in the decision-making process of borrowers so that if a borrower wishes to take out a high LVR, they must make a positive election to do so, and specify the reasons for this. This would be done by introducing a presumption that a loan amount above a low risk LVR (calculated using conservative assumptions about changes in house prices or interest rates) would be unsuitable for a borrower's needs and requirements. The presumption could be rebuttable and therefore displaced where some further need was demonstrated before the borrower can agree to a higher LVR. This could be supplemented by further requirements on the lender or the broker in respect of identifying and articulating those needs. 10.66 This is intended to address the risk of a borrower taking out a reverse mortgage which carries a greater risk of depleting their home equity without appropriate consideration. It would also require the borrower and the licensee to specifically identify a need for greater funds before applying for the loan. Impact on consumers 10.67 Consumers will benefit from: · having increased access to information regarding reverse mortgages, and their legal and financial impacts; · a reduced risk of being offered an unsuitable loan; · mandated use of an ASIC website demonstrating personalised projections of how different loan options will apply to the borrowers personal circumstances will improve their ability to assess how the loan will impact their current and future requirements; and · a reduced risk of accessing an LVR which may adversely impact their ability to meet future financial requirements, without adequate consideration. 10.68 To the extent that credit licensees will incur costs in meeting these reverse mortgage specific responsible lending conduct obligations, such costs may be passed onto consumers. 216


Chapter 10 -- Regulation Impact Statement Impact on industry 10.69 Licensees will benefit from being provided with greater clarity regarding their responsible lending conduct obligations. 10.70 The time and cost for credit licensees of providing, or assisting a consumer to apply for a reverse mortgage may increase, as such licensees will be required to meet more robust responsible lending conduct requirements. To the extent that credit licensees already perform these obligations under self-regulation measures, the cost impact of this option will be limited. For example, the MFAA requires its members to have accreditation with SEQUAL as an equity release consultant, meaning such brokers currently perform obligations commensurate with those proposed to be applied under this option. Also, SEQUAL members are required to make available to all borrowers and their advisers a calculation tool illustrating the potential effects of future house values, interest rates and the capitalization of interest on the loan. This requirement is similar in practice to the requirement to use an ASIC reverse mortgage calculator as proposed above. Option 2.2: Reverse mortgage information statement 10.71 Under this option, lenders and intermediaries such as brokers would be required to provide borrowers with a pre-contractual reverse mortgage information statement containing generic information regarding the key features and implications of a reverse mortgage. Such a prescribed information statement would need to be provided to the consumer with sufficient time for them to adequately consider it before gaining further legal and/or financial advice or before entering the contract (for example, upon first meaningful contact with the lender or broker). This information Statement would not be a PDS as defined in the Corporations Act. Nevertheless, the proposed approach is informed by the broader analysis of disclosure undertaken in relation to other products, and the desirability of information being short and high impact. The exact length and content of this Information Statement would be determined after further consultation, but would not need to be more than four A4 pages and could include the following: · a description of a reverse mortgage and its key features. For example it is a loan which must be repaid, secured by a mortgage over the borrower's property, how repayment may occur; · the cost of the loan, including entry, ongoing and exit costs and an indicative break fee under a fixed interest loan described in dollars; 217


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · description of compound interest and how it affects the amount repayable under the loan. This could include a statement that it involves being charged interest on the interest and a brief example of the effect of compound interest on a typical loan; · explicit cautions about potential risks. This could include over-depleting equity, possible implications for pension entitlements, limiting future options, non-title-holding residents' rights and effects on inheritances; · client examples. This could include examples of situations which would be common to most borrowers and demonstrate which loan may suit which loan purposes (for example borrower taking loan as a regular income stream to supplement their income, or as a lump sum to pay for renovations). This could also include a borrower `worst case scenario' where a borrower has insufficient equity to meet their aged care costs to prompt an applicant to consider more carefully the long-term effects the loan may have for their future personal circumstances; · indicative illustrations of loan options (using graphs). This could include how taking out a reverse mortgage as a lump sum, line of credit or regular payment affects the amount repayable under the loan, and provide different scenarios regarding changes in interest rates and house prices; · generic information regarding how taking out a reverse mortgage product may effect a borrower's pension entitlements; · sources of further information: for example ASIC, Centrelink (Financial Information Service), National Information Centre on Retirement Investments (NICRI), SEQUAL; and · a checklist for consumers: could include questions about alternatives such as downsizing and possible questions consumers could ask legal and financial advisers. Impacts on consumers 10.72 Under this option, consumers will be in a better position to make informed decisions regarding the appropriateness of a reverse mortgage to their personal circumstances via receiving timely, simple, and standardised information to educate their decisions. In particular, this will facilitate comparison between the borrower's current and future needs and how the loan will affect their ability to meet such needs. 10.73 The benefit to consumers will vary on the financial literacy of each consumer. More financially literate consumers will benefit relatively 218


Chapter 10 -- Regulation Impact Statement less as they are more likely to already understand the risks and implications which characterise equity release products. However, less sophisticated consumers will be able to improve their understanding and decision-making via the use of the information statement. Previously disengaged consumers of all levels of financial literacy may become more engaged as a result of the availability of the information statement. However, a portion of borrowers may choose not to read the information statement, although industry experience suggests that this is an area where borrowers are more likely to read information provided to them. Impacts on industry 10.74 Currently, SEQUAL members are required to provide potential borrowers with the SEQUAL Key Facts document. SEQUAL has indicated that they expect their members would substitute the use of this SEQUAL document with the document prescribed under this option. To that extent, transitional costs for lenders may be incurred; however, ongoing costs can be absorbed into existing practice. Option 2.3: Excluding certain default clauses 10.75 Under this option, lenders would be prevented from including the below matters in their default terms leading to enforcement action in their reverse mortgage contracts: · cross default (for example being in default with a different credit contract with the same lender); · failure to inform the lender that another person is a resident in the property; · failure to pay for any contingent cost under the loan, such as a periodic home valuation; and · a clause which does not expressly state the borrower's specific obligation. Impacts on consumers 10.76 Consumers will have greater clarity regarding what circumstances can result in a default and have a reduced risk of incurring a default for minor reasons or matters not connected with the loan. 10.77 To the extent that lenders incur transitional costs in ensuring their reverse mortgage contracts comply, such costs may be passed onto consumers. Impacts on industry 10.78 Providing advice to consumers on the effect of default clauses for professional advisors such as lawyers will be less onerous, as default clauses will be simplified. 219


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 10.79 Existing lenders will incur transitional costs in the short term, in ensuring their contracts comply with default clause obligations. New entrants could address this when establishing their reverse mortgage contracts, rather than altering existing contracts. Option 2.4: Mandatory default procedure 10.80 Under this option, a uniform default procedure would be mandated across the reverse mortgage industry requiring lenders to personally contact, or make reasonable attempts to contact, the borrower (or their legal representative) before the expiry date of a default notice and ensure the borrower has received the notice and understands the consequences of not rectifying the default. Impacts on consumers 10.81 Consumers will have a reduced risk of default as borrowers are better informed when they are in default and how to remedy it. This will particularly benefit those borrowers who have fallen into default as a result of being incapacitated due to illness and/or hospitalisation. Impacts on industry 10.82 Lenders will not incur enforcement expenses for defaults which are remedied as a result of the mandatory procedure. 10.83 Since SEQUAL members comply with a similar obligation, it is expected this will have a limited cost impact on these current lenders. Option 2.5: Improving post-contractual information 10.84 Under this option, the ongoing disclosure regime under the Code would be tailored for reverse mortgage borrowers. The additional disclosure content would cover issues such as the status of any non-title holding residents under the loan and ongoing obligations of the borrower under the contract such as property maintenance, property valuations, and especially those obligations that trigger default or void any no negative equity protection. Impacts on consumers 10.85 Consumers will be better informed regarding the ongoing obligations of the reverse mortgage during the course of the loan. Impacts on industry 10.86 Existing lenders will incur compliance costs in ensuring their ongoing disclosure documentation complies with this option. New 220


Chapter 10 -- Regulation Impact Statement entrants could address this when establishing their business model and practices, rather than altering existing practice. Option 2.6: Requirements relating to non-title holding resident protections 10.87 Under this option, if a lender elects to provide legal recognition to the tenancy of a non-title holding resident, such a resident must be designated as a nominated resident under the loan contract, upon the request of the borrower prior to entering the loan. In order to qualify for this, the non-title holding resident would need to be at or above the minimum age required to be a borrower under the loan. 10.88 Those lenders who do not provide non-title holding protections will be required to disclose this to consumers before entering into the loan. Impacts on consumers 10.89 Borrowers will be better informed regarding the protections available under the loan to non-title holding residents. Impacts on industry 10.90 Currently, lenders are not required to disclosure to borrowers pre-contractually the rights of non-title holding protections. Therefore, lenders will incur transitional costs in incorporating this requirement into their pre-contractual processes. Any new lenders could address this when establishing their business model and practices, rather than altering existing practice. Option 2.7: Mandatory legal advice to borrowers 10.91 Under this option, a regulation making power will be inserted into the Credit Act to require consumers to obtain independent legal advice before entering into a reverse mortgage or home reversion scheme product. This would be achieved by consumers being required to seek legal advice from a provider of their choice (for example, their family solicitor or other solicitor of their choice). The commencement of this obligation would be implemented via Regulation, and would depend on further consultations with Law Societies to address factors such as the costs implications or maximising the extent to which specially accredited lawyers are able to provide the advice. Impacts on consumers 10.92 Currently, only SEQUAL members require borrowers to obtain independent legal advice before entering into the loan. This option 221


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 mandates such a requirement across the whole industry, ensuring that all borrowers obtain such advice regardless of whether or not their lender is a SEQUAL member. 10.93 All consumers would therefore, have improved access to legal advice regarding the implications of the loan. 10.94 The cost of entering into the loan will increase as borrowers are required to meet the cost of obtaining the legal advice. This cost can range between $300 and $1,500 depending upon the solicitor the borrower uses and the solicitor's familiarity with equity release products. Impacts on industry 10.95 SEQUAL members already require borrowers to obtain legal advice before entering into the loan. Therefore, this option will have no effect beyond current practice for those lenders and will not increase the time and cost of entering a borrower into a loan. Option 2.8: Mandatory financial advice for borrowers 10.96 Under this option, consumers would be required to obtain independent financial advice before entering into a reverse mortgage. This could be achieved by consumers being required to obtain advice from a financial planner of their choice, either as part of an overall financial plan or specifically in relation to the product. Impacts on consumers 10.97 Currently, SEQUAL members recommend borrowers should obtain independent financial advice before entering into the loan. This option would mandate a requirement to obtain such advice across the whole industry, ensuring that all borrowers obtain such advice. This would significantly increase the number of borrowers accessing independent financial advice and increase the information available to borrowers regarding the short and long term financial impacts the loan would involve on the borrowers personal circumstances. 10.98 Currently, approximately 5 per cent of borrowers access their reverse mortgage via a financial planner. Therefore, mandating such a requirement will add a new step into the process of entering into a loan for approximately 95 per cent of borrowers. 10.99 The cost of entering into the loan will increase as borrowers are required to meet the cost of obtaining the financial advice. The cost of this will depend on whether the borrower obtains this advice in regard to entering into the reverse mortgage only or in regard to a full financial plan. However, it is expected that the cost would be several hundreds of dollars at a minimum. As few borrowers currently use a financial planner, 222


Chapter 10 -- Regulation Impact Statement and seek to use a reverse mortgage because they have no ability to service a traditional loan, there is potential that this cost may discourage many borrowers from seeking advice. Impacts on industry 10.100 Currently, financial planners are only advising approximately 5 per cent of reverse mortgage borrowers. Mandating this requirement for every borrower will require the financial planning industry to engage with reverse mortgage products to a much larger extent. If this did not occur, the supply of such advice would not meet the demand, creating a bottleneck of potential borrowers waiting to apply for a reverse mortgage. Option 3: An information campaign 10.101 Under this option, an information campaign directed at seniors would be conducted to raise their understanding of equity release products. This could be achieved by increasing the scope of current sources of information provided to consumers by Government agencies such as ASIC or Centrelink, or by the Government funding information campaigns conducted by independent bodies such as the Council on the Ageing or the National Information Centre on Retirement Investments (NICRI). 10.102 Such a campaign could involve: · seminars in locations across the country, particularly in major cities where most reverse mortgage borrowers are located; · a public telephone service such as the Equity Release/Reverse Mortgage Information Service currently operated by NICRI (which will cease operation in mid-2011); · publishing information in existing print media and especially seniors publications; and · the production and distribution of materials to seniors. Option 4: Applying regulatory measures to home reversion scheme products 10.103 In order to address consumer information asymmetry and facilitate competitive neutrality between reverse mortgages and home reversion scheme products, this option largely applies options 2.1 to 2.7; with adjustments for differences in product structure (for example there is no need to apply a statutory protection against negative equity to a home reversion scheme product). 223


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 10.104 Under this option, the following requirements would be applied to home reversion scheme providers: · Requirement to be licensed with ASIC and have membership with an ASIC-approved external dispute resolution scheme. · Requirement to provide consumers with a home reversion scheme specific information statement prior to the consumer entering into the contract. · Meet certain responsible conduct requirements prior to offering to enter into a contract with the consumer. Such a requirement would mirror the responsible lending conduct requirement under the Credit Act that a borrower not be offered a credit product that would be unsuitable for their requirements. · Require applicants to obtain independent legal advice prior to entering into the contract. · Requiring providers who do not offer tenancy protections for non-title holding residents to disclose this to consumers before they enter the contract. If providers do offer tenancy protections for non-title holding residents, they will be required to offer this in a mandated way. Impact on consumers 10.105 Seniors applying for a home reversion scheme product would benefit in the following ways: · The requirement to provide a home reversion scheme specific information statement will allow consumers to be better informed about the long term costs and risks the home reversion product creates for their long term situation and will be in a better position to decide whether the contract meets their requirements and objectives. · The requirement for providers to meet responsible conduct obligations will facilitate consumers not being placed into unsuitable home reversion schemes. If a consumer is placed into an unsuitable home reversion scheme, remedies would be available to them to compensate for any loss or damage they suffer as a result. · ASIC's ability to licence home reversion scheme providers and, if appropriate ban a provider, will ensure that only reputable and competent operators supply products to this market. 10.106 To the extent that providers incur transitional costs, these could be passed onto consumers. 224


Chapter 10 -- Regulation Impact Statement Impact on industry 10.107 This option ensures competitive neutrality between reverse mortgage and home reversion scheme products, ensuring that the equity release market is not distorted in either the supply or demand for these products by government action. 10.108 Improving protections for consumers will also improve consumer confidence with home reversion schemes and consequently, the creditability and reputation of the home reversion industry. 10.109 As providers of home reversion schemes are not currently subject to these obligations, they will incur transitional and ongoing compliance costs. For example, in regard to obtaining membership with an EDR scheme, the application cost of membership to the Financial Ombudsman Service (FOS) for a credit licensee is $220 with a yearly membership fee based upon the size of the business. The only current provider of a home reversion scheme, Homesafe Solutions Pty Ltd is already a member of FOS and will therefore not incur these costs as a result of Option 4. However, new entrants not already FOS members will incur this cost. 10.110 Home reversion scheme providers will also incur costs in obtaining and renewing a licence with ASIC. The cost of this will vary for each individual provider and largely depend on the volume of their business. Implementation Strategy 10.111 The Government has committed to have the election commitment in place by mid-2012. This will be achieved via the recommended options being progressed under the first part of Phase Two of the consumer credit protection reforms, and in place by mid-2011. Specific transition and implementation issues will be progressed in consultation with industry via the specialist equity release consultation sub-group discussed below and be in place by mid-2012. 10.112 The implementation of options relating to home reversion schemes will involve a referral of power from the states to the Commonwealth. This will be progressed via the Financial Services and Credit Implementation Taskforce (FSCRIT) which comprises representatives of Commonwealth, state and territory departments and agencies. Consultation 10.113 The Government has conducted extensive consultations in the development of enhancements to the regulation of equity release products. The main forum of consultation has been the Equity Release Consultation 225


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Working Group (ERCWG) convened by the Department of the Treasury since February 2010. The membership of this group consists of SEQUAL (the main industry body for reverse mortgages and home reversion scheme products), major industry bodies such as the Mortgage and Finance Association of Australia and the Financial Planning Association, as well as seniors, legal and consumer group representatives (a full list of membership is provided at Attachment A). 10.114 The members of the ERCWG who submitted responses to the Green Paper were the Royal Bank of Scotland (RBS), Commonwealth Bank (CBA), Westpac Bank, Homesafe Solutions Pty Ltd, SEQUAL, the MFAA, the FPA, Consumer Credit Legal Centre (NSW) (CCLC), Council on the Ageing (COTA), National Legal Aid (NLA), and NICRI. In general, these consultation stakeholders have expressed in-principle agreement with the election commitment, considering such protections as facilitating consumer confidence in the equity release industry and promoting responsible use of these products by seniors. Their main views as detailed in their Green Paper submissions are outlined below. Industry representatives 10.115 The main industry body SEQUAL and its members who made submissions support options such as a statutory protection against negative equity, mandatory default procedure, mandatory legal advice for borrowers, and improving pre-contractual disclosure via an information statement. 10.116 In regard to the regulation of home reversion schemes, all these stakeholders (including the only current provider of the product in Australia, Homesafe Solutions) agree that home reversion schemes should be regulated consistently with reverse mortgages, to reduce compliance costs and regulatory arbitrage between these products. 10.117 Homesafe Solutions supports home reversion schemes being subject to their own regulatory regime, rather than subject to the same regime as reverse mortgages. It supports the options of an information statement being provided to consumers and an obligation for consumers to receive independent legal advice. However, it also does not support a `one-stop-shop' delivery of all legal and financial advice to borrowers. Professional bodies 10.118 The FPA and MFAA agree that there is a need for a statutory protection against negative equity; however, the MFAA considers that such a protection is achieved usually by a higher interest rate. 10.119 The FPA also considers there is a need for standardised default clauses, mandatory non-title holding protections and specific responsible lending obligations applicable to reverse mortgage providers and intermediaries. The FPA is of the view that any reforms which simplify 226


Chapter 10 -- Regulation Impact Statement the structure of reverse mortgages are important, as this will reduce the time and cost of giving advice on these products. 10.120 The FPA supports regulatory consistency between home reversion products and reverse mortgages whilst the MFAA does not consider they should be subject to the same regulation. Consumer, legal and seniors groups 10.121 There was in-principle agreement amongst these stakeholders with most reforms canvassed under the above options (although not all these stakeholders commented on each option). 10.122 COTA has expressed concern that the cost of obtaining independent legal and/or financial advice could be prohibitive for borrowers and that this needs to be addressed. 10.123 CCLC, NLA and NICRI support a requirement for borrowers to obtain legal and financial advice before entering into the loan, with NICRI being government funded to deliver this service. Regulator 10.124 ASIC, as regulator of the consumer credit regime, has been a member of the Equity Release Consultation Working Group and has provided feedback at all stages of the development of these options. Conclusions and recommended options 10.125 The below are recommended options: · Option 1: Statutory protection against negative equity; · Option 2.1: Reverse mortgage specific responsible lending conduct obligations; · Option 2.2: Reverse mortgage information statement; · Option 2.3: Excluding certain default clauses; · Option 2.4: Mandatory default procedure; · Option 2.5: Improving post-contractual information; · Option 2.6: Requirements relating to non-title holding resident protections; · Option 2.7: Mandatory legal advice; and · Option 4: Applying a range of regulatory measures to home reversion scheme products. 227


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Costs and benefits of recommended options Benefits 10.126 The below summarises the benefits of the recommended options: · Option 1: Statutory protection against negative equity. This option directly achieves the Government's objective under the election commitment of establishing a statutory protection against negative equity. It would also eliminate the risk to all borrowers of incurring negative equity. · Option 2.1: Reverse mortgage specific responsible lending conduct obligations. This option will address borrower information asymmetry and facilitate their improved decision making by requiring credit licensees to discuss with borrowers the specific risks associated with equity release products and how it may affect their situation. Importantly, this option achieves the objective of making borrowers more aware of how the loan may affect their future financial situation, and not just their situation at the time they enter into the loan. · Option 2.2: Reverse mortgage information statement, Option 2.5: Improving post-contractual information and Option 2.6: Requirements relating to non-title holding resident protections: - These options are recommended as they meet the government's election commitment of providing borrowers with greater disclosure of the features and fees on reverse mortgages. - These options would address the problems of borrower information asymmetry regarding the legal implications of a reverse mortgage, especially via better disclosure regarding the rights of non-title holding residents, and the borrowers' ongoing obligations under the loan. - It would also address the information asymmetry relating to the financial implications of entering into the loan, both current and future, by proving explicit information to the borrower of the long term affects of the loan and how it may affect their ability to meet future requirements. · Option 2.3: Excluding certain default clauses and Option 2.4: Mandatory default procedure: - These options are recommended as they meet the objective of protecting consumers against a specific risk 228


Chapter 10 -- Regulation Impact Statement associated with reverse mortgages, that is the effects of current default clauses and procedures. · Option 2.7: Mandatory legal advice: - This option is recommended as it would meet the Government's objective of improving the decision-making of consumers by facilitating access to information regarding the legal implications of entering into the loan. · Option 4: Applying a range of regulatory measures to home reversion scheme products: - This option is recommended as it meets the Government's election commitment of introducing specific protections to seniors using home reversion schemes. - It also meets the objective of facilitating competitive neutrality between home reversion products and reverse mortgages, since it applies comparable requirements on providers of both products. Costs 10.127 The above options are also recommended as they meet the Government's objective of ensuring the reforms minimise the regulatory burden on the market, especially in regard to compliance costs. To a large extend, the current equity release market already meets many of the requirements involved in these options under industry self-regulation measures. Therefore, transitional costs will be incurred; however, the ongoing requirements for the majority of the equity release industry can be substantially adapted to existing practice. 10.128 The highest cost to equity release consumers would relate to the cost of obtaining independent legal advice, which (depending on the solicitor providing the advice) could be several hundreds of dollars. 10.129 However, since SEQUAL members already require borrowers to obtain legal advice before entering into a reverse mortgage, this is already a cost being meet by the vast majority of current borrowers. 229


Chapter 11 Regulation impact statement THE REGULATION OF SHORT TERM, SMALL AMOUNT FINANCE JUNE 2011 Summary 11.1 One of the issues identified during the course of Phase One of the National Consumer Credit Protection reforms was the approach to be taken to short term, small amount lending (`short term lending'). This was in the context that some, but not all, States and Territories had introduced an interest rate cap. In Queensland, ACT and NSW there is currently a comprehensive cap of 48 per cent which includes interest, fees and charges. In Victoria there is a 48 per cent interest rate cap excluding fees and charges. There is no cap in WA, NT, SA108 and Tasmania. 11.2 It was agreed that during Phase Two of the reforms, the need for Commonwealth intervention in relation to the cost of short term lending would be considered. As part of this, an examination would be undertaken of the role of interest rate caps. In the meantime those States and Territories who had interest rate caps would retain them. 11.3 The key findings in this Regulation Impact Statement (RIS) are as follows: · The majority of consumers accessing short term credit have low incomes, with possibly up to 25 per cent of borrowers having incomes below the Henderson Poverty Line ($401 a week for a single working person as at March 2010). · Borrowers largely have no access to other forms of credit (with some surveys finding that this is the situation of over 70 per cent of borrowers). · The most common uses of the funds advanced under short-term loans are to meet living expenses, such as bills (including utilities), food, rent, and car repairs and 108 The Consumer Credit (South Australia) (Pay Day Lending) Amendment Bill 2009 was introduced into the South Australian Legislative Council in February 2009 to implement a 48 per cent interest rate cap, inclusive of fees and charges. The Bill was put on hold in light of the National credit reform package and related Phase Two work on interest rate caps. 231


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 registration. There is minimal or negligible use of short term loans for discretionary spending purposes. · Research consistently demonstrates that borrowers who use short-term loans rarely select a lender on the basis of price. Factors such as the speed of provision of loan have a greater influence, and this is reflected in the advertising used by these lenders. - There is an element of self-selection in that consumers who are price sensitive are more likely to be deterred from using short term loans and seeking alternatives; that is, the more vulnerable the consumer the more likely they are to use short-term loans. · The combination of low incomes and the use of loan proceeds to meet basic expenses can result in significant levels of repeat borrowing. · There are significant variations in the level of costs charged by short-term lenders. The impact on low income borrowers (defined as those with an annual income of $24,000) of loans of between $300 and $1,000 over terms of 1 week to 1 year can be summarised as follows: - The cost of a single loan can be between 2.59 and 50.05 per cent of their income during the period of the loan. - The cost of two consecutive loans (where it is assumed the borrower uses 25 per cent of the proceeds of the second loan to repay the first loan) can reduce the borrower's income by between 9.55 and 77.13 per cent, during the period of the two loans. · Consumers who use leases also are largely unable to access mainstream sources of finance, and can only acquire household goods through leases. This form of finance has a number of inherent risks including that consumers may not be able to own the goods at the end of the contract, and that consumers may therefore make significant payments relative to their income without obtaining any long-term benefit. 11.4 The level of costs that can be charged can result in consumers being unable to a continued financial exclusion, and consequent greater risk of social exclusion. The higher the costs charged the greater the impact on a consumer's income, default rates and level of social inclusion. This means that the most financially vulnerable consumers are paying high costs relative to their income when using short term, non-productive forms of finance, resulting in financial harm through an inability to accumulate savings or personal wealth, and a risk of continuing dependency on these products. 232


Chapter 11 -- Regulation Impact Statement Background Characteristics of short term, small amount finance 11.5 There is no universally accepted or comprehensive definition of short term, small amount lending. The Victorian Department of Justice undertook a Small Amount Lending Inquiry in 2008; it developed a definition of a small amount loan as one that included features based on the position of the borrower, and that did not only depend on the size or duration of the loan. The Inquiry defined a small amount loan as a loan that: is provided by a lender who typically targets consumers who have limited access to credit, including consumers with low incomes or poor credit records; offers easy and fast processing from application to approval and provision of funds; has a short term duration; has a fixed fee or charge for the loan with low or unexpressed annual interest charges109, and requires repayment via a direct debit authority.110 11.6 The National Financial Services Federation (NFSF) a peak industry body, categorises two types of short term, small amount lending as follows:111 · Payday loan: `a payday loan is a small short term loan, usually of two to four weeks duration, often designed to help meet unexpected expenses'. This RIS uses the term `payday loan' to refer to a loan of under $1000, and for a duration of less than three months.112 · Micro-loan: `a loan that has a slightly longer duration, averaging between three to twelve months, and for amounts of $500 or more'. This RIS uses the term `micro-loan' to refer to a loan of this term but where the amount advanced is $1000 or more. 11.7 The two categories are not exhaustive, in that there are other types of credit that do not fall within these strict definitions but still may meet some of the characteristics adopted in the Victorian Department of Justice's Small Amount Lending Inquiry. In this RIS the term `short term lending' is used to refer to this broader definition that would encompass both payday loans and micro-loans. 109 The presence of a substantial fixed fee or charge would be unique to Victoria given that the cap in that State only applies to interest charges and not fees, and therefore fees will be higher while the interest rate may be lower than would be the case in other jurisdictions. 110 Consumer Affairs Victoria, `Small Amount Lending Inquiry 2008', Report to Tony Robinson MP, 2008, p. 5. 111 http://www.nfsf.org.au/about-microlending-pay-day-advances.htm. 112 It also is consistent with the approaches taken by academics G. Marston and L. Shevellar in their report discussed below. 233


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.8 This type of lending does not include the form of credit known as `micro-finance', that is, non-commercial lending that focuses on poverty alleviation or community building, where the purpose of the credit is to improve the overall financial capacity of the borrower. These loans often charge zero or low (cost covering) interest, and are typically provided through charitable organisations. 11.9 Another form of small amount finance is consumer leases. Any regulatory intervention proposed as a result of the Phase Two considerations should apply equally to consumer leases for the following reasons: · the cost of the lease can result in similar problems to those identified in this RIS in relation to credit contracts (noting that the absence of any disclosure of the cost of leases in a comparative way, as outlined in the RIS addressing consumer leases, reduces the likelihood of consumers actively seeking cheaper forms of leases); and · some transactions are structured as leases to avoid the obligations that, under the Credit Act, only apply to credit contracts (for example, where the contract is in substance a loan, as the goods being leased have only a nominal value or where the consumer `sells' their own goods to the lessor and then leases them back).113 11.10 The level of research into leases is substantially less than in relation to small amount lending (and they are therefore discussed in less detail below). Current Regulatory Framework States and Territories -- Current regulation 11.11 As previously mentioned, during Phase One of the credit reform process, it was agreed that States and Territories who had interest rate caps would be allowed to maintain them. The current position in respect of each State and Territory is set out in Table 1 below. Table 11.1: Approach of each State and Territory to interest rate caps Jurisdiction Regulation Australian Capital Territory · A maximum cap of 48 per cent per annum, inclusive of fees and charges. · The ACT Government has not made an announcement about the future of its interest rate cap. 113 This risk was identified in the submission to the Green Paper by the Financiers Association of Australia, p. 21. 234


Chapter 11 -- Regulation Impact Statement Jurisdiction Regulation New South Wales · A maximum cap of 48 per cent per annum, inclusive of interest, fees and charges commenced in March 2006. · In March 2010 NSW enacted legislation which continues, until 1 July 2011, its interest rate cap with amendments to expand the definition of credit fees and charges included in the calculation Northern Territory · No interest rate cap. Queensland · A maximum cap of 48 per cent per annum, inclusive of interest, fees and charges. Current arrangements commenced on 31 July 2008. · Queensland has retained its interest rate cap. South Australia · No interest rate cap. However, following the release of a discussion paper in October 2006, South Australia introduced the Consumer Credit (South Australia) (Pay Day Lending) Amendment Bill 2009 which would have implemented a 48 per cent interest rate cap, inclusive of fees and charges. This Bill lapsed in light of the Federal Phase Two work on interest rate caps Tasmania · No interest rate cap or licensing/registration requirements. · Introduced, but did not enact, legislation to restrict advertising of credit products where the total cost of credit exceeded 40 per cent per annum. Victoria · A maximum cap of 48 per cent per annum for unsecured credit and 30 per cent per annum for secured credit, exclusive of fees and charges. · Victoria has enacted legislation which continues its cap until 1 July 2011. Western Australia · No interest rate cap. The National Consumer Credit Protection Act 2009 11.12 The National Consumer Credit Protection Act 2009 (the Credit Act) regulates the provision of consumer credit, including most short term, small amount loans (noting that it will not apply to forms of lending where the structure of the transaction avoids the application of the Credit 235


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Act). Under the Credit Act providers and brokers of consumer credit must be licensed, comply with responsible lending obligations, disclosure requirements and various other obligations. 11.13 The Credit Act does not directly regulate fees or interest charges. However, the National Credit Code does include remedies: · Where the contract is unjust, including because the annual percentage rate or costs are excessive (section 76) -- taking into the risks undertaken by the credit provider and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates charged by other credit providers in comparable cases. · Where the contract is unjust, because a fee or charge is unconscionable (section 78). 11.14 There are no recorded cases of either consumers or regulators having successfully used the Code (or equivalent provisions under the UCCC, in place since 1996) in order to have a contract declared unjust because of the annual percentage rate or the level of fees or charges. 11.15 Unconscionability must be demonstrated on a case by case basis and, where the level of costs is said to be too high, will require evidence of the credit provider's costs in the provision of a loan. Consumers generally have difficulty in obtaining access to information about the lender's real costs, making them unable to determine whether or not the provision restricting their capacity to decide whether or not to commence legal proceedings. 11.16 In 2005, Consumer Affairs Victoria argued that credit fees and charges imposed by a small amount lender, City Finance, were, across all its loans, of such an amount that they were unconscionable. The Tribunal found that this remedy depended on evidence of the relationship between the borrower and the lender, and that the amount or nature of the fee could not in itself render it unconscionable.114 The effect of this finding is to make it uneconomic for consumers to seek a remedy under section 78.115 11.17 The Credit Act also introduces, for the first time, a requirement that credit providers, lessors and brokers must provide or arrange credit and consumer leases responsibly; that is, a provision of credit to a consumer must not be unsuitable having regard to their needs and requirements, and their capacity to repay the loan without substantial hardship. Responsible lending will not in itself affect the cost of these products, although it may limit access to it for particular consumers in 114 Director of Consumer Affairs v City Finance Loans (Credit) [2005] VCAT 1989, 27. 115 Consumer Affairs Victoria, `The Report of the Consumer Credit Review', Supplementary Information, 2006, p. 336. 236


Chapter 11 -- Regulation Impact Statement some circumstances, where their application is denied because they cannot afford to meet the repayments under the proposed contract. This issue is discussed in more detail in the problem identification section of this RIS. The Australian Securities and Investments Commission Act 2001 11.18 The Australian Securities and Investments Commission Act 2001 (ASIC Act) provides, in section 12GB, that a term of a consumer contract (including a credit contract or lease) is unfair if: · it would cause a significant imbalance in the parties' rights and obligations arising under the contract; · it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and · it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. 11.19 Pursuant to 12BI of the ASIC Act, the unfair contract term provision does not apply to terms that define the main subject matter of the contract, or set the upfront price payable under a contract. This includes interest rates and entry fees and charges. Accordingly, it would not provide a borrower with recourse in relation to credit on the basis the cost is unfair (or therefore restrain lenders from charging higher costs because of the absence of any risk of the cost being characterised as unfair). 11.20 Other sections of the ASIC Act prohibit unconscionable conduct, misleading or deceptive conduct and false or misleading representations in relation to financial services. These provisions do not directly regulate the terms on which credit is provided, although they may provide a remedy because of the individual circumstances of a particular consumer (where, for example, they are vulnerable in a way that is taken advantage of by the lender), or where there have been misrepresentations by a lender. Sources of Data on short term lending 11.21 This RIS refers to data and analysis from a number of academic papers, reviews and submissions from both Australia and overseas. The table below sets out those papers which include primary research on the Australian market in reverse chronological order. Where relevant, information about methodology is detailed. Other papers containing secondary analysis and theoretical content are referenced in footnotes throughout this RIS. 237


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Table 11.2: Primary research papers on short term lending Name Methodology/Comments G Marston and L Shevellar, · 47 micro lenders identified by NFSF sent `The Experience of Using surveys. Thirteen responses received. Fringe Lenders in Queensland: · 44 borrowers surveyed in total (28 A Pilot Study', July 2010. surveyed in depth). Borrowers self- selected by responding to a request contained in a postcard that was available at loan centres, financial counsellors and offices of legal aid. · Interviews with ten other stakeholders including: two government officials, one academic, three financial counsellors, three consumer advocates and one representative from a community finance institution. National Australia Bank, `Do · Pilot project related to loans of $1000 -- you really want to hurt me: $5000 of a term of 12 months. Exploring the costs of fringe · 510 loans were written. 328 clients were lending -- A report on the contacted for survey and 64 responses NAB small loans pilot', 2010. were received. Out of a possible 4664 non clients (those who were refused), 40 responses were received. Z Gillam and Consumer · Online survey of 448 borrowers (of loans Action Law Centre, `Payday under $2000 to be repaid in less than Loans, Helping Hand or eight weeks). Quicksand', 2010 · Qualitative research involving four group discussions, five standard depth interviews, and three in home interviews. A Ellison and R Forster, · Three focus groups of unknown size. Policis, `The dynamics of low · Telephone survey across Adelaide, income credit use', undated116 Brisbane Melbourne, Perth and Sydney. Sample of 500 low income consumers; 400 low income credit users; 320 low income users of payday loans. 116 Neil Ashton for Consumer Action Legal Centre (CALC), in a Draft Payday Lending Literature Review, states that the research underpinning these papers was commissioned by Cash Converters, although this has not been disclosed in the paper. CALC states that `... after investigation, an email inquiry to Policis was answered by report author Anna Ellison who confirmed that the report was prepared by Policis in 2008 (see email from Anna Ellison to Consumer Action Law Centre, 21 May 2008). Although Policis would not reveal for whom the report was commissioned, an email from 18 May 2008 from Glenn Donaldson of Cash Converters revealed that the report had been commissioned by Cash Converters', p. 19. 238


Chapter 11 -- Regulation Impact Statement Name Methodology/Comments N Howell, T Wilson, · Survey of 40 short term lending J Davidson for Consumer businesses in Queensland. Business Credit Legal Centre `Interest chosen from telephone book and names Rate Caps, Protection or provided by NFSF. Information Paternalism, December 2008 requested in relation to $1000 loans and $300 loans. · In addition 20 qualitative interviews with nine consumer advocates in QLD, NSW, VIC, Act; five micro lenders in QLD, NSW; six government staff from QLD, NSW, VIC; seven representatives from five mainstream lenders. R Scutella and G Sheehan · Six focus groups of 33 people in Brotherhood of St Laurence, Victoria. `To their Credit. Evaluating an experiment with personal loans for people on low incomes', 2006. Market Intelligence Strategy · Compilation of database of 277 micro Centre (MISC) Australia for loan products available in Victoria Consumer Affairs Victoria, (information acquired via stakeholder `Consumer Credit Report', contracts, lenders directly, website 2006. checks, mystery shopping and loan enquiries over the phone). D Wilson, Consumer Law · Interviews with 10 financial counsellors Centre Victoria, `Payday and consumer support workers in Lending in Victoria -- A Victoria. research report', 2002 · Telephone survey of 20 businesses (of which data was collected for 18). · A Street survey of 78 consumers (with 72 being consumers applying for or repaying payday loans) taken in the vicinity of payday lenders in 11 locations across Victoria. · 12 in depth interviews (11 were volunteers from the street survey; one was referred from a financial counsellor). 11.22 In a 2010 study and literature review on the short term lending industry the academics Gregory Marston and Lynda Shevellar note that much of the existing research on the topic in Australia and around the world is heavily biased -- `even seemingly objective academic research projects are often sponsored by a consumer advocacy organisation, a 239


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 bank, or the non-bank lending industry'117 ... `all...positions are validated and denied, proven and disproven, argued for and rallied against'.118 11.23 This RIS also refers to overseas experiences with short term credit, noting that differences in regulatory approaches, product design and practical operation may limit their relevance. Financial position of consumers who use short term credit Income Levels 11.24 Studies of short term credit have consistently found that borrowers on very low incomes constitute a significant percentage of the people who use short term loans: · Dean Wilson's 2002 study found that 43 per cent of payday borrowers earned less than $20,852 per annum119 and 85 per cent of borrowers earned below $31,304 per annum. Overall 44 per cent of payday consumers had dependent children and 80 per cent lived in rental accommodation.120 · In the recent Marston and Shevellar pilot study of the Queensland short term lending market borrowers in Queensland, the authors state that `the overwhelming majority of the borrowers we spoke with were living below widely accepted measures of poverty. A quarter of the borrowers we spoke with were routinely accessing emergency relief for food vouchers'.121 Of the 44 borrowers interviewed, only six had full-time employment.122 · The 2010 Consumer Action Legal Centre Report123 found that 28.1 per cent of respondents were in part-time or casual employment and 21.9 per cent unemployed. For those consumers who were employed, 72.8 per cent had income levels below the average wage. 23.4 per cent had incomes of less than $20,000.124 117 G Marston and L Shevellar, University of Queensland, `The Experience of Using Fringe Lenders in Queensland: A Pilot Study' 2010, p. 9. 118 Marston and Shevellar, p. 9. 119 Wilson, p. 57. 120 Wilson, p. 59. 121 Marston and Shevellar, p. 6. 122 Marston and Shevellar, p. 5. 123 CALC noted that because the study was undertaken online, some of the most vulnerable may have been excluded, and therefore there may have been some distortion in results. Gillam, p. 54. 124 Gillam, p. 53. 240


Chapter 11 -- Regulation Impact Statement · Policis reports that half of the payday customers it surveyed for its Australian paper `The Dynamics of Low Income Credit Use' had household incomes of below $35,000.125 · Data provided by Cash Stop (quoting uncited research of over 122 lending outlets and 4000 borrowers by Smiles Turner for the NFSF in 2006) found that 50.1 per cent of applicants received social security payments (including where this was their only income).126 · The Wesley Community Legal Service noted in its 2010 Green Paper Submission that in its experience short term loans are used by vulnerable classes of consumers, including indigenous people, people with disabilities, people with gambling problems, and those with little education and very low financial literacy. National Legal Aid stated that the majority of consumers who came to legal aid in relation to these loans were Centrelink recipients or low income workers.127 · 2010 Cash Converters data shows that 46.15 per cent of borrowers of loans of less than $1000 and of one month duration (Cash Advance Loans) received government benefits (although they may also be in receipt of other income).128 The figure was 43.93 per cent for borrowers of their other main product (a Personal Loan), a loan over $1000 with a duration of 6 -- 12 months. Table 3 below sets out the income level of borrowers for each type of loan, and shows that for Cash Advance loans, 75.69 per cent of customers have an income of under $36,000 and just under half had an income of under $24,000.129 Table 11.3Table 3: Income levels of borrowers taking out Cash Converter's Cash Advance and Personal Loan products Net Income (pa after tax) Cash Advance Personal Loans $0 $11,999 14.76% 8.93% $12,000 -- $23,999 34.19% 34.66% 125 Policis, `The Dynamics of Low Income Credit Use', undated, p. 29. 126 Cash Stop Financial Services, `Response to the National Credit Reform Green Paper', 2010, p. 10. 127 National Legal Aid, `Green Paper on National Credit Reform, NLA Response', 2010, p.23. 128 Cash Converters 2010, p. 7. 129 Cash Converters 2010, p. 6. 241


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Net Income (pa after tax) Cash Advance Personal Loans $24,000 -- $35,999 26.74% 32.63% $36,000 -- $47,999 15.36% 15.52% $48,000 -- $59,999 4.96% 4.78% $60,000 -- $71,999 1.95% 1.85% $72,000 -- $83,999 1.00% 0.82% $84,000 + 1.04% 0.82% 11.25 These studies show consistency between the reporting of income levels of short term borrowers. In summary the data suggests that: · Approximately 40 to 49 per cent of short term customers have an annual income of less than $24,000. · Between 50 to 74 per cent of short term customers have an annual income of less than $36,000. · 50 per cent of short term customers are partially employed or unemployed. · Between 46 and 50 per cent of short term customers are in receipt of government benefits. 11.26 The research also demonstrates that a substantial number of short term borrowers, possibly up to 25 per cent, have incomes that are so low that they fall beneath the Henderson Poverty Line. This is a measure of the minimum income level needed to avoid a situation of poverty, and varies according to whether or not a person is working and the number of dependants.130 The March 2010 Poverty Line figures assessed a working single person with an after-tax income of under $401 a week ($20,852 pa) to be in poverty; and a non-working single person with a disposable income of under $325 a week ($16,900 pa) to be in poverty.131 These figures assume no children -- a person who has dependents would require a higher income to be above the Poverty Line. 11.27 In 2010, 14.76 per cent of Cash Converters payday customers had incomes of under $12,000 per annum, and were therefore below the Poverty Line. A further 34.19 per cent of their customers had incomes of between $12,000 and $24,000, a portion of whom would also fall below the Poverty Line. These figures are consistent with those in Wilson's 2002 study, which found that 43 per cent of payday borrowers earned less 130 Published by Melbourne Institute of Applied Economic and Social Research, University of Melbourne. 131 Income is required to meet the cost of housing. Note that the level varies according to family type and circumstances (for example, according to the number of children or employment status). 242


Chapter 11 -- Regulation Impact Statement than $20,852 per annum and 38 per cent were below the Henderson Poverty Line.132 The 2010 CALC report showed 23.4 per cent of surveyed consumers had incomes of less than $20,000 and were therefore just on or below the Poverty Line.. 11.28 These figures are consistent with the US experience of short term lending (notwithstanding differences in product structure in that country that mean the poorest consumers tend to be excluded from the short term credit market).133 The American Federal Reserve Board undertakes a tri-annual Survey of Consumer Finances.134 In 2007 the mean income of families who took out a payday loan was $32,614 (the median was $30,892), contrasted to a mean income of $85,473 (median was $48,397) for those who did not use a payday loan.135 Families who had borrowed from payday lenders had a mean net worth of $22,616 (and, remarkably, had a median net worth of $0). Those who did not use payday lenders had a mean net worth more than 20 times that -- $469,374 (median $80,510).136 41 per cent of families borrowing from a payday lender were headed by single women, and 40 per cent were headed by married couples.137 Lack of access to alternative sources of credit 11.29 The Australian research demonstrates that many consumers use small amount lenders because they are unable to access alternative forms of credit: · In its submission Cash Stop quotes research undertaken by Smiles Turner for the NFSF of 3408 consumers across Australia. Cash Stop states that the research demonstrated that a large proportion of consumers reported that they had no access to other forms of credit -- 71.6 per cent (QLD), 132 Wilson, p. 57. 133 In America a consumer often borrows by receiving an amount to be repaid either by cash, or, should this not occur, by the lender presenting a post-dated cheque. Borrowers are therefore required to have a cheque account, and, as many lower income households in the USA do not have checking accounts this prevents them from obtaining payday loans (and results in them using alternative sources of finance, such as pawnbrokers).See E Lawrence and G Ellihausen, `A Comparative Analysis of Payday Loan Customers', Contemporary Economic Policy, Vol 26, No. 2, 2008, p. 305. 134 The survey includes a random sample of approximately 4400 families, and is widely used by government and economic research centres. 135 A. Logan and C. Weller for Centre for American Progress, `Who Borrows From Payday Lenders? An Analysis of Newly Available Data', 2009, p. 7. 136 Logan and Weller, p. 8-9. 137 Logan and Weller, p. 6. 243


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 72.1 per cent (SA), 76.7 per cent (NSW); 81.6 per cent WA.138 · The submission by the Financiers Association of Australia and Minit-Software to the Green Paper139 lists poor credit history as one of the reasons consumers access short term loans.140 · Cash Converters report that three in 10 of their clients cannot get credit from other types of lenders.141 · Consumers surveyed in the Marston and Shevellar Pilot Study also reported that they felt they had little choice but to access high cost credit.142 11.30 There is qualitative evidence that the inability to access alternative credit, and the consequent need to obtain a short term loan, is perceived by some borrowers as a personal failure because of an inability to manage their finances.143 Analysis of qualitative interviews indicates that some borrowers felt that their need to use these types of loans was shameful or embarrassing, and as something that would be concealed from friends and family. Consumer needs met through use of short term credit 11.31 The data below demonstrates, across a range of sources, that approximately 70 per cent of loans are used by consumers to meet recurrent or basic living expenses: · The 2010 CALC paper reported that 71.3 per cent of surveyed consumers used short term loans to pay for basic expenses: utility bills (21 per cent), food (17.6 per cent) and rent (10.7 per cent).144 22 per cent of the loans were used to pay for car repairs or registration. · The 2002 Wilson paper reported that respondents had taken out short term loans to pay for bills (32 per cent), day to day living expenses (26 per cent), car repairs or registration (10 per cent), and rent or mortgage (10 per cent). In total 78 138 Smiles Turner is registered on the WA register of lobbyists on behalf of Cash Stop. 139 Min-it Software produces in-house software specifically for payday and micro-lenders. 140 Min-it Software and Financiers Association of Australia, `Submission, Green Paper, National Credit Reform, 2010, p. 11. Additional factors are being new to a country or area, disenchantment with mainstream lenders, and locality. 141 Cash Converters, 2010, Appendix Two. 142 Marston and Shevellar, p. 6. 143 Gillam, pp. 64 and 231. 144 Gillam, p. 59. 244


Chapter 11 -- Regulation Impact Statement per cent of borrowers were borrowing for non-discretionary spending.145 · Research by the Policis research consultancy found that credit, particularly small sum credit, is used by low income households primarily for essentials and to ensure the effective functioning of household finances. Policis described 28 per cent of borrowing as `distress borrowing' to deal with cash shortfalls; 29 per cent was used to meet unexpected bills and expenses; and 9 per cent was used to meet regular bills and expenses. Credit was used to finance spending on discretionary items in only 10 per cent of cases.146 · Data provided by Cash Converters in a 2008 submission to Treasury is consistent with these findings, showing that nearly 6 in 10 of their clients with incomes less than $35,000 per annum would be unable to manage a cash emergency without borrowing and 55 per cent would be unable to renew or repair essential equipment.147 This suggests that its clients are borrowing to meet emergencies of this type. · Data provided by Cash Stop, quoting Smiles Turner research, found that the top uses for credit were for basic expenses and bills (29.8 per cent), personal (32.9 per cent), car expenses (8.1 per cent) and groceries (5.6 per cent). A similar SA study undertaken by Smiles Turner in 2007 of 533 South Australian consumers had similar findings: bills (25.3 per cent); groceries and food (22 per cent); shopping (undefined) (16.1 per cent); living costs (11.2 per cent); and car repairs/maintenance (10 per cent).148 11.32 In summary, between 50 and 70 per cent of short term borrowers primarily use short term credit to meet basic living expenses, presumably because of their low incomes. 11.33 In addition to the above uses, Australian data also suggests that short term loans are used by problem gamblers when they have exhausted other alternative sources of funds (for example, accessing available money in transaction or home loan accounts, or on a credit card).149 The extent of this use has not been quantified, although the South Australian 145 Wilson, p. 36. 146 Policis, p. 8. 147 Cash Converters, `Position Paper, Response to the Federal Government's Green Paper on Financial Services and Credit Reform, 2008', p. 10. 148 Cash Stop Financial Services, p. 11. 149 South Australian Centre for Economic Studies, 2010, p. 38. 245


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Centre for Economic Studies in a 2010 paper quoted data suggested that 8 per cent of problem gamblers had obtained funds from short term lenders.150 The Honourable Ann Bressington, Member of the South Australian Legislative Council referred to this issue during her reading speech for the Consumer Credit (South Australia)(Pay Day Lending) Amendment Bill. She said: `there are about 20 payday lenders operating in Adelaide, and just about all of them are located in lower socioeconomic areas in the north and south. Many are located within close proximity to gambling facilities, and social welfare groups have advised my office that they have heard many reports of people using these loans to gamble or buy drugs and alcohol'.151 11.34 Again, the Australian research as to the use of funds provided by short term lenders is consistent with that undertaken in the United Kingdom and the United States. 11.35 In the United Kingdom research by Paul Jones from the University of Liverpool found that over 90 per cent of participants needed to obtain credit to make ends meet. The interviews and focus groups identified how people regularly borrowed to pay bills, to buy clothes and school uniforms, and for birthdays, holidays and Christmas.152 Berthoud and Kempson found that `poorer families, on the whole, use credit to ease financial difficulties and those who are better-off take on credit commitments to finance a consumer life-style'.153 11.36 The American Survey of Consumer Finances found that 29 per cent of borrowers gave their reason for borrowing as an emergency, 21 per cent cited a basic consumption need, 8 per cent stated that it was the only option available to them, while 34 per cent borrowed for convenience.154 Reliance by consumers on Short term Small amount Credit 11.37 The Australian research demonstrates that many low-income consumers use small amount lenders because they have an urgent need for finance, and because they are unable to access alternative forms of credit. The combination of these factors means that: 150 South Australian Centre for Economic Studies, 2010, p. 33 - 34. 151 South Australian Legislative Council Reading Speech, Consumer Credit (South Australia) (Payday Lending) Amendment Bill, 8 April 2009, p. 1936 152 P. Jones, `Access to Credit on a Low Income: A study into how people on low incomes in Liverpool access and use consumer credit', p. 9. 153 R. Berthoud and E. Kempson, `Credit and Debt: The PSI Report', Policy Studies Institute: London. 1992, quoted in Wilson, p. 36. 154 Logan and Weller, p. 11. 246


Chapter 11 -- Regulation Impact Statement · Consumers tend not to identify different short term lenders and consciously choose between them, as, presumably, they are keen to obtain finance as quickly as possible from the first available lender. · Consumers are generally not price sensitive, as the inability to access alternative sources of finance and the financial pressure they may be experiencing result in them accepting the credit irrespective of the terms on which it is offered. As noted above, consumers who use short-term lenders can feel a sense of failure, and this in turn can make them grateful to a lender who they perceive as helping them when no one else would.155 11.38 The following research demonstrates these trends: · The Consumer Action Legal Centre's 2008 survey found that less than one third of respondents who had accessed short term loans from a particular lender knew of other companies providing similar loans.156 · A current supplier of software programs to a large number of payday lenders has advised that less than 5 per cent of consumers appear on the database of more than one lender.157 Consumers surveyed by Policis158 (and later quoted by Cash Converters in its submission) stated that their primary motivations to access short term credit were: - Quick access to cash when you need it (just over 80 per cent) - Minimum hassle forms and process (just under 50 per cent) - Can borrow small sums difficult to get from bank (just over 50 per cent) - Can pay back over short term (just over 60 per cent) - Banks less flexible or accessible (approximately 45 per cent) · Wilson observes that, for the twelve customers with whom he undertook in-depth interviews, a high standard of personalised customer service was a common experience. Karen Sampford notes that the market is characterised by 155 Gillam, pp. 73-4. 156 Gillam, p. 221. 157 Submission to the Green Paper by the Financiers Association of Australia, p. 11. 158 Policis, p. 25. 247


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 strong brand loyalty, and that this can equate to a failure to compare products of different providers.159 · The 2008 CALC survey had some findings in relation to cost that demonstrated that consumers were not just insensitive to price, but ignorant of it: - 12.9 per cent of respondents stated that the amount that they were charged for the loan by the lender was $0, and a further 8.9 per cent of respondents stated that the amount that they were charged for the loan by the lender was either $10 or $20 (when the amount would have been closer to $100).160 11.39 Less than 10 per cent of borrowers choose short term lenders because of cost. Only 4.9 per cent of consumers surveyed chose their short term loan due to low fees; and only 4.5 per cent because of good rates.161 advertising for short term loans in Australia is consistent with this research in that it rarely includes references to the cost of these products, with marketing focusing on other features such as speed, accessibility, lack of credit checks (as noted by the Griffith University research). 11.40 These findings are also consistent with those from the 2010 UK Review on High Cost Credit which found that consumers who take out short term loans are often unaware of other options, and tend to focus on how quickly and easily the product can be accessed, and how affordable the product is, rather than focusing on cost.162 The UK Competition Commission investigated the cost of consumer credit in that country and said `we found it striking that there was so little evidence of price competition of any kind; not only no lowering of headline prices, but no differentiation of prices, discounting or offering higher rebates ... as a means of keeping customers who might defect or attracting new ones'.163 American researchers similarly note that `competition does not appear to 159 Sampford, 13. 160 Gillam, p. 65. 161 Gillam, p. 66. 162 Office of Fair Trading Britain, `Review of High Cost Credit, Final Report', 2010, p. 29. See also Consumer Focus, 9: `Some consumers are positively choosing this form of credit as a result of deficiencies in the mainstream: They see payday loan fees as clearer ... they feel more able to `control' their debt ... and other forms of finance are often not considered or seen as an option because they were not available to these consumers or negative associations, such as the potential for longer-term debt'. 163 Competition Commission Britain, Home Credit Market Inquiry, Provisional Findings Report at 7.17. 248


Chapter 11 -- Regulation Impact Statement affect fees charged [on payday loans] in the way one normally thinks that competition will affect loan market interest rates.'164 11.41 Research by Drysdale and Keest in America has also suggested that consumers had little knowledge of the alternatives to payday loans.165 A survey undertaken for the Canadian Payday Loan Association involving 350 consumer interviews similarly found that over half the consumers chose payday loans because they were quick and easy.166 Repeat borrowing 11.42 In this section of the RIS, `repeat borrowing' is used to describe the following range of situations: · A `rollover' loan. This includes scenarios where the term of an existing loan is extended, with a borrower typically being charged additional fees and ongoing interest charges, and where a new loan is advanced which is used to repay an existing loan. · A new loan with the same lender is taken out immediately or very soon after a previous loan has been repaid. · A consumer who has multiple loans at the same time from different lenders. · A consumer who regularly takes out short term loans. 11.43 In all of these situations ongoing borrowing may be required because the consumer either cannot repay the initial loan, or has only been able to do so by temporarily deferring other expenses but then requires more money to meet these deferred costs. 11.44 It is considered that there is an inherent in short term lending in respect of consumers who are on fixed incomes and who use the funds advanced to them for living expenses that their first loan will not be their last: · Financial counsellors who provide qualitative date based on their experience in dealing with numerous consumers have reported that borrowers using short term loans experience great difficulty in avoiding repeat use.167 164 M. Flannery and L Samolyk, `Payday Lending: Do the Costs Justify the Price?', Federal Deposit Insurance Corporation, Working Paper No. 2005-09 in Ashton, p.10. 165 Drysdale and Keest, p. 630-1. 166 Thinkwell Research, for the Canadian Payday Loan Association `Payday Loan Customer Study: Final Report', 2010, p. 9. 167 Gillam, p.72. 249


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · Similarly, Wilson has reported that consumers are not easily able to avoid repeat use, and the cost of the loans, over time, can be absorbed into week-to-week budgets (with a consequent reduction in disposable income).168 11.45 Repeated use of these products can therefore lead to a debt spiral in which the consumer borrows repeatedly to meet their escalating cost of debt, but finds an increasing percentage of their income is used to meet the repayments on these loans, reducing their capacity to meet living expenses directly from their income.169 11.46 Different definitions and understandings of repeat borrowing mean that it is difficult to accurately estimate the extent of repeat borrowing either in general or the particular forms of repeat borrowing mentioned above.170 It is also the case that some borrowers may understate the amount of repeat borrowing they engage in, given that the greater the extent to which this occurs the more they may be embarrassed by this conduct reflecting adversely on their capacity to manage their finances.171 11.47 Australian data suggests a reasonable percentage of users of short term lending would engage in repeat borrowing: · The 2002 Wilson paper found that in Victoria the average number of loans taken out by consumers was six per annum. 37 per cent of consumer had used five or more short term loans in the 12 months preceding the study. 15 per cent of the surveyed borrowers took out more than ten loans per annum.172 · The CALC report's findings show less evidence of repeat borrowing, with the survey finding that 27.5 per cent of borrowers had taken two loans in the preceding 18 months. A further 8.9 per cent had taken out three loans and 3.6 per cent had taken out four. Cumulatively, 86.4 per cent of respondents had taken out four or less high-cost short term loans over an eighteen month period.173 168 Wilson, p. 75. 169 Gillam, p. 26. 170 Note that some datasets will hide repeat borrowing because a consumer can take out a new loan rather than `rolling over' an old loan, may use multiple lenders for multiple loans or a new lender to pay out a loan from an existing lender. 171 Gillam, p. 264. 172 Wilson, p. 65. 173 Gillam, p. 69. As previously mentioned in relation to the CALC survey, concerns have been expressed the results were skewed by the online format of the survey (ensuring that responses only come from people with internet access and capabilities). 250


Chapter 11 -- Regulation Impact Statement · The Policis report finds that payday customers in Australia take out, on average, a little over four loans per year, rising to 5 loans per year for those who believe they do not have other credit options.174 They make repayments, on average, for 18 weeks per annum. · 25 per cent of the consumers interviewed by Marston and Shevellar in 2010, stated that they were `hooked' in the short-term lending cycle.175 11.48 The greater the extent of repeat borrowing (including consecutive loans) the greater the probability the borrower will be left with a significant shortfall in income, depending on the terms of their loan, to meet other recurring essential costs, such as food, utilities and transport costs. The inability to stagger payments according to necessity may add to, or not resolve, the borrower's financial situation with consequent pressure on the consumer to borrow again to meet these costs, and, as noted above, to have an ongoing reduction in income as their budget now incurs the costs associated with short term lending on a continuing basis. 11.49 American data provides more detailed findings in relation to the level of repeat borrowing. In Florida and Oklahoma customers are allowed to have only one payday loan at a time. To enforce this regulation, the states maintain central databases run by a private company,176 Veritec, in which short term lenders must register customers. This data provides useful neutral insight into the level of borrowing in these States. In Florida and Oklahoma the average number of loans over 12 months (June 2008 -- May 2009) was 8.4 and 9.3 respectively. Approximately 30 per cent of borrowers in both states took out 12 or more loans in that period.177 These numbers are confirmed by a further study by the US Federal Deposit Insurance Corporation,178 which found that more than a 25 per cent of customers obtain more than 12 payday advances per annum and that more than 50 per cent of payday loan customers take out seven or more loans per year.179 11.50 United States research has also identified a correlation between payday lending and bankruptcy, stating that findings `are consistent with the interpretation that payday loan applicants are financially stressed; 174 Policis, p. 41. 175 Marston and Shevellar, p. 6. 176 J. Caskey, for Federal Reserve Bank of Philadelphia, `Payday Lending: New Research and the Big Question', Working Paper NO. 10-32, 2010, p. 4. 177 J Caskey, p. 5. 178 M. Flannery and K. Samolyk, `Payday Lending: Do the Costs Justify the Price?', Federal Deposit Insurance Corporation, Working Paper No. 2005-09, p. 2. 179 Flannery and Samolyk, p. 5. 251


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 first-time loan approval precedes significant additional high interest rate borrowing; and the consequent interest burden tips households into bankruptcy'.180 Characteristics of Short term Small Amount Lending Size and nature of the Australian market 11.51 There is limited data about the actual size of the short term lending market in Australia and researchers have noted the difficulty in obtaining reliable figures.181 In 2006 the Market Intelligence Strategy Centre (MISC) undertook an analysis of the consumer credit market for Consumer Affairs Victoria. It noted `payday lending data provides the worst example of inconsistency, with national estimates varying from $38 million to $200 million'.182 Cash Converters also recently reported that the exact size of the short term lending market has not been quantified.183 11.52 According to the NFSF, in 2008 payday lending and micro loan advances constituted approximately $500 million worth of loans per annum in Australia.184 A survey undertaken by Consumer Action Legal Centre in 2008 identified about 28 large short term lenders operating in Australia at that time.185 The more current data below demonstrates that there are a large number of providers, including Cash Converters and international entities like the Cash Store, that expect to expand at a rapid rate. Cash Convertors alone currently accounts for just under $257 million worth of short terms loans per annum. A smaller operation -- Money3 -- has nine branches and revenue in 2010 of $11,000,772. It would appear that there has been a significant increase in the size of the market since the NFSF estimated it at $500 million in 2008. 11.53 There are currently at least 567 branches of short term providers in Australia. This number is an indicative minimum only. It tallies the number, as disclosed on each provider's website, of branches and franchises of well-known short term loan providers (as listed below). 180 Skiba and Tobacman, p. 23. 181 Market Intelligence Strategy Centre (MISC) Australia for Consumer Affairs Victoria, `Consumer Credit Report', 2006, p. 51. 182 MISC, p. 51. 183 Cash Converters, `Response to the Commonwealth Government Green Paper on Consumer Credit Reform - Phase 2', 2010, p. 5. 184 National Financial Service Federation, `Submission to Financial Services and Credit Reform Green Paper', 2008, p. 2. 185 Z. Gillam and Consumer Action Law Centre, `Payday Loans, Helping Hand or Quicksand', 2010, p. 10. 252


Chapter 11 -- Regulation Impact Statement There are providers who are lesser known or who have a small number of branches that have not been included in this calculation. 11.54 There are two industry bodies that represent short-term lenders, the National Financial Services Federation (NFSF) and the Financiers Association of Australia (FAA). Both bodies have approximately 75 members (that is, counting franchise arrangements as a single member). Some lenders are members of both bodies, and between them they represent approximately half of all short-term lenders. Market distribution 11.55 The two main distribution channels for short term loans are at a storefront or online. Many businesses offer both avenues. It is understood that there are six major storefront short term lenders in the Australian market -- Cash Converters, the Cash Store, Cash Stop, Fast Access Finance, Cash Doctors and City Finance. In addition to these are a number of smaller lenders, who may have numerous retail outlets. A review of internet-only short term loan providers undertaken by CALC in 2010 identified more than twenty.186 However, according to the CALC survey of 448 consumers in 2008, only a small percentage of borrowing was done purely online.187 11.56 A number of providers of short term lending services categorise themselves as `brokers', by organising loans from a third party. However, these models are different from mainstream broking in that generally the broker only arranges short term or small amount loans, rather than a broader range of products. In practice, the role of the broker may be limited to acting as an intermediary rather than being involved in product selection, thereby allowing an additional fee to be charged, and avoiding the restrictions on fees charged by the lender in the jurisdictions where a cap applies. Expansion rates 11.57 The short term, small amount lending market is currently expanding rather than contracting. The researcher Dean Wilson identified the following factors as contributing to this increase: `deregulation of the mainstream financial services and withdrawal of services from low-income consumers; stagnating or declining real incomes amongst lower income earners in industrialised economies; rising levels of credit 186 Gillam, p. 11. 187 Gillam, p. 90. 253


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 use across social strata; increasing levels of household debt and declining levels of savings; and rising rates of personal bankruptcy.'188 11.58 It is noted that in America the short term market has grown rapidly. In the early 1990s this number was put at 200 payday lending stores in the country. The number had grown to 25,000 by 2007189 with `payday lenders ... having more storefronts than McDonald's and Starbucks combined'.190 A similar growth has been experienced in the United Kingdom. The 2010 report Keeping the Plates Spinning by the British statutory body, Consumer Focus, stated that the number of people using high cost short term credit in England had quadrupled over the preceding 4 years to 1.2 million people (borrowing a combined total £1.2 billion). This research also estimated that the number of these loans had from 1.2 million in 2006 to 4.1 million in 2010.191 Major providers of short term loans 11.59 There are a number of major short term lenders in Australia, as follows: · Cash Converters is the largest short term lender in Australia. It is a public company that in August 2010 had 137 outlets, and employed more than 2000 staff Australia-wide.192 - In the 2009 - 2010 financial year it provided 626,555 short term loans, amounting to $256,947,297 in transaction value.193 The predominant area of Cash Converters business falls into what the company describes as cash advance loans. These are loans of less than $1000 and of one month duration. In the 2009 -2010 financial year, 90.29 per cent of Cash Converters' short term lending business fell into this category. The rest of the loans are categorised by the company as personal loans, are over $1000 and have a duration of 6 - 12 months.194 - In the six months to December 2010 Cash Converters reported a 48 per cent growth in revenue and a net profit of 14.3 million. Cash Converters reported that one reason for the growth was the implementation of an online loan 188 D. Wilson for Consumer Law Centre Victoria, `Payday Lending in Victoria - A research report', 2002, p. 29. 189 Gillam, p.124. 190 P. Skiba and J. Tobacman, `Do Payday Loans Cause Bankruptcy', 2009, p. 2. 191 Consumer Focus, `Keeping the Plates Spinning: Perceptions of Payday Loans in Britain', 2010, p. 12. 192 Cash Convertors 2010, p. 3. 193 Cash Converters 2010, p. 5. 194 Cash Converters 2010, p. 5. 254


Chapter 11 -- Regulation Impact Statement application system; from 5,868 online enquiries, 1,823 loans, totalling $2.5 million were written with 82 per cent of the borrowers being new customers.195 · The Cash Store Australia Holdings Inc. (`the Cash Store') is another large provider of short term loan services in Australia. By the end of the 2010 financial year, it operated 61 branches in Australia (doubling the number of branches over that year): - In most states, the company acts as a broker on behalf of consumers seeking short term advances from third party lenders.196 The Cash Store reports that the average type of loan it provides is a loan of $400 with a term of less than 31 days. It charges a brokerage fee of $30 per $100 advanced. The consumer will additionally pay 48 per cent interest to a third party lender. · City Finance has 114 franchised locations across Australia, and expects to open another 22 franchises in the near future.197 Some businesses are run from the franchisee's home. · Cash Doctors has branches in at least 79 towns across Australia. · Cash Stop has 42 branches across Australia. · Fast Access Finance has 32 branches across Queensland. · Cash Loan Money Centre has 29 branches across NSW, QLD, VIC, TAS and WA. · Money3 is a publicly listed company with 9 branches across Victoria. In the financial year 2010 it had revenue of $11,000,772 and a profit of $3,114,739.198 Costs charged by Short Term Lenders 11.60 Reviews of short term lending have identified a significant divergence in the level of costs charged by different lenders. Table 4 sets out a comprehensive analysis of costs of short term loans charged by 40 Queensland lenders (undertaken by Howell in 2008). It sets out, for different products, the range of interest rates charged, and the costs to the borrower (set out as the total amount they repaid, expressed as a percentage of the principal). 195 Cash Converters International Limited, Financial Report Half-Year End December 31 2010. 196 The Cash Store Australia, p. 6. 197 http://www.cityfinance.com.au/franchise-news. 198 Money 3, `Report to AGM' 2010, http://www.asx.com.au/asxpdf/20101112/pdf/31tvmpnvw0bbt6.pdf. 255


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Table 11.4: Griffith University Review: Ranges of APRs and total payments as a percentage of principal Product Type Principal ($) Duration APR199 all Total (weeks) inclusive Payment as per cent of principal Payday 300 1 390 -- 3380 110 -- 165 300 2--8 300 -- 700 120 -- 138 1000 1--8 300 -- 1100 107 -- 133 Small loan 300 12 -- 52 120 -- 580 134 -- 295 Large loan 1000 26 -- 52 107 -- 420 133 -- 307 11.61 Table 5 sets out the cost to the consumer in dollar terms (including both fees and interest) between the lowest and highest charges for particular type of loans, and also expresses the difference between these two figures as a percentage.200 Table 11.5: Griffith University Review: Range of Dollar Charges Loan Duration Lowest $ Highest Dollar Per cent amount (weeks) Charge $ difference difference Charge between between charges charges $300 1 41.58 195.00 153.42 368.98% $300 4 50.68 113.72 63.04 124.39% $300 26 157.00 376.00 219.00 139.49% $1000 1 68.15 231.01 162.86 238% $1000 4 151.64 254.52 102.88 67.84% $1000 26 326.00 1477.00 1151 353.07% $1000 36 533.60 811.32 277.72 52% $1000 52 622.68 2074.76 1458.08 233.2% 199 National Credit Code, Section 17 requires that a credit contract must specify the annual percentage rate (APR) that is used to calculate the interest payable under that contract. As it is the rate that is required to be disclosed it is most often the rate that is used to compare costs of different loan products. It has limitations in the context of short term loans, with industry participants arguing that it has the potential to be misleading. Other methods of calculating charges include calculating the total charge as a percentage of the amount lent, or simply providing the cost in dollar terms. The analysis of costs uses a mixture of these approaches (largely because it is reliant on the calculation methodologies used in the research that it references). 200 Data extracted from Howell, p. 41- 48. 256


Chapter 11 -- Regulation Impact Statement 11.62 The differences in cost are considerable; for example, for a loan of $1,000 over a year the difference in cost was $1452.08. It can be assumed that the lenders charging the lowest amounts above are still making a profit. However, it is not possible to determine whether the lenders charging higher costs do so because they are making substantially higher profits on individual transactions or operating business models that are relatively inefficient by comparison with other lenders. 11.63 The findings in the other reports that have analysed the range of costs charged by short-term lenders in detail are: · The 2010 Consumer Action Legal Centre report includes a summary of charges and a calculation of APRs from a number of short term lenders.201 The APRs calculated by CALC on loans with a 14-day term ranged from 651.7 per cent to 886.4 per cent, and the APRs calculated on loans with a 30 day term ranged from 304 per cent to 413.6 per cent (in both cases reflecting a difference in costs of approximately 25 per cent between the cheapest and the most expensive credit). · The 2006 MISC report stated that across Victoria `the average cost of borrowing $200 through a payday loan or chattel loan product is $54, for any single loan term... In Metropolitan Melbourne, this figure equates to $52 for any single loan term, while it is $61 and $69 in Inner and Outer regions respectively'202 (a difference in cost of approximately 33 per cent between the cheapest and the most expensive credit). Default costs charged by Short Term Lenders 11.64 There is no universal data about the levels of default in repayments, and the consequent charges payable by the consumer, across the short term lending industry. It is likely the level of default varies significantly, principally because of the difference in charges levied by lenders. Assuming all other circumstances are comparable, a low-income borrower is more likely to default where, for example, as set out in Table 5, they are being charged $195 for a one week loan rather than $41.58. 201 Gillam, p. 286. 202 MISC, p. 75. Note that these figures relate to loans provided by `subsidiary micro-credit providers' and include `micro-credit products and services that are provided by non- mainstream for profit lenders. This includes payday lenders, payday loans; loans against goods, unsecured personal loans, short-term loans, small consumer loans and title loans'. 257


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.65 In this context it is noted that the 2010 Cash Convertors submission to Treasury quotes a bad debt rate of 3.46 per cent.203 However, it is not possible to extrapolate this figure across the industry, given that Cash Convertors charges lower rates and lower charges than some other industry participants. It would not be surprising if some lenders experienced default rates of 30 per cent or more. 11.66 Where a consumer defaults in repayments they become liable to pay default costs to the lender. The most common type of costs are: · Late payment fees -- these can be charged for each day, week or month the payment is late. · Default interest charges -- interest may continue to be charged at the same rate as for the provision of credit, or at a higher rate. An interest rate of, for example, 100 per cent (charged in a State without a cap) that results in a relatively small amount in dollar charges on a four week loan will lead to an exponential increase in the amount of the debt as interest compounds, when it is applied for a longer period of time. · Loan rescheduling fees -- these may be charged where a consumer is unable to meet payments as they fall due under the repayment schedule. The loan reschedule fee may occur independently of, or in addition to, default fees. 11.67 The table below sets out the default charges payable by consumers as specified in the credit contracts in relation to a number of current lenders. Table 11.6: Default charges levied by short-term lenders Lender Late fees Direct Loan Default debit reschedule interest rate dishonour fee** fee* A $75 per day - - that a payment is late. B $30 per $100 $150 47.5% outstanding (pro rata per day) C - $33 $7 203 Cash Converters 2010, p. 10. 258


Chapter 11 -- Regulation Impact Statement Lender Late fees Direct Loan Default debit reschedule interest rate dishonour fee** fee* D $7 per day. $35 Capped at 42 days. E $30 $50 F $20 when a $20 $20 45% manual payment is received after due date. G $48 late $48 $20 payment fee when a manual payment is received after the due date $25 monthly fee each month account remains in default H $15 $15 $15 45% *Note that where a payment is due to be made by direct debit but defaults, a borrower will face additional and separate charges from their financial institution. ** A Loan reschedule fee is the fee charged when a borrower requests that their repayment schedule is changed. Consumer Leases Background 11.68 Currently the Credit Act only regulates leases which meet the following criteria: the consumer has no right or obligation to purchase the leased goods at the end of the contract; the contract is for a fixed period of more than four months; and the total amount payable by the consumer exceeds the cash price of the goods (that is, the reasonable market value). 11.69 There are two categories of leases that are not regulated by the Credit Act, first, those where the lease is for an indefinite period, and, second, where the initial term of the lease is for a fixed period of less than four months (notwithstanding that both the lessor and the consumer anticipate that the contract will be rolled over on a regular basis). 11.70 In summary, the Credit Act applies a lower level of obligations to regulated consumer leases, relative to credit contracts, and does not 259


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 apply at all to exempt leases. This asymmetry has prompted regulatory arbitrage, with leases being marketed to consumers as an alternative finance product to credit. They are functionally similar to credit contracts, and many consumers may be unaware that they are entering into a contract for a different form of finance product, in which they will not own the goods at the end of the contract (although they may be able to negotiate their subsequent purchase with the lessor). 11.71 The RIS in respect of leases recommended that both these types of exempt leases should be largely regulated consistently with credit contracts. Accordingly the discussion below also considers exempt leases (on the assumption that both types of leases will become regulated by the Credit Act). 11.72 There are three main different types of retail outlets that offer consumer leases: · Mainstream retail outlets, including national or multi-store operations. · Smaller outlets, often with only a single store, that largely rely on local custom and where the consumer is only given the choice of financing the acquisition of goods through a lease. · Operators with no retail presence who engage in door-to-door marketing of household goods to remote and primarily Indigenous communities, particularly in rural New South Wales and the Northern Territory. 11.73 Industry sources estimate that the smaller retail outlets largely, but not completely, offer exempt leases and that these lessors have 20 per cent of the market share (based on the number of contracts rather than the value of those contracts). The extent of the activities of the operators who visit remote communities is not known, but they can arrange contracts with a value of over $100,000 on a visit to a single community. 11.74 The nature of the exemption relied on by the lessor can have different consequences for consumers, as follows: · where the lease is for an indefinite term -- the consumer must keep making payments as long as they retain possession of the goods, that is, potentially for an indefinite length of time; and · where the lease is for an initial period of four months or less -- the lessor and the consumer may both have an expectation that the consumer will retain possession for longer than four months (and the lessor may advertise the availability of the goods in that way), but the terms of the contract, in relation 260


Chapter 11 -- Regulation Impact Statement to the total amount payable by the consumer, will not reflect that expectation. Use by low-income consumers 11.75 As discussed above, there are three main types of businesses that offer leases. There is a clear differentiation between these providers, in that the larger retail outlets will offer both leases and credit contracts, and therefore do cater to consumers who can access mainstream products. 11.76 Generally the smaller retail outlets and the operators who visit remote communities predominantly sell relatively cheap household goods (rather than, for example, computers or other items that are regularly being updated or improved), and use leases to provide those goods to low-income consumers who cannot access alternative means of credit.204 Typically these businesses will offer a large range of goods with a cash value of below $1,000, with leases being used to provide what is, in substance, a form of small amount finance. 11.77 The use of leases typically has a number of structural disadvantages compared to credit contracts that make them a less economically rational selection and can, therefore, result in a significant adverse financial impact on low-income consumers. These disadvantages are: · The cost is significantly higher than credit provided through a credit card or an `interest free' arrangement. The total payments under a lease regularly can amount to twice the market value of the goods, so that the consumer can pay nearly double the amount relative to an `interest free' arrangement (alternatively, the consumer could use an `interest free' transaction to purchase goods with double the value). · The consumer does not own the goods at the end of the contract, and must make additional payments, either to purchase the goods (where the lessor allows this), or on an ongoing basis in order to retain possession and continue to be able to use them. This outcome is particularly financially disadvantageous to low-income consumers where they are leasing cheap or basic household goods as these consumers are more likely, because of their income constraints, to want to maximise the benefits obtained from the goods, by continuing to use them for as long as possible, rather than wanting to upgrade to newer or replacement goods. 204 The larger retail outlets are not marketed to low-income consumers to the same extent, with the major operations offering consumers a choice between credit contracts and leases. 261


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.78 Given these consequences it is considered that generally consumers would not need to use leases if they were either able to pay cash or access other, cheaper mainstream credit options to pay the relatively modest amounts necessary to own the items outright. Leases are therefore disproportionately used by low-income consumers to acquire goods because they do not meet the eligibility criteria of lenders who offer credit contracts. 11.79 Given that consumers are limited in their choices by their income, so that they are unable to satisfy the eligibility criteria of a range of lessors, they are only able to obtain possession of the goods by accepting the terms offered by those lessors who are prepared to provide them with finance. As a result, the lower the consumer's income the fewer choices they will have, and the greater the risk they will be charged high costs. 11.80 The extent of the demand for leases by low-income consumers also means that if a consumer 11.81 defaults in payments then the lessee is at minimal risk of loss as they can simply take possession of their goods and re-lease them to another consumer. There is therefore only a limited financial incentive for lessors to reduce repayments (and therefore the overall cost). 11.82 In summary, there is currently a dysfunction between the way in which leases operate, and the way in which they are regulated by the Credit Act, in that they are an attractive way of suppliers providing low-value goods to consumers, but have significant disadvantages for this class of consumers, and can result in them paying more in dollar terms for the goods than consumers with higher incomes. Level of costs charged by lessors 11.83 The difference in cost charged by three lessors was examined by the Micah Law Centre, in its 2007 report into consumer leases, titled `A loan in lease clothing: problems identified with instalment based rent/purchase contracts for household goods'. The following Table sets out the interest rate in respect of 7 household items, calculated as if the transaction was a credit contract (noting that the interest rate would be higher than that stated in the Table where the consumer also has to pay an additional amount at the end of the contract to purchase the goods). Table 11.7Table 7: Micah Report: Comparison of charges by different lessors Goods Charges by lessor 1 Chargers by Charges by lessor 2 lessor 3 81cm LCD TV 28% ($15.29) 41% ($17.94) 41% ($17.94) 106cm Plasma 28% ($17.19) 39% ($19.95) 41% ($20.18) TV 262


Chapter 11 -- Regulation Impact Statement Goods Charges by lessor 1 Chargers by Charges by lessor 2 lessor 3 260L Fridge 28% ($6.69) 62% ($9.95) N/A Washing 28% ($5.71) 109% ($12.95) N/A machine X Box Game 25% ($5.49) 142% ($15.95) 40% ($6.93) system PlayStation N/A 190%($10.95) N/A portable Panasonic N/A 98% ($9.95) 52% ($6.37) camcorder 11.84 Table 7 shows that there is a significant variation in the effective interest rates in these contracts, and how, given the low value of the goods being purchased even relatively small increases in weekly or monthly payments can result in significant differences in this rate. 11.85 It should also be noted that the interest rate will be higher where the lessor is leasing second-hand goods, as will happen on a regular basis where the goods have already been leased once and returned into the possession of the lessor. In this case the difference between the value of the goods and the amount being paid by the consumer will be even greater. 11.86 In addition, there are particular issues in relation to the way in which both consumer leases and exempt leases have been utilised by door-to-door traders marketing goods in Indigenous communities. These communities are commonly located in remote or regional Australia, and its members usually have no other or very few alternative sources of finance, or, therefore, for obtaining even basic household goods, such as beds or tables. Individual borrowers are commonly in receipt of Centrelink payments and the lessor relies on payment through direct debit arrangements that are rarely cancelled in practice. As a result, the lessor is able to continue receiving payments notwithstanding that it may result in financial hardship for the consumer.205 11.87 Table 8 below sets out the total amount charged to consumers by lessors to remote communities for the lease of two common household items, and the cost of the lease as an interest rate (again calculated as if the transaction was a credit contract). 205 See Unconscionable Conduct and Aboriginal and Torres Strait Islander Consumers Research Report, by Indigenous Consumer Assistance Network Ltd. 263


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Table 11.8: Charges by lessors providing goods to remote communities Goods and cash Total payments by Cost of finance Effective value lessee interest rate Double bed $830 (24 months) $435 83% ($399) Washing $1734 (24 $885 83% machine ($849) months) Problem Identification Overview 11.88 Short term lending and consumer leases are both products that have a significant risk of financial harm. Consumers on low incomes or who are financially stressed are at risk of long term financial detriment because of the impact that the cost of finance, where it is not regulated or capped, can have on their financial position. Conversely, limiting the financial impact of this form of finance can improve the capacity of the borrower to stabilise or improve their position. 11.89 Consumers can be charged costs that, given their financial position, create a risk of: · ongoing payments to the credit provider or lessor for minimal, or diminishing, benefit; · a debt spiral, where an increasing percentage of the consumer's income is used to meet repayments under a contract; and · an ongoing cycle of disadvantage, that reduces the potential for financial and social inclusiveness of this class of consumers. Short term small amount lending 11.90 The review of the short-term lending market in this RIS identified that the majority of the users of this form of finance have the following characteristics: · They have low incomes: - Approximately 40 to 49 per cent of short term customers have an annual income of less than $24,000, and between 50 to 74 per cent of short term customers have an annual income of less than $36,000. 264


Chapter 11 -- Regulation Impact Statement - 50 per cent of short term customers are partially employed or unemployed. - Between 46 and 50 per cent of short term customers are in receipt of government benefits. - Possibly up to 25 per cent of short term borrowers have incomes that are so low that they fall beneath the Henderson Poverty Line. · Borrowers are largely excluded from being able to obtain credit from mainstream lenders (principally because of their incomes or an impaired credit history). · Borrowers usually have an urgent or immediate need for credit. The most common uses of the funds are to meet the following costs: bills (including utilities), food, rent, and car repairs and registration. There is minimal or negligible use of short term loans for discretionary spending purposes. · There are very few procedural obstacles to obtaining credit, with loans able to be processed quickly, making them an attractive way of meeting the need for credit. A consumer's choice of lender is primarily driven by whether or not they can have address their pressing financial needs through quick and efficient access to credit (and that the price or features of the credit are, at best, a secondary consideration). 11.91 There are currently a range of alternatives to high cost short term loans, such as Centrelink products (both loans and advances on payments), utility hardship programs, and non-commercial microfinance products (primarily no interest and low interest loan schemes). There are also a range of services available, principally financial counsellors, who can assist borrowers to better understand and address underlying problems. 11.92 While it might be expected that consumers in financial stress would be aware of or seek out these alternatives this is not necessarily the case. The 2008 CALC survey found minimal knowledge of these options, in its qualitative surveys.206 Navigating the range of services available to identify appropriate options can prove a formidable task for disadvantaged consumers, and a lack of information `can impact on people's capacity to make informed decisions and actively participate in the life of their community.'207 206 Gillam, p. 264. 207 Julia Farr Association, 2010, Submission to the Social Inclusion Board. 265


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.93 It is also noted that a recent survey of 5,315 respondents had findings that demonstrated a low knowledge by consumers of relatively basic consumer protection issues.208 These findings were: · 10 per cent of consumers were unaware that laws exist to protect them when purchasing products or services in Australia; and · 10 per cent of consumers did not know where they would go to seek advice or assistance if they felt they had been exploited by a business. 11.94 This combination of factors means that borrowers will utilise short term lenders, even where other cheaper alternatives may be available, The level of costs that they may be charged as a result can increase the risk of social exclusion, and in the long-term can impair further their already restricted financial capacity. 11.95 The following tables use data provided in Table 5 above (setting out the range of charges for loans of identical amounts and terms). They show the charges of the highest cost and lowest cost charges for each loan, and the impact of those costs on a consumer with an assumed income of $24,000 per annum, looking at the impact both where they take out a single loan and two consecutive loans. It is assumed, first, that the loans are repaid in accordance with their terms, and without the borrower incurring any default charges, and, second, in respect of the consecutive loans, that 25 per cent of the amount advanced is used to repay the amount outstanding under the first loan (as where the borrower requires two loans in succession they are presumed to be unable to repay the first loan from their own income). Table 11.9Table 9.1: Impact of high and low cost credit on income from a single loan Loan Duration of Cost for a Income Cost as a per amount loan single loan during loan cent period proportion of (assuming income annual during loan income of period $24,000) $300 (LC) 1 week $41.58 $461.54 9.01% $300 (HC) 1 week $195.00 $461.54 42.45% $1000 (LC) 1 week $68.15 $461.54 14.77% $1000 (HC) 1 week $231.01 $461.54 50.05% $300 (LC) 4 weeks $50.68 $1846.16 2.75% 208 Australian Consumer Survey, June 2011, pp. 11 and 26. 266


Chapter 11 -- Regulation Impact Statement Loan Duration of Cost for a Income Cost as a per amount loan single loan during loan cent period proportion of (assuming income annual during loan income of period $24,000) $300 (HC) 4 weeks $113.72 $1846.16 6.16% $1000 (LC) 4 weeks $151.64 $1846.16 8.21% $1000 (HC) 4 weeks $254.52 $1846.16 13.79% $1000 (LC) 1 year $622.68 $24,000 2.59% $1000 (HC) 1 year $2074.76 $24,000 8.64% LC = low cost. HC = high cost Table 11.10: Impact of high and low cost credit on income from consecutive loans Loan amount Duration of loan Reduction in Reduction in income after income during payments to loan period credit provider $300 (LC) 2 weeks $158.16 17.13% $300 (HC) 2 weeks $465.00 50.37% $1000 (LC) 2 weeks $386.30 48.81% $1000 (HC) 2 weeks $712.02 77.13% $300 (LC) 8 weeks $176.36 9.55% $300 (HC) 8 weeks $302.44 16.38% $1000 (LC) 8 weeks $553.28 29.96% $1000 (HC) 8 weeks $759.04 41.11% LC = low cost. HC = high cost 11.96 These tables demonstrate that: · short term loans can have a significant impact on a borrower with an annual income of $24,000, resulting in a reduction of income of between 2.59 per cent and 50.05 per cent for a single loan, and between 9.55 per cent and 77.13 per cent for consecutive loans (noting that the impact will be greater on those borrowers whose income is below $20,000); and · consumers may, in a very short period, be placed in a position where the debt cannot be easily repaid, given that persons on low incomes or in receipt of Centrelink payments 267


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 are unlikely to experience significant changes to their income between payments. 11.97 The risk to a consumer of this financial detriment increases according to the following factors: · The borrower's income -- the lower the income the greater the reduction in income. · The term of the loan -- the shorter the loan the less income the borrower can expect to receive, so that there is little or no opportunity for a borrower to put aside sufficient income to repay the principal plus associated charges, so that the impact will be greater in relation to loans with terms between one week and one month. · The number of loans -- the more loans that the borrower takes out within a short period of time, the more likely it is that income is being diverted to meet repayments, rather than ongoing expenses. 11.98 The financial position of some borrowers, together with the level of costs charged by some short-term lenders, can result in such a reduction in income that the consumer may, in a very short period, be placed in a position where the debt cannot be repaid. If the consumer cannot make the repayments, they have two options: · to default and incur consequent fees and charges; or · to take out a new loan to meet the liabilities under the old contract (with the risk that this may only defer the point at which default occurs, and for a larger amount). 11.99 Table 10 below sets out the default charges that would accrue under a number of contracts currently offered by short term lenders. Table 11.11: Default charges in dollar terms on a loan of $500209 Lender Loan term Charges if Charges if Additional paid on paid 30 days charges time late 1 30 days $787.50 $3,037.50 $2,250.00 2 14 days $186.00 $505.89210 $319.89 3 14 days $105.00 $350.00 $245.00 209 Assumptions: daily compounding interest, payment via direct debit. When a loan is paid late, it is paid 30 days late, one direct debit default occurs, one loan reschedule occurs. Default interest is calculated on the principle amount. 210 Default interest rate is calculated on the amount borrowed, not the fees upon default. The interest is compounded daily. 268


Chapter 11 -- Regulation Impact Statement 11.100 For those consumers who have a loan with a lender who charges daily default fees, the cost of the loan can escalate rapidly to a point where, for a low-income consumer, they would be unable to meet the additional payments required from their regular income. 11.101 The above analysis applies to all short-term credit. However, for the reasons set out above, the circumstances of some borrowers mean that they are particularly vulnerable and unable to make informed choices or negotiate the terms on which credit is provided. This makes them susceptible to unfair conduct. Some short-term credit providers engage in practices that are intended to take advantage of these consumers (and that are regarded as unacceptable by both consumer advocates and the majority of short term lenders). 11.102 These practices include: · Structuring the transaction as a lease to avoid the operation of a State or Territory cap (with the consumer `selling' goods they already own to the provider, with those goods then being leased back to the consumer, at a cost that is legally in excess of the cap). - This practice exploits the likelihood that borrowers will not scrutinise or question the written contract provided to them. · Inflating the number or amount of fees charged to the consumer in relation to the credit contract, in order to artificially increase the principal amount on which interest can be charged. - This implicitly acknowledges that some borrowers will not question the terms on which short term credit is provided. · Deliberately overstating the amount lent to the consumer (for example, as $500 instead of $300), and then charging interest on the higher amount but calculated in accordance with a State cap. - This practice exploits the lack of financial literacy of some borrowers, where payment of the loan proceeds to the consumer is in cash. · In relation to very short term loans, fixing the date for repayment according to when the consumer will next receive a payment of income (which could be as short as three or four days), rather than according to the needs of the consumer. - The use of a direct debit, which is unlikely to be cancelled by the consumer, means that the consumer can be required 269


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 to repay a significantly higher amount (in dollar terms) within a short period, irrespective of the consequent impact on their financial situation. · Structuring the repayments under the loan contract in a way that maximises the likelihood of the consumer defaulting, so that significant default fees can then be charged. - This practice is more likely to be adopted in relation to borrowers who are in receipt of an income through paid employment, where payment of the debt can be enforced through garnishee orders on their employer. 11.103 In summary consumer therefore also face a risk of financial detriment from unfair conduct in these situations. The extent of these practices is unknown but consumer advocates and financial counsellors advise that the conduct is systemic (in that if a lender is likely to adopt a practice in relation to all their customers). Consumer Leases 11.104 A similar dynamic has developed in relation to leases, where low-income consumers make a disproportionate use of a form of finance to arrange the acquisition of goods that is relatively high in cost. As set out above in the RIS, the costs and structure of leases indicates that the class of consumers who largely use leases do so because they do not meet the eligibility criteria of lenders who offer credit contracts, they do not have access to finance through a credit card or they cannot afford to pay cash to purchase the goods. 11.105 For this class of consumers leases may typically finance relatively low-cost goods, where the consumer has to make lower repayments than under a short term loan, but for an extended, or even indefinite, period. Consumers may therefore find themselves: · making payments that they can afford, but without obtaining any long-term benefit in the sense of reaching a point where they own the goods and no longer have to keep making payments; · having to pay several times more for the use and eventual ownership of the goods than if they had access to alternative forms of finance; · being liable to pay additional amounts at the end of the lease to retain possession of the goods; and · being in a position, where they are unable to meet the repayments and default, where they still need to acquire replacement goods (and will have to incur ongoing costs to do so). 270


Chapter 11 -- Regulation Impact Statement 11.106 The risk of this detriment increases according to the following factors: · the amount and number of the repayments -- the higher these are the more the consumer will be paying, without necessarily ever owning the goods; · whether or not the lessor is prepared to sell the goods to the consumer at the end of the term of the contract, and, if so, the amount they charge for this -- the higher the cost charged to secure ownership the more likely the consumer will be unable to afford to pay that amount as a lump sum, and may therefore have to make ongoing payments as they continue having to lease the goods; · whether or not the leased goods are second-hand -- where this is the case the amount the consumer is paying can be much higher relative to the value of the goods (without the consumer necessarily being aware of this); and · the location of the consumers -- individuals in remote communities have limited or no access to alternative sources of finance, and can therefore be charged significantly high costs (in some cases at a level equivalent to an interest rate of 83 per cent). Limitations of responsible lending obligations 11.107 As discussed above, short term lenders and providers of leases have been required to comply with responsible lending obligations under the Credit Act since 1 July 2012. However, this obligation does not directly address the risks identified above, for the following reasons. 11.108 First, the responsible lending obligations require the credit provider or lessor to assess whether or not the consumer can afford the repayments under the contract without substantial hardship, and do not directly impact on the cost of credit. Credit providers and lessors therefore cannot set the repayments at a level the consumer cannot afford to repay. In some situations, this may result in the consumer having to meet lower repayments than would otherwise be the case. However, this would apply on an individual basis, and does not provide a comprehensive response in the same way that an upfront limitation on costs would. 11.109 It is noted that the introduction of the responsible lending requirements could be expected to have the greatest impact on very short-term loans with a single high repayment. However, there do not appear to have been any significant changes to practices in this area. 11.110 Secondly, the responsible lending obligations require each contract to be considered in isolation. In the case of repeat borrowings 271


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 this will mean that it is not possible to consider the cumulative effect of a series of contracts with the same lender. 11.111 Finally, there are practical limitations in establishing whether or not a consumer can afford the repayments under short-term contracts. For these consumers, it depends on being able to precisely establish what their living expenses are, and this can be difficult in practice. Relationship between use of short term loans and consumer leases and social exclusion 11.112 The potential impact on consumers from the reduction in their income arising from short-term lending or consumer leases is not only financial. The number of consumers in this class can be estimated by using as a proxy the number of persons who either do not hold a credit card or would be unable to use an existing credit card to raise $3,000 in cash in case of an emergency (that is, they have largely exhausted the credit available through their card). 11.113 A recent survey estimates that approximately 1,444,000 individuals would fit into this category, with 11.6 per cent of survey respondents having used a fringe lender to raise funds in an emergency.211 11.114 Financial exclusion can result in or contribute to a range of broader social problems as the ability of consumers to meet their living expenses decreases, and their standard of living reduces. There can be a reciprocal relationship between low or declining incomes and other problems, so that financial exclusion can cause, reinforce or stem from other elements of disadvantage. The potential problems that can contribute to ongoing social exclusion and a cycle of disadvantage can therefore be self-reinforcing. There will also be an element of self-selection in that consumers who use short-term lenders or providers of leases are more likely to be vulnerable in the sense of lacking the capacity or external support to be able to identify other cheaper forms of credit, or external sources of assistance. 11.115 The range of social problems is broad and can include: · Health problems -- 35 per cent of people in lowest income quintile report fair or poor health compared to only 7 per cent in the highest income quintile.212 People experiencing 211 Connolly, C., Georgouras, M., Hems, L. and Wolfson, L., Measuring Financial Exclusion in Australia, Centre for Social Impact - University of NSW, 2011, for the National Australia Bank, pp. 8 and 27. 212 Australian Social Inclusion Board, Social Inclusion in Australia How Australia is faring, January 2010, p. 1. 272


Chapter 11 -- Regulation Impact Statement financial hardship have higher rates of suicide and self-harm than the rest of the population.213 · Intergenerational joblessness -- jobless families with dependants may not be able to access or provide resources that would assist children in their development (such as healthy foods, educational materials); this increases the likelihood that these dependants will be unable to break free from the cycle of disadvantage.214 · Increased incidence of being motivated to commit crimes -- 49 per cent of prisoners in a recent Australian study of women prisoners and debt said that they had committed crime to repay a debt.215 · Inadequate housing -- people experiencing financial hardship are more likely to live in housing that does not meet their needs, with consequent risks on their health or relationships.216 · Adverse responses to financial stress -- other facets of a cycle of disadvantage may include relationship breakdown, mental health issues, drug use, homelessness and domestic violence.217 All of these outcomes may precipitate a crisis or emergency that can result in a need for credit. 11.116 In conclusion, the risk of financial harm from being charged excessive costs cannot be considered in isolation. It is likely to have a dynamic relationship with other components of disadvantage (such as poor health or housing), such that there can be a propensity for one type of disadvantage to cause or exacerbate the other. 213 Ibid. 214 Reference Group on Welfare Reform, Participation Support for a More Equitable Society, Final Report, FaCS, Canberra, 2000. 215 Stringer, A., CRC Justice Support, Women Inside in Debt, the Prison and Debt Project, Broadway, Sydney, 2000, 10. The project used a combination of research techniques, including a survey by questionnaire of 121 prisoners and 4 follow up interviews, plus focus groups and unstructured interviews with key stakeholders. 216 Western Australian Council of Social Service Inc, ER Factsheet #5. 217 Department of Families, Housing, Community Services and Indigenous Affairs, Community Development Finance Institutions (CDIs) Scoping Study, Chapter 1: The Nature of Financial Exclusion, 2009. 273


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Objectives of Government Action 11.117 The objectives of government action are to: · assist consumers to have a greater degree of social and financial inclusion; and · mitigate the particular risks associated with short term credit (and to do so in a way that minimises the risk of avoidance). Options Introduction 11.118 Some of the options discussed below will restrict the level of costs that can be charged by short term lenders. In order to ensure the above objectives can be met, it is therefore necessary to analyse the profitability of the short term lending market. 11.119 Providers note that underlying costs and risk means that the costs of arranging short term loans are more expensive relative to the amount being borrowed than larger longer term loans. In submissions to the Green Paper many lenders argued that a 48 per cent cap inclusive of fees and interest (as currently applies in New South Wales) was unsustainable for the short-term, small amount lending industry: · Cash Stop stated that a 48 per cent cap means effectively earning a gross amount of less than $1 per hundred dollars lent per week. In other words for an average four week loan of $350, the lender would gross $14. · Fast Access Finance stated in its Submission that the current `legislated [comprehensive] interest rate caps are set at a level where the total cost achievable is below primary costs, let alone achieving a profit.'218 · The NFSF points out that a $10 fee on a $100 week-long loan is the equivalent of an APR in excess of 500 per cent. A $20 fee on a $100 week-long loan would the equivalent of an APR in excess of 1000 per cent per annum fee. · Min-it Software reported that lenders for whom it provided software in States with comprehensive caps had seen their incomes shrink and that, in the past 2 years, this has resulted in staff losses in excess of 160. Min-it Software stated that it had lost 27 clients due to the interest rate caps in some States and Territories.219 218 Fast Access Finance, `Response to National Credit Reform Green Paper' 2010, p. 14. 219 Min-it Software, p. 17. 274


Chapter 11 -- Regulation Impact Statement 11.120 The actual cost of providing these loans across the industry has historically been difficult to ascertain, and is subject to a high degree of variability. Costs will depend on the efficiency and scale of the business and the amount and the term of the loans: · Cash Converters' response to the Green Paper stated that the average cost per $320 transaction was $76.07, and the average profit was $35.93, resulting in a cost to the consumer of $112.220 Their charges across a range of credit products are set out in Annexure A, and vary from State to State with the cost structure reflecting the regulatory arrangements in different jurisdictions in respect of a cap on costs. · In 2010 the National Australia Bank reported on the findings from a Small Loans Pilot launched in May 2008. One objective of the pilot was to determine the `viability of a lending model that could operate within the fringe credit market and offer small loans over 12 months at a break-even rate'.221 The loans provided were from $1000 to $5000, and had a term of 12 months.222 Therefore the study did not provide insight into costs of providing smaller amount, shorter term payday loans. The study emphasised that the cost of providing credit was very much dependent on loan amount, loan term and the size of loan portfolio.223 It found that: - It was possible to provide loans of approximately $2900 over 12 months, with a portfolio of 3000 loans, make a modest profit and be below the government regulated interest rates of 48 per cent per annum. A 32.8 per cent APR was needed to break even on loans of this size (or $18.70 interest for every $100 lent). 224 If a modest profit of 20 cents in the dollar was added, an APR of 39 per cent would be needed.225 - Assuming the same costs, it reported that `it is not possible to make a profit and legally operate with the 48 per cent per annum cap for loans of $1700 or smaller, 220 Cash Converters, 2010, p.10. 221 NAB Loans Pilot, Foreword. Note that there are likely to be cost differences for a major ADI lender conducting a specialist pilot program with sophisticated record keeping and lending protocols and smaller or single person lending businesses conducted from suburban shop fronts. 222 Note that not all applicants were successful in accessing the loans. 223 NAB, p. 12. 224 NAB, p. 4. 225 NAB, p. 13. 275


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 for a portfolio of 3000 loans or less, for loan terms of one year or less'. For a company writing $100 million of loans per year, the smallest average size loan possible would be $605 at an APR of 48 per cent (making a profit of 20 cents in the dollar). This lender would need to write 165,000 loans per year.226 11.121 The data would suggest that approximately $20 to $30 per $100 is required to generate a reasonable return on providing loans up to a certain limit (under $300), noting that this will vary between lenders and that the shorter the loan term the higher the repayments will need to be to generate a return. After this point, it could be expected that costs would reduce relative to the amount borrowed (as the majority of the costs incurred by the lender arise in arranging the loan do not vary according to the size of the loan). 11.122 It is noted that Ernst & Young LLP prepared a report on payday lending costs for the Ontario Government in 2009. The analysis was based on a survey of the cost structures of nine payday lenders in that province. Based on the (unaudited) information received Ernst & Young calculated a weighted average cost of $21.50227 per $100 lent.228 Although operating in a different market, the figure provides some indication of costs of the business. Ontario has implemented a cap at this rate ($21 per $100 lent). Other Canadian jurisdictions have taken a similar approach with caps varying from $17 to $31 for every $100 borrowed. 11.123 Annexure B shows the approach to capping taken in Europe, the United States and the United Kingdom. Many countries have chosen this avenue as a way to moderate fees and charges for credit. 11.124 The way in which Options 1.1, 1.2 and 1.3 would result in the application of a cap are summarised below. Table 11.12Table 11: Summary of Options 1.1 -1.3 Option Commonwealth State and Territory regulation regulation 1.1 Maintain the status No legislation Regulation of costs quo through different caps 1.2 Cap on costs -- All contracts subject to State and Territory flat-rate the same cap laws may be repealed 226 NAB, p. 13. 227 $22.07 unweighted. 228 Ministry of Small Business and Consumer Services Ontario `The Cost of Providing Payday Loans in Ontario' 2009, p. 2. 276


Chapter 11 -- Regulation Impact Statement Option Commonwealth State and Territory regulation regulation 1.3 Cap on costs -- Contracts subject to a State and Territory tiered approach cap with cap laws may be repealed. determined according to the loan amount and the term of the contract. Option 1.1: Maintain the status quo 11.125 Under this option, the Commonwealth Government would not introduce further regulation that would impact specifically upon short term lending, including the cost of short term credit. 11.126 Under this option, governments may either elect to continue existing State and Territory interest rate caps or, over time, introduce caps (noting that South Australia was proceeding with this approach prior to the transfer of responsibility for credit to the Commonwealth). It is noted that the Intergovernmental Agreement for Credit would still allow States and Territories the option of regulating the cost of credit. 11.127 Phase One of the National Credit Reforms will have an impact on the small amount lending market through the introduction of, first, a requirement for such lenders to hold an Australian credit licence (where they provide products that are regulated by the Credit Act), and, second, responsible lending requirements. 11.128 These changes (relative to the regulatory scheme previously operating in the States and Territories) will have the following impacts: · Licensing requirements will enable ASIC to ban credit providers who consistently do not comply with the Credit Act, or other legislation, in their dealings with borrowers. · Responsible lending will require credit providers to specifically consider whether the consumer can afford the repayments under a short term contract without substantial hardship, and whether it meets the borrower's requirements. 11.129 These new requirements do not directly regulate the cost of lending and will therefore have a marginal impact on the problems associated with the cost of short term lending and the consequent risk of financial harm to consumers. Impact on Consumers 11.130 There will be no new impacts on consumers under Option 1.1, or any change from current arrangements. There will continue to be different controls over the cost of credit according to the State or Territory in which they reside. 277


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.131 This may change over time depending on the approach taken by States and Territories in response to a Commonwealth decision to not introduce interest rate caps (noting that all consumers will have the benefit of Phase One of the National Credit Reforms), and whether those jurisdictions without a cap introduce one. Impact on Short Term Credit Providers and Lessors 11.132 As the approach to interest rate caps varies across the different Australian jurisdictions, national providers of short term loans will continue to have to comply with different obligations in each State and Territory that has a cap. Lenders will also face uncertainty into the foreseeable future about the existence of caps in other States and Territories, and may face, over time, different regulatory requirements evolving in each jurisdiction. 11.133 Cash Converters in its 2010 submission to the Green Paper identified the following costs as multiplying where they have vary from jurisdiction to jurisdiction according to the regulatory requirements in that State or Territory: · legal drafting and compliance costs; · information software and technology requirements; · government and network communications requirements; · store compliance auditing; · state-based training requirements; · store-based training requirements; and · communications and marketing regulatory compliance.229 11.134 Payday and micro lenders who currently only operate in States or Territories that do not have a cap would face compliance costs should this situation change. Option 1.2: Cap on Costs -- Flat-rate 11.135 A flat-rate cap currently exists in a number of Australian jurisdictions and is defined as a cap that imposes a single maximum annual percentage rate across the consumer lending market, and applies in the same way to all credit products (rather than varying according to the type of product). It is a `hard cap' in the sense that charges in excess of the cap are strictly prohibited (rather than the cap being the trigger for additional conduct or disclosure obligations). 229 Cash Converters 2010, p. 16. 278


Chapter 11 -- Regulation Impact Statement 11.136 In order to be effective the cap would be need to be comprehensive: · by applying to all regulated products (including consumer leases) -- to address the risk of avoidance that would arise if, for example, the cap only applies to amounts under a specified figure or for a particular term; and · by applying a broad definition of the costs that are to be taken into account in determining whether the cap has been exceeded -- as otherwise additional costs can be imposed on customers by increasing the amount payable in respect of costs not specified as being included in the cap. The scope of the definition of costs to be taken into account would address structures that have been historically used to avoid the effect of price caps in the States and Territories (for example, the artificial use of brokers to increase the amount of fees charged to the borrower or the charging of deferred establishment fees that are expressed as contingent in the contract but are payable in practice). 11.137 The use of consumer leases creates particular difficulties for low-income consumers. However, it is also the case that regulating the cost of credit contracts and not regulating the cost of consumer leases would encourage avoidance techniques that rely on `artificial' consumer leases (noting that some stakeholders suggest this is already happening in response to the caps in New South Wales and Queensland). 11.138 As a flat-rate cap is inflexible it can have the following consequences: · The cap can be set relatively high; in order to take into account the higher costs charged by a particular subset of the market, with the consequence that the regulation is largely ineffective for other sectors of the market. · The cap can be set too low, and therefore risk putting out of business large parts of the market (as has been argued in relation to the current cap in New South Wales, of 48 per cent). 11.139 This issue was identified by the 1973 UK Inquiry into Consumer Credit Reform, with the Government stating that `It would not be realistic to try to set a rate which could be reasonably applied to every type of transaction. Whether a rate is excessive essentially depends on such circumstances as the size and duration of the loan, whether it is secured or unsecured and, if unsecured, the credit worthiness of the borrower'.230 230 Department of Trade and Industry, Reform of the Law on Consumer Credit, 1973, quoted in Office of Fair Trading, `Report of the Review on High Cost Credit' Annexe B - Price Controls, 2010, p. 28. 279


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.140 The flat-rate cap would be set at a level, based on the experience of the States and Territories, which sought to minimise these consequences. 11.141 Consumer leases would be subject to a cap determined according to the underlying value of the leased goods, rather than the amount borrowed. Impact on Consumers and Short Term Credit Providers and Lessors 11.142 The impact of a flat-rate cap on consumers and providers will vary depending on the level at which the cap is set up: · If it is set at a high level, it may have little impact on lenders and provide minimal new protections to borrowers. · If it is too low, it may restrict the availability of short term credit by limiting charges to such an extent that short term lending businesses becomes unprofitable. The consequences of this could be either greater exclusion from the credit market of certain sections of the Australian population, or the emergence of an unregulated market in short term credit. 11.143 However, on the assumption that a flat rate cap is set at the same level or a similar rate to the existing cap in New South Wales and that it is comprehensive (in that it includes both fees and interest), this reform is likely to have the following consequences for lenders: · Some lenders would exit the market -- there is evidence that following the introduction of comprehensive caps in New South Wales and Queensland at least 27 lenders have ceased trading in the last two years.231 These lenders are most likely to be smaller businesses who find the cap makes lending unviable, or those running an inefficient business model. This impact would be greatest in those jurisdictions that do not currently have a cap (Northern Territory, South Australia, Tasmania and Western Australia), and more limited in other jurisdictions that have already adapted to existing caps (where the majority of lenders who could not operate with a cap may already have exited the market). · Some lenders would continue to operate but seek to recover a similar level of costs to those they currently receive by adopting a range of methods to avoid the comprehensive cap -- At least nine different avoidance techniques have been 231 Min-it Software, p. 17. 280


Chapter 11 -- Regulation Impact Statement developed in New South Wales and Queensland, including the use of other exemptions, provision of finance through continuing credit contracts or leasing arrangements, and mandatory requirements for borrowers to purchase additional goods or services from the provider. - Lenders whose primary motivation is to earn as high a return as possible from borrowers are likely to utilise avoidance techniques. - These avoidance techniques create a range of new problems for consumers, including a lack of transparency in disclosure, and a continuing risk of financial harm, so that the regulation may be ineffective in achieving its desired outcomes. It would therefore be necessary to address this risk through applying the cap in a way which mitigates the scope for avoidance, and addresses identified techniques. · A small number of lenders may continue to operate by complying with the cap. This particularly applies to larger lenders who are better able to provide lower-cost loans through economies of scale, and are more likely to have a market presence which means that they can attract a greater share of those consumers who previously used those lenders who have ceased operating. - These lenders would have lower revenue per contract, but have a larger volume of contracts. They would also incur compliance costs in implementing the cap (although, for national providers, this would be partially offset by no longer having to meet varying obligations in different jurisdictions). 11.144 This change in the market would allow consumers continued access to short-term credit as follows: 11.145 From a small number of lenders who comply with the cap -- where the cost of credit would be cheaper than is currently the case. · From other lenders who structure the transaction to avoid the cap -- where the cost of credit is likely to be similar to current charges, but the contracts would be more complicated, and the cost of credit disguised or understated (for example, because the consumer must also purchase other goods or services from the credit provider). 11.146 It may also result in some borrowers being refused credit when this would not have been the case previously, where the return that can be earnt from contracts with these borrowers is deemed insufficient to justify the risk. It is considered that this would be a relatively small number of 281


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 borrowers as, first, it would only be an outcome in those jurisdictions that currently do not have a cap, and, second, the difference in risk is unlikely to be significant in dollar terms for lenders where they are advancing small amounts (that is, they may respond to this change not simply by refusing credit but, for example providing smaller loans). This outcome would not be new, in the sense that there are currently persons who are unable to access any form of credit, even of a short term nature, and who therefore need to utilise existing Government and community services. 11.147 The experience in New South Wales and Queensland suggests it is unlikely that there would be any significant increase in loan sharks (defined as lending that is characterised by extremely high costs and where payment can be extracted by threats of violence, due to links with criminal activity). In these States, the primary response from mainstream short term lenders has been avoidance rather exiting the market, so that any gap from a reduction in the number of lenders is filled by other short term lenders rather than loan sharks. It has been suggested that part of the reason for this is that consumers usually are unacquainted with loan sharks, and are therefore unlikely to resort to them. 11.148 This experience is consistent with a recent review of interest rate restrictions in the European Union, which found that there was no evidence to establish that controls on costs had caused growth in any market in illegal credit, and found indicating that the presence of illegal lending is more significant in countries without interest rate restrictions, suggesting. 11.149 That illegal lending is more attributable to factors other than interest rate caps.232 11.150 In summary (assuming the flat rate cap was based on the New South Wales model), this option can be expected to have the following costs and benefits: · It is unlikely to provide significant benefits for consumers, and can be expected to have a limited impact on cost (because of the development of avoidance techniques); and · It will have a relatively low impact on providers, although it could be expected that some short-term lenders would cease operating in those jurisdictions that do not currently have a cap (Northern Territory, South Australia, Tasmania and Western Australia). 232 iff/ZEW (2010): Study on interest rate restrictions in the EU, Final Report for the EU Commission DG Internal Market and Services, Project No. ETD/2009/IM/H3/87, Brussels/Hamburg/Mannheim, XIII. 282


Chapter 11 -- Regulation Impact Statement Option 1.3: Cap on Costs -- Tiered Approach 11.151 A tiered interest rate cap or ceiling would place a maximum limit on the cost of credit, with the cap adjusted to meet different segments of the market, according to the features or characteristics of the type of credit being extended. A tiered cap, unlike a flat rate cap, is therefore able to take into account the different costs associated with different forms of loan. 11.152 Again, in order to be effective the cap would be need to be comprehensive, both in terms of the products it applies to and the costs that are to be taken into account in determining whether the cap has been exceeded. 11.153 The maximum cost for different forms of loans would vary according to the following factors: the loan amount, the term of the contract and whether security has been taken. A tiered cap would limit the maximum amount charged using a different formula for different segments as follows: · For short term small amount loans -- a total charge for credit based on a cap for each hundred dollars advanced, with this also adjusted according to the term of the contract. · For all other regulated forms of credit -- an annual percentage rate. · For default costs -- a cap on costs so that, for example, an annual percentage rate of 48 per cent cannot continue to be charged on an ongoing basis. 11.154 The rate at which the cap would be set would be determined as follows: · For short term loans -- taking into account the lowest amounts commonly charged by short term lenders in Australia (enabling the cap to be set at a level that results in consumers paying a controlled price for credit, while still allowing some lenders to achieve a return on this type of lending that allows for a profit). · For all other regulated forms of credit -- the annual percentage rate would be set taking into account the experience of the cap in the States and Territories where it currently operates. 11.155 The definition of a short term small amount unsecured loan would also be the subject of further refinement, but is likely to cover loans of $2,000 for a period of either 12 or 24 months. 11.156 Similarly consumer leases would be subject to a tiered cap, but with the cap determined according to the underlying value of the leased 283


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 goods, rather than the amount borrowed (so that the cap for short-term leases is set at a maximum figure for each $100 of the value of the goods, and for other leases the maximum charge allowed would be a charge calculated as an interest rate (using the market value of the leased goods as an equivalent to the amount financed). 11.157 The differences in costs that can be charged between this approach and that in Option 1.2 are summarised in Table 12 below (assuming that a rate of $30 per $100 advanced is allowed). Table 11.13Table 12: Comparison of costs payable under Option 1.2 and 1.3 Loan amount and term Option 1.2 flat rate Option 1.3 tiered cap cap (48% per annum) $30 per $100 $300 for 1 month $4.81 $90 $300 for 3 months $14.43 $90 $1,000 for 1 month $21.13 $300 $1,000 for 3 months $63.39 $300 Note: The amount earned will vary according to the frequency and amount of repayments under the contract, as each repayment will reduce the principal amount on which interest can be charged. Impact on Short Term Credit Providers and Lessors 11.158 The tiered cap specifically address the concerns of the short term lending industry who have in the past emphasised that a flat rate cap does not acknowledge the difference between short term credit and other forms of consumer credit.233 As set out above, it is proposed that the cap would be consistent with costs charged by short term lenders at the lower end of the scale. 11.159 This option would have the following consequences for lenders: · Some lenders will be able to continue to operate and comply with the cap with minimal or no changes to the level of costs they charge. - Some but not all lenders would have lower revenue per contract. - Lenders would also incur compliance costs in implementing the cap (although, for national providers, this would be partially offset by no longer having to meet varying obligations in different jurisdictions). The main 233 Howell, p. 86. 284


Chapter 11 -- Regulation Impact Statement cost would be in adapting existing software to enable loan amounts and terms to be calculated in accordance with the cap. This cost is estimated at between $2,500 and $10,000 for most lenders. - Lenders would be under pressure to reduce operating costs. · Some lenders would exit the market, but fewer than under Option 1.2. By comparison with that option, it is more likely to be those lenders who are reluctant to comply with the cap because they want to keep charging costs that are uncompetitive. · Some of these lenders would continue to operate but seek to recover a similar level of costs by adopting a range of methods to avoid the comprehensive cap (again requiring specific anti-avoidance measures). 11.160 Again, it is unlikely that there would be any increase in loan sharks. This risk would be even lower than under Option 1.2, given that it is expected a larger number of lenders would remain in the market. 11.161 In South Africa, the introduction, in 2007, of a tiered cap has had a largely positive impact on the market with commercial institutions coping well, micro-lending continuing to grow and micro lenders extending business by using technology to keep costs to a minimum.234 Impact on Consumers 11.162 A tiered cap will have the following consequences: · It will limit the cost of credit for consumers, so that they will no longer be charged relatively high costs for these types of credit, thereby better enabling them to manage their finances. This will particularly assist those consumers who use short-term lenders who charge higher costs, and where therefore the risk of a debt spiral is greatest. · It will reduce the incidence of repeat borrowings where this is the result of consumers becoming dependant on short term lenders due to the drop in income they experience when repaying a loan. This will minimise the risk of debt spirals arising from multiple borrowings. 234 M Whittaker, `South Africa's National Credit Act: A Possible Model for the Proper Role of Interest Rate Ceilings for Microfinance', 28 NW. J. INT'L L. & BUS. 561, p. 573. 285


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 · It allows consumers access to this form of credit through the continued operation of those short term lenders who currently charge costs below or at the rate of any cap (and from those lenders who elect to reduce their costs to come within any cap). It reduces the incentives for lenders to adopt avoidance techniques where they now have certainty about the ongoing nature of regulation in this area. · Those consumers who experience financial difficulties through multiple borrowings will have debts that are smaller in size, making it easier for financial counsellors and similar agencies to resolve their problems where they do seek assistance. Impact on other Credit Providers 11.163 This reform would be expected to have a minimal impact on other credit providers, as the operation of the existing caps has only identified one situation where mainstream products are inadvertently regulated by the cap. This is where bridging finance is provided to a borrower -- between the sale of one property and the purchase of another -- and the amount of charges may be relatively high where the bridging is only provided for a very short period. This situation could be specifically exempted from the operation of a cap. 11.164 It may be preferable to provide certainty by providing that the tiered cap does not apply to credit provided by an Authorised Deposit-Taking Institution (to avoid any other inadvertent application of these requirements to their products). 11.165 In summary, this option can be expected to have the following costs and benefits: · It maintains the profitability of short term lending for providers, and therefore allows consumers continued access to these products. · It reduces the risk of financial detriment to consumers resulting from excessive charges. · It results in compliance costs for lenders, but these are offset by a reduction in compliance costs from inconsistent State and Territory regulation, while the industry has certainty about its continued viability. Option 1.4: Specific Protections 11.166 This Option proposes a series of specific protections for consumers to address the risks associated with short term lending. These protections could operate as an alternative or as a complement to a hard 286


Chapter 11 -- Regulation Impact Statement cap on costs; that is, if a cap on costs is introduced, the definition of the particular types of short term loans that would trigger these additional obligations would be determined so that it applied to loans permitted by the cap. 11.167 The following protections would be introduced in relation to short term contracts. Restriction on refinancing and multiple loans 11.168 The following measures are proposed in order to reduce the extent to which borrowers may make recurrent or regular use of short term lending: · A credit provider is unable to advance a short term loan to a consumer where the consumer already has a short term loan with that credit provider. · A credit provider must not use any part of an amount advanced to discharge a liability of a borrower under an existing loan with that credit provider. · Restricting the circumstances in which a credit provider can renew or extend a short term loan that has not been repaid by its due date, including restricting the charges a lender can impose for extending such a contract. · Introducing specific responsible lending obligations to address the following situation: - where a borrower seeks to enter into multiple short term loans one after the other; and - where a provider of credit assistance is assisting a consumer to enter into a short term credit contract, or recommending such a contract, where the consumer is still making repayments under an existing short-term contract. 11.169 The first two requirements are intended to address the risk of repeat borrowing by prohibiting this conduct. It is not considered that these changes would have a negative impact on competition between short term lenders as, first, the obligations apply equally to all lenders, and, secondly, some consumer may respond by seeking finance from other lenders and, in consequence, develop a better understanding of the range of lenders and products available. 11.170 The third requirement indirectly seeks to encourage lenders to provide loans with longer terms and lower repayments. This is likely to result in better outcomes for consumers as they are more likely to be able to afford those repayments without a significant impact on their financial position. 287


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.171 The introduction of new responsible lending obligations will ensure that lenders and brokers develop practices to address specific high risk practices, while still allowing consumers access to credit in appropriate situations. 11.172 These measures are specifically designed to minimise the risk of a debt spiral. These reforms may also indirectly encourage lenders to provide contracts with longer terms and lower repayments, as they can no longer rely, to the same extent, on generating revenue through repeat or multiple borrowings. Disclosure requirements 11.173 Short term lenders would be required to meet additional disclosure requirements to consumers, including 11.174 A requirement to disclose the cost of the loan on application (that is, at an earlier point in time than is currently the case, when the cost only needs to be disclosed when the consumer is entering into the contract); and · where the lender has a website on which applications for credit can be made -- a supplementary requirement for the lender to provide comprehensive information about their fees and charges (again to be available prior to application). 11.175 The analysis in the RIS suggests that disclosure of fees and costs will have only a limited impact on consumers, as they are primarily motivated by factors other than cost. Accordingly, it is proposed that these requirements would be simple and straightforward in nature, to minimise the costs to lenders. Reporting requirements 11.176 Short term small amount credit providers will be required to report information annually to ASIC in relation to their short term loan portfolio. This would include information such as: the number of loans, extent of repeat borrowing, average default rates, a list of all fees and charges and the circumstances in which they are charged, and, for lenders with a website, details about compliance with disclosure requirements that apply to internet access. 11.177 This will assist in ensuring greater transparency in the implementation of the reforms (given that currently there is low visibility in respect of complaints). This will help identify the consequences of the reforms for future reviews. 11.178 The reporting period may only be for a two year period following the introduction of the reforms, with the measuring of usage and 288


Chapter 11 -- Regulation Impact Statement outcomes in this way enabling the effectiveness of the reforms to be accurately assessed. Impact on consumers 11.179 The protections discussed in this option will: · address some of the high risk features associated with short term lending; · enable consumers to have continued access to this form of credit, but restrict repeated access; and · introduce greater accountability of short term providers of finance. 11.180 It will not offer the same level of protection, in terms of regulating the cost of credit, as Options 1.2 or 1.3, and consumers may therefore continue to face some of the same risks, in relation to paying relatively high costs for access to credit. Impact on Short Term Credit Providers and Lessors 11.181 The protections discussed in this option will: · result in either a decrease in the amount of credit provided or a decline in the rate of growth of these products, as the level of repeat business is reduced, due to constraints in respect of `rollovers'. · impose compliance costs on lenders. Impact on other Credit Providers 11.182 This reform would be expected to have a minimal impact on other credit providers, as the types of contracts to which these protections would apply are generally not offered by mainstream providers. 11.183 These protections could, however, be specifically excluded from applying to credit provided by an Authorised Deposit-Taking Institution (to avoid any inadvertent consequences). 11.184 In summary, this option can be expected to have the following main costs and benefits: · It reduces the risk of financial detriment to consumers resulting from repeated use of these products. · It results in compliance costs for lenders. 289


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Option 1.5: Encourage Consumers to use Alternative Sources of Short Term Loans or seek Assistance from Financial Counsellors 11.185 This option would operate on a standalone basis or complement any of the previous Options. Under this option measures would be taken to encourage greater use of financial counsellors and to promote awareness of the following alternatives to high cost short term loans: · Centrelink products; · utility hardship programs; and · non-commercial microfinance products (primarily no interest and low interest loan schemes). 11.186 The scope and operation of these alternatives are set out below, followed by a discussion of the way in which obligations could be introduced to encourage greater use of these alternatives. Centrelink products 11.187 Centrelink provides lump sum advances of social security payments. The amount and frequency of the advance is limited according to the type and rate of a consumer's benefit. Advance Payments are only available if a person can afford to repay over the following six months, and will not suffer financial hardship as a result. 11.188 People who are provided with Age Pension, Carer Payment, Disability Support Pension, Widow B Pension and Wife Pension are entitled to up to three advances over a six month period. The cumulative amount is limited by a maximum limit, and all advanced amounts must be above a minimum limit. Limits are determined by a person's benefit payment rate. Once an advance has been paid off further advances may become available. 11.189 People who are provided with Abstudy, Newstart Allowance, Parenting payments, Widow Allowance or Youth Allowance benefits are entitled to one advance sum payment per annum of between $250 and $500. The money must be repaid over six months by reducing the main payment. The payments are interest free. 11.190 Centrelink also provides a pension loan scheme, which is a voluntary arrangement that provides support in the form of a loan (paid in regular fortnightly instalments) for people of age pension vintage, who are not eligible for a pension, or who only receive a part pension, so they can access capital tied up in their assets. 11.191 Social Security Hardship benefits are also available to people in severe financial hardship, which can assist people experiencing financial 290


Chapter 11 -- Regulation Impact Statement difficulties and cannot be reasonably expected to liquidate (or borrow against) assets at short notice. Utility programs 11.192 Across Australia energy companies have payment programs designed to assist consumers in hardship. In addition to these programs many States and Territories have concession schemes, rebates and other relief, generally for concession card holders. Annexure C summarises some of the current range of programs available to provide assistance to a consumer who is struggling to meet utility bill payments. National Legal Aid has suggested that there is currently limited awareness of Utility Financial Assistance Programs. Mandatory disclosure of information about the existence of these Schemes by small amount lenders could assist.235 11.193 The Second Exposure Draft of the National Energy Customer Framework was released in November 2009. The legislation will implement a national regime for the non-economic regulatory aspects of energy distribution and retail, is proposed to come into effect in all States and Territories (except Western Australia and the Northern Territory) between mid-2011 and mid-2013. This will introduce a unified hardship regime, which will require payment plans to be offered to hardship customers and those experiencing financial difficulties. Microfinance programs 11.194 There are a range of microfinance programs that provide no or low-cost short term small amount loans. These loans are generally only available to low income consumers or consumers in receipt of government benefits. In October 2009 the Government announced targeted funding to support the Good Shepherd Youth and Family Service/NAB No Interest Loans Scheme (NILS), StepUP and AddsUP programs and the Brotherhood of St Laurence/ANZ Saver Plus and Progress Loans programs.236 11.195 This support was extended under the 2011/12 Budget, with the Government committing $60.6 million over four years to continue these and other micro-finance and financial literacy initiatives, including $6.2 million over four years to support financial literacy services for Indigenous people across Australia. 235 National Legal Aid Submission. 236 Joint Media Release, Prime Minister and Minister for Families, Housing, Community Services and Indigenous Affairs, `Financial measures to support struggling Australians', 15 October 2009. 291


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.196 Currently, the demand for these products is less than the available supply, so that there is an existing capacity to meet an increase in requests following the introduction of the reforms. Implementation 11.197 This option would have two distinct aspects: the first would be to impose specific obligations on short term lenders, requiring them to notify borrowers of these alternatives; and the second would be better marketing of the Centrelink advances and government microfinance programs. 11.198 Under this option short term lenders would be subject to obligations that would alert potential borrowers to the existence of these alternatives by: 11.199 Providing a concise high impact notice about the existence of these alternatives, prior to the consumer entering into a contract. · Where the borrower applies online, requiring the lender to display similar information to the borrower before an application can be commenced, together with a hyperlink to the ASIC financial literacy website (so that, to the extent lenders make use of the internet, this technology can be adapted to deliver messages to consumers). · Where the borrower is in receipt of Centrelink payments, providing consumers with a remedy where it would have been more suitable for them to obtain an interest free advance through Centrelink. 11.200 This option would also see existing education or financial literacy programs used to provide information to consumers, to encourage better decision-making by consumers in relation to the use of short term credit and leases. There are currently a range of such programs, including: · Delivery of financial literacy information through ASIC's new MoneySmart website (http://www.moneysmart.gov.au/). This website offers all Australians personalised money guidance, support and encouragement to empower them to take control of their finances, and could be used to provide tailored information in relation to alternatives to short-term lending and leases (coupled with a requirement on providers to provide a hyperlink on their websites, where they have one). · Centrelink's Financial Information Service (FIS), which provides individuals with information and assistance regarding specific financial issues (including sensible use of credit and debt reduction options). This free education and 292


Chapter 11 -- Regulation Impact Statement information service is available to everyone in the community through Centrelink offices around Australia. Impact on Consumers 11.201 As noted above there is limited awareness by consumers of alternatives to short term small amount finance. The more disadvantaged or isolated the consumer the greater the likelihood that they will be unaware of these options. 11.202 It is expected that disclosure of these alternatives would have the following impacts: · low-income consumers, for whom small savings in dollar terms can have a significant impact, would have a greater motivation to explore these alternatives; · borrowers who are in default with a number of other creditors would be likely to use a financial counsellor as a source of advice and assistance that can address the entire range of their problems; · the repeated provision of this information for borrowers who regularly use this form of credit would, over time, reinforce the availability of these alternatives, and encourage consumers to make use of them as they come to realise the costs involved, and the impact on their financial situation; and · No Interest Loans Schemes that provide finance for the purchase of household goods are likely to be particularly utilised by eligible consumers as an alternative to high cost consumer leases. 11.203 The impact on consumers who decide to use one of the alternatives to a short term loan is likely to be: · a reduction in the amount the borrower will spend to access credit or obtain household goods (because of the lower charges associated with the alternative products); · where they use financial counsellors, better management of their income, changes to their spending habits and, overall, less reliance on all credit products; and · more successful outcomes in relation to mitigating the borrower's dependency on short term lending given that 293


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 assistance is being provided earlier than would otherwise be the case.237 11.204 It is noted that the impact of these reforms is likely to vary between different classes of consumers, according to their reasons for seeking short term credit, and their preparedness to address underlying financial problems. It is expected that a percentage of borrowers would still prefer the convenience or accessibility of this form of credit, notwithstanding the cost. Impact on Short Term Credit Providers and Lessors 11.205 The impact of this reform on short term lenders and lessors will be: · A reduction in the amount of credit provided (to the extent that consumers are being encouraged to use alternative sources of finance, or being directed to financial counselling agencies that can address underlying financial problems). · Consequent greater incentives for short term lenders and lessors to be more efficient in the way they operate (with those who charge consumers higher costs because of inefficient business models under greater pressure to change their business models). · Minimal compliance costs, given that the disclosure requirements proposed are relatively abbreviated. Impact on other Credit Providers 11.206 This reform would be expected to have no impact on other credit providers. 11.207 In summary, this option can be expected to have the following costs and benefits: · It allows consumers continued access to these products, but, where they do so, consumers will be informed about other options available to them, with some consumers expected to seek out these alternatives. · It reduces the risk of financial detriment to consumers resulting from the use of short term lenders and lessors, where consumers take up these cheaper alternatives. 237 TNS Social Research, 2010, Breaking the Cycles of Disadvantage, p. 50. 294


Chapter 11 -- Regulation Impact Statement · It results in relatively low compliance costs for lenders (given that the changes are only to disclosure requirements and therefore relatively straightforward to implement on a one off basis). Consultation 11.208 22 submissions were received that provided feedback about the short term, small amount lending market. Of the 22 submissions, 18 were received from lenders or lender representative. Four submissions were received from consumer advocate organisations. Consumer organisations 11.209 Submissions were received from four consumer organisations. All of these organisations supported price regulation for the reasons explored in the RIS, including a failure of competition in the small amount loan market. They felt that the impact of high cost credit on the vulnerable individuals who they support was unhelpful, and could be disastrous. 11.210 The consumer organisations were not enthusiastic about enhanced disclosure. They expressed concerns that contractual disclosure did not generally assist consumers to make informed decisions about credit. They also felt that a prohibition on rollovers was unlikely to ameliorate issues arising from short term credit (because it would not stop people from accessing credit from multiple lenders, or take out a new contract in a short period after having completed a previous one). 11.211 Consumer advocate organisations did not believe that the licensing or responsible lending reforms introduced during Phase One would reduce the need for an interest rate cap because neither laws addresses cost. Nor, being principles based laws, are they as easy to enforce as an interest rate cap which would provide a black line for those trying to represent consumers. 11.212 These organisations emphasised the importance of other measures, in addition to the cap, such as income adequacy, community development finance and broadening of utility payment schemes, to ensure financial inclusion of low income consumers. They also emphasised the importance of curbing avoidance mechanisms as well as active regulatory enforcement to ensure efficacy of the interest rate cap. Lenders 11.213 Many of these submissions reported the high cost relative to principal of providing small amount loans, noting that the administrative costs and loss provision were often similar to large, long-term loans (and therefore higher relative charges are necessary to make a profit). The 295


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 NAB Loan Pilot, which reported on cost of providing short term loans was referenced frequently in this regard. 11.214 A majority of submissions were also concerned that the use of an annualised percentage rate (APR) to determine cost of short term loans was, at best, emotive and, at worst, misleading. The National Financial Service Federation pointed out that $20 charge for lending $100 over one week would equate to an APR in excess of 1000 per cent. A number of lenders suggested the use of a total charge for credit (in dollar terms) as an alternative. 11.215 All submissions concentrated heavily on the issue of a national interest rate cap. All lender and lender representatives rejected such a cap. The reasons for this included concerns that a cap would: · be ineffective due to avoidance. Some lenders may choose to set up complicated structural mechanisms, or other avoidance practices, to avoid the cap; · reduce the availability of legal short term credit. Some lenders may choose to leave the market due to lack of profitability; · lead to a black market in credit. If many regulated lenders left the market because of unprofitability this may lead to illegal lending via unregulated loan sharks. It could also encourage the growth of offshore internet-based small amount loan providers. It was argued that charitable no-interest and low-interest programs are not nearly large enough to prevent this from happening; · be unnecessary. Many submissions expressed the view that in light of Phase One credit reform, including responsible lending and licensing, consumer issues in the short term credit market would decrease. Others contended that market competition can be relied upon to force most usurious businesses from the market; · be impossible to set at a fair and equitable level. Submissions noted that a flat interest rate cap could be both too low (so that short term lending would no longer be possible) and at the same time too high (so that for larger, longer term loans usurious profit-making would still be possible); and · Generally harm consumers by either: (a) hiding the costs of credit in avoidance structures; or (b) restricting short-term credit for which there is great consumer demand; or (c) making short term credit only available through an unregulated sphere. 296


Chapter 11 -- Regulation Impact Statement 11.216 Submissions from some lenders endorsed alternatives to a cap, including the following: enhanced and streamlined disclosure (including a total charge for credit disclosed in dollars); prohibitions on rollovers (with some lenders already having these in place on a voluntary basis); prohibitions on borrowers having more than one loan with the same lender; and controlling the amount and frequency of default fees. Recommended Options 11.217 Options 1.3, 1.4 and 1.5 are the preferred options. It is considered that these options would operate in a complementary way to provide the most comprehensive response to the issues identified in this RIS. 11.218 The combined effect of the options would be: · Consumers would be encouraged to avoid using short term small amount finance through: - disclosure of alternative sources of finance or the availability of financial counselling agencies that can provide services designed to address underlying financial problems; and - clearer high-impact disclosure of the cost of finance, which may encourage some consumers to make greater use of the alternative sources of finance also disclosed to them. · Consumers who use short term small amount finance would be at less risk of financial detriment through: - being charged lower amounts; and - having lower levels of repeat borrowing. · ASIC would be able to identify and target particular providers who may be adopting high risk practices through the introduction of reporting requirements (for example, providers who report unusual levels of defaults or repeat borrowing). 11.219 This approach acknowledges that a range of different requirements are needed in order to address the complexities associated with this issue, and that it would not be a sufficient response to simply seek to change the behaviour of consumers only, or to solely rely on regulating lenders. 11.220 Given that the combination of these options is likely to result in a decrease in the number of lenders the following analysis of the impact 297


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 on competition is provided. It is considered these reforms would have the following consequences on credit providers and lessors: · The number of lenders could be expected to decrease, although this would primarily be those who would find most difficulty in complying with the cap on costs, either because they currently charge significantly higher levels of costs and are unable or unwilling to adapt, or because they are fringe lenders who engage in unfair practices such as those described in the Problem Identification section in order to maximise the return from borrowers (and who therefore have a minimal interest in providing loans on terms that meet the needs of their customers). It is estimated that lenders who currently provide about 25 per cent of contracts may cease operating, and that nearly all larger lenders would continue to operate. · New businesses could still enter the market but would be more likely to do either by identifying niche markets (for example, operating in locations where there are few existing lenders to compete with), or, more likely, by utilising the internet (where lower establishment costs are required). · The overall volume of short term contracts could be expected to decrease, as this reform is intended to reduce the extent of repeat borrowing that creates the greatest risk of a debt spiral. · Lenders would have little scope to compete on price. However, the as discussed above, the inclinations of the borrowing population mean that cost is usually not the basis for selecting a lender. 11.221 The reforms would have the following consequences for consumers from this change in the industry: · The reduction in competition would not result in an increase in costs to consumers, as the very purpose of the cap is to prevent this. · Lenders who remain in the market would, by definition, be those who have opted, in response to the cap, to remain in business and are therefore committed to continuing to comply with the legislation. This would mean that consumers would be dealing, to a greater extent, with lenders with higher standards of conduct, as fringe players who deliberately and consistently utilise unfair practices leave the industry. · It will reduce the incidence of repeat borrowings where this is the result of consumers becoming dependant on short term lenders due to the drop in income they experience when 298


Chapter 11 -- Regulation Impact Statement repaying a loan. This will minimise the risk of debt spirals arising from multiple borrowings. · It will require borrowers to seek assistance from Government or community agencies at an earlier point in time (because they have been refused credit when it would previously have been provided to them), or when the total amount of their debts is smaller (due to the caps on costs, including default charges), and therefore easier to resolve. 11.222 In summary, these options are all intended to have a significant and direct impact on short term lending practices. There is a clear relationship between this type of lending and the risk of borrowers experiencing a continuing lack of social or financial inclusion, in that the more one increases the more the other decreases. A benefit to low income borrowers (through, for example lower costs or reduced use of these products) is necessarily a cost to lenders (principally through reduced revenue); a commitment to seeking to improve the position of these borrowers and to address their problems cannot be implemented otherwise. Implementation 11.223 This reform will be implemented by being included in the package of changes in Part One of Phase Two of the Credit Reforms, though legislation to be introduced in a 2011 sitting of Parliament. This reform will be effected through amendments to the Credit Act which will mean that ASIC will be responsible for administering and monitoring compliance. 11.224 Given the specialised nature of this reform government will continue to consult directly with primary stakeholders (short term lenders and consumer groups) about, first, the level at which the cap will be set, and, second, on the detail of the other changes. This will enable an immediate exchange of views beyond these stakeholders and government, rather than it being filtered through third parties, such as industry bodies. Review 11.225 The terms of the National Credit Law Agreement agreed by the Commonwealth and all States and Territories in 2009, require the Commonwealth to commence a review of the operation of the National Credit Law, no later than two years from commencement. 11.226 The review of the effect of the cap can be informed by the additional reporting requirements referred to in Option 1.5 that will provide a detailed summary of the sector as to matters such as the number and type of loans, number of defaults and level of repeat business. 299


ANNEXURE A -- Costs charged by Cash Converters ANNEXURE A -- Costs charged by Cash Converters Product State Loan Brokera Account Loan APR Default E'ment ge fee keeping term + fee* fee fee Cash QLD, 35% of 30 Days 24% $16.50 advance ACT principal (this is an NSW* Deferred 1 -- 24 48% $16.50 unsecured e'ment months product) fee TAS 35% of 30 days 48% $16.50 principal VIC 35% of 30 days 0% $16.50 principal WA 35% of 30 days 0% $16.50 principal Unsecure QLD, 35% of 6--7 48% $33 d Loans ACT principal months ($1000 NSW 7- 24 $48% $33 -- months $2000) TAS $350 6--7 96% $33 months VIC $385 $7.50/ 6--9 48% $33 week months WA $350 6--9 96% $33 months Secured QLD, 12 -- 24 48% $33 Loans ACT months ($2500 NSW Not available in NSW -- $5000) TAS $450 12 -- 24 72% $33 months VIC $450 $7.50/ 12 -- 24 30% $33 week months WA $450 $1/ week 12 -- 24 72% $33 months *Deferred establishment fee applied at customer's discretion. #Default fee includes bank charges for direct debit request default, as well as an element relating to the administration of rescheduling the loan. +APR = Annual Percentage Rate. 301


ANNEXURE B -- International Approaches European Union 11.227 A study was undertaken on interest rate restrictions in the EU between December 2009 and September 2010. It undertook an inventory of interest rate restrictions (IRR) in the European Union countries. IRR were defined to be legal rules that limit directly (caps) or indirectly (rules on the calculation of compound interest). The study found that238: · Default: With the exception of two Member States (Ireland and Romania), all had an IRR in relation to default interest. · Absolute and relative ceilings: 14 States either had a form of an absolute ceiling (Greece, Ireland, Malta) or a relative ceiling based on a reference rate (Belgium, Estonia, France, Germany, Italy, Netherlands, Poland, Portugal, Slovakia, Spain, Slovenia). The spread of ceilings was high (Slovenia ranging from 13.2 per cent for a long-term loan to 453 per cent per annum for a short-term loan; France from between 5.72 per cent to 21.63 per cent for different forms of credit). 11.228 The study notes a trade-off between `reducing credit access for irrational or uninformed consumers (which is beneficial, as these are protected from becoming over-indebted) and excluding consumers who are able to make appropriate credit decisions (which is negative as it reduces their options to choose from)'. United States 11.229 In the United States payday lending is generally regulated at State level with many States maintaining interest rate caps of between 16 per cent -- 36 per cent. Some States have also introduced additional or separate protections, for instance, by restricting the number of loans that can be taken out at any one time. In 2007 the Federal government also intervened in the payday lending market by imposing a 36 per cent interest rate cap on loans to US military personnel. The Department of Defence report which inspired the intervention noted that `predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force'.239 238 European Commission, `Consultation Document on the EU Study on Interest Rate Restrictions in the EU', Brussels, 25 January 2011. 239 Department of Defense, `Report to Congress on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents', 2006, p. 9. 302


ANNEXURE B -- International Approaches Canada 11.230 In Canada, British Columbia has recently introduced a cap on interest and fees on short term loans of 23 per cent. Other protections have been introduced, including a cooling off period, prohibitions on rollovers (including using a new loan to pay out a previous one). Quebec has an interest rate cap of 35 per cent, and Manitoba a cap of 17 per cent.240 United Kingdom 11.231 In the United Kingdom, consideration was given to the issue of high cost credit by the Office of Fair Trading in 2009 -- 2010. In its findings it reported that `in some respects, the markets for high-cost consumer credit can be seen to be working reasonably well. The OFT does, however, have some concerns in relation to these markets arising from this review [including that] on the demand side, the relatively low level of ability and effectiveness of consumers in driving competition between providers, given their low levels of financial capability. On the supply side, sources of additional supply such as mainstream financial providers seem to be limited. In such circumstances, competition on price is not effective and prices are high.'241 11.232 The final report rejected the introduction of an interest rate cap, partially after consideration of research provided by Policis which drew a number of conclusions about the impact of interest rate caps in other markets -- including France, Germany, Japan and the US. Policis raises a number of concerns about: A) possible restriction on the supply of short term credit encouraging consumers into revolving credit products or leading to financial exclusion; B) general ineffectiveness or avoidance of the cap by lenders restructuring their products; and C) a growing black market supply of credit. 240 Office of Fair Trading, High Cost Consumer Credit (Emerging Evidence from the Review), 2009 16 - 17. 241 Office of Fair Trading, Press Release, http://www.oft.gov.uk/OFTwork/credit/review- high-cost-consumer-credit/. 303


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 11.234 The methodology, assumptions and conclusions of the report have been criticised by a number of academics, including credit specialists in the countries about which the report draws conclusions.242 The impact of interest rate caps varies significantly based on the level at which the cap has been set (if it is too low it will inevitably lead to a restriction of credit); the regulatory framework that exists in the country in question; and how credit is provided in the country in question (for example, banks, non-bank lenders). 11.235 Despite the OFT recommendations, Labour MP Stella Creasy has introduced a Consumer Credit (Regulation and Advice) Bill, which is due for second reading in February 2011. The Bill includes a cap on the total charge for lending.243 242 Office of Fair Trading, Annexe B, p. 45 - 46 summarises the concerns that were provided to them in submission. They included that the research does not fulfil the basic tenets of social research such as the need to contribute to knowledge in a reliable, and transparent way; the report contains methodological and analytical problems and makes statements and conclusions that are not supported by the data provided; provides inadequate sourcing of evidence; fails to define key terms used in the surveys; makes unjustified assumptions; fails to utilise relevant data from the countries it purported to assess (for instance public collected statistical information); comes to erroneous conclusions about cause and effect (for instance it fails to recognise that the lack of credit product diversity in Germany is due to German banks monopoly on cash credit rather than interest rate caps). See also U Heifner, IFF `Comments on the DTI Study The effect of interest rate controls in other countries - Germany, France and US, Hamburg 2004'. 243 www.independent.co.uk/money/loans-credit/simon-read-the-battle-to-beat-legal-loan- sharks-hits-westminster-2126538.html. 304


ANNEXURE C -- Utility financial assistance programs Jurisdiction Options Victoria244 · Payment plans if consumer is in financial hardship. · Utility relief grant from the Victorian government (normally concession card holders but some flexibility around this) · Centrelink recipients may be entitled to concession rates and grants WA245 · Payment plans if consumer is in financial hardship. · Energy Rebate: the Government provides a range of subsidies and rebates to assist with energy costs for a range of people including those at financial disadvantage. · Hardship Utilities Grant Scheme: This scheme can provide a one-off grant of up to 85 per cent of the amount that a household owes to an energy or water retailer. It also refers people to a financial counsellor for counselling. ACT246 · Payment plans if consumer is in financial hardship. · ACT Civil and Administrative Tribunal is empowered to order continued supply despite failed payment, to set up payment schedules and to discharge part or all of overdue account. NSW247 · Retailers are required to make two offers of a payment plan to a residential customer experiencing financial difficulties before the retailer can move to disconnect the customer. · A number of rebate programs and energy account vouchers are available. · Free financial counselling services offered. 244 http://www.moneyhelp.org.au/Housing-costs/Energy-and-water-bills.html accessed 10/02/2011. 245 http://www.energy.wa.gov.au/2/3265/64/financial_hardship_assistance.pm accessed 10/02/2011. 246 http://www.acat.act.gov.au/category.php?id=3. 247 http://www.industry.nsw.gov.au/energy/customers/questions-electricity-gas-prices accessed 10/02/2011. 305


Index Schedule 1: Enhancements Bill reference Paragraph number Item 1, section 72(1) 2.7 Item 1, subsection 72(2) 2.8 Item 1, subsection 72(3) 2.9 Item 1, subsection 72(4)(a) 2.10 Item 1, subsection 72(4)(b) 2.11 Item 1, subsection 72(4) 2.12 Item 1, subsection 72(5) 2.13 Item 1, subsection 72(6) 2.14 Item 2, section 73 2.15 Item 3, section 74 2.16 Item 5, subparagraphs 88(3)(f)(i) and (ii) 2.17 Item 6, section 89A 2.18 Item 6, subsection 89A(1) 2.19 Item 6, subsection 89A(2) 2.20 Item 6, subsection (2) and (4) 2.22 Item 6, subsection 89A(3) 2.24 Item 6, subsections 89A(2) and (3) 2.25 Item 7, subsection 94(1) 2.26 Item 9, subsection 94(3) 2.27 Item 9, subsections 94(3) and (5) 2.28 Item 10, section 180A 2.29 Item 10, section 180A 2.30 Item 10, subsection 180A(2) 2.34 Item 10, paragraph 180A(2)(d) 2.35 Item 10, paragraph 180A(4)(a) 2.40 Item 10, paragraph 180A(4)(b) 2.43 Item 10, paragraph 180A(4)(c) 2.44 Item 10, paragraph 180A(4)(d) 2.45 Item 10, paragraph 180A(4)(e) 2.47 Item 10, paragraph 180A(4)(f) 2.49 307


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Item 10, paragraph 180A(4)(g) 2.51 Item 10, subsection 180A(5) 2.52 Item 10, subsection 180A(6) 2.53 Item 10, subsection 180A(7) 2.55 Item 10, subsection 180A(8) 2.56 Items 12 to 16, sections 125 and 128 2.60 Items 15, 16 and 19, sections 128 and 151 2.59 Items 17 and 18, section 148 and heading to Division 3 2.64 Item 19, section 151 2.63, 2.65 Items 22 and 23, section 27 and the heading to Division 3 of Part 2-1 2.69 Item 24, section 33 2.68 Item 25, Part 3-6A and section 160A 2.70 Item 25, section 160B 2.71 Item 25, subsection 160B(2) 2.72 Item 25, subsection 160B(1) 2.75 Item 25, subsection 160C(1) 2.77, 2.81 Item 25, subsection 160C(3) 2.79 Item 25, subsection 160C(4) 2.83 Item 25, section 160D 2.85 Item 25, sections 160E 2.90 Item 27, subsection 124(1) 2.95 Item 28, subsection 124(4) 2.97 Item 29, subsection 19(1) 2.101 Item 30, section 32 2.102 Items 31 and 32, paragraphs 36(1)(c) and (d) 2.103 Item 38, section 40 2.104 Item 39, subsection 71(1) 2.105 Items 40, 41 and 42, section 83 2.106 Items 43 and 44, section 87 2.107 Items 45, 46, 47 and 48, paragraphs 88(5)(a) and (d), subsection 2.108 88(6), and paragraphs 93(1)(c), (2)(a) and (2)(d) Item 49, subsection 95(1) 2.109 Item 51, section 206 2.110 Item 51,subsection 204(1) 2.112 Items 52 and 53, section 128 and subsection 130(1) 2.111 Item 54, paragraph 181(b) 2.111 Item 55, subparagraph 88(3)(g)(i) 2.112 308


Index Item 56, subsection 127(2) 2.112 Items 57, 58, 59, 60 and 61, headings to sections 129, 130, 131, 132 2.112 and 133 Schedule 2: Reverse mortgages Bill reference Paragraph number Item 1, subsection 5(1) 3.13 Item 2, paragraph 13A(1)(b) and subsection 13A(4) 3.14 Item 2, paragraph 13A(1)(a) and subsection 13A(2) 3.14 Item 2, paragraph 13A(1)(a) and subsection13A(3) 3.14 Item 2, subsection 13A(4) 3.15 Item 3, subsection 204(1) 3.16 Item 4, subsection 5(1) 3.17 Item 5, subsection 204(1) 3.19, 5.49 Item 6, subsection 204(1) 2.33 Item 6, subsection 204(1) 3.22 Item 7, subsection 204(1) 3.22 Item 8, subsection 204(1) 3.22 Item 9, section 133 3.23 Item 10, section 133DA 3.26 Item 10, subsection 133DB(1) 3.27 Item 10, paragraph 133DB(1)(b) 3.28 Item 10, subsection 133DB(3)(a) 3.30 Item 10, subsection 133DB(3) 3.30 Item 10, subsection 133DB(4) 3.31 Item 10, paragraph 133DB(1)(c) 3.33 Item 10, paragraph 133DB(1)(d) 3.34 Item 10, subsection 133DB(5) 3.35 Item 10, subsections 133DB(1) and (2) 3.37 Item 10, subsections 133DC(1) and (2) 3.39 Item 10, subsections 133DD(1) and (2) 3.39 Item 10, subparagraph 133DD(1)(b)(ii) 3.39 Item 10, subsections 133DC(2) and (3) and subsections 133DD(2) 3.40 and (3) Item 10, subparagraph 133DD(4)(a) 3.41 Item 10, subparagraph 133DD(4)(b 3.41 309


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Item 10, paragraph 133DD(4)(c) 3.43 Item 10, subsections 133DE(1)and (2) 3.44 Item 10, subsection 133DE(2) 3.46 Item 10, subsection 133DE(3) 3.47 Item 11, paragraph 179(6)(d) 3.49 Item 11, subsection 179(6) 3.53 Item 11, subsection 179(7) 3.54 Item 12, subsection 17(15A) 3.57 Item 13, section 18A 3.63 Item 13, subsections 18B(1) and (2) 3.67 Item 13, subsection 18B(4) 3.69 Item 13, subsections 18B(2) and (4) 3.70 Item 13, section 18C 3.72 Item 14, subsection 22 3.76 Item 15, section 26 3.76 Items 16 and 17, subsection 32(2) 3.76 Item 18, paragraph 67A(a) 3.77 Item 18, paragraph 67A(b) 3.77 Item 19 , Division 1 of Part 5 (heading) 3.79 Item 20, sections 86A and 86B 3.82 Item 20, subparagraphs 86A(b)(i) and (ii) 3.83 Item 20, subsection 86B(2) 3.85 Item 20, subsection 86A(2) 3.86 Item 20, sections 86C and 86D 3.87 Item 20, section 86E 3.88 Item 21, subsections 88(1) and (2) 3.90, 3.93 Item 22, subsection 88(7A) 3.94 Item 22, subsection 88(7B) 3.95 Item 23, subsection 93A(2) 3.97 Items 24 and 25, subsections 111(1) and (2) 3.99 Item 26, subsection 185A(1) 3.100 Item 26, subsection 185A(2) 3.101 310


Index Schedule 3: Small amount credit contracts Bill reference Paragraph number Item 1, subsection 5(1) 4.17 Item 1, subsection 5(1) 5.19 Item 2, paragraph 5(1(f)) 4.23 Item 2, subsection 5(1) 4.22 Items 4 and 8, subsections 117(1) and 130(1) 4.24 Items 5, 6, 11 and 12, subsections 118(3), 123(3), 131(3) and 133(3) 4.29 Item 7, section 124B and item 13, section 133CB 4.33 Item 7, section 124A and item 13, section 133CA 4.20, 4.38 Item 13, section 133CC 4.35 Item 15, section 335A 4.39 Schedule 4: Caps on costs etc for credit contracts Bill reference Paragraph number Item 1, subsections 17(4) to (6) 5.20 Items 2 and 3, section 23 and subsection 23(1) 5.21 Item 4, section 23A 5.22 Item 4, subsection 23A(2) 5.23 Item 5, section 24 5.28 Items 6 and 7, subsections 24(1A) and (2) 5.25 Item 8, section 24A 5.27 Item 9, section 27A 5.29 Items 10 and 11, section 31 5.30 Item 12, section 31A 5.31 Items 12, subsection 31A(2) and item 23, subsection 204(1) 5.40 Items 12, subsections 31A(3) and item 23, subsection 204(1) 5.42 Item 12, section 31B 5.44 Item 13, subsection 32A(1) 5.46 Item 13, subsections 32A(2) and (3) 5.47 Item 13, subsection 32A(4) 5.48 Item 13, section 32AA 5.50 Item 13, section 32B 5.54 Item 13, paragraph 32B(3)(c) 5.56 311


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Item 13, subsection 32B(4A) 5.57 Item 14, subsection 34(6) 5.60 Item 15, subsection 39A(1) 5.61 Item 15, paragraph 39A(1)(b) 5.65 Item 15, subsection 39A(2) 5.66 Item 15, paragraph 39A(2)(c) 5.67 Item 15, subsection 39B 5.68 Item 15, paragraph 39A(2)(ba) 5.69 Item 15, subsection 39B(2) 5.71 Item 15, subsection 39B(3) 5.73 Item 15, section 39C 5.76 Items 16 and 17, subsection 111(1) and paragraph 111(2)(f) 5.77 Items 18 and 19, subsections 114(1) and (1A) 5.80 Item 20, subsection 204(1) 5.81 Items 21, 22, 23, 24, 25 and 26 5.87 Item 22, subsection 204(1) 5.86 Item 25, subsection 204(1) 5.62 Schedule 5: Consumer leases Bill reference Paragraph number Item 1, subsection 5(1) 6.84 Items 2 and 3, subsection 5(1) 6.84 Item 4, subsection 147(7) 6.85 Items 5 and 6, subsection 147(7) 6.85 Items 7 and 8, subsection 199(2) 6.86 Item 9, subsection 199(3) 6.84 Item 10, paragraph 200(1)(b) 6.86 Item 11, subsection 76(8) 6.82 Items 12 and 26, subsection 204(1) 6.82 Items 13 and 25, subsection 204(1) 6.82 Item 14, subsection 173(1) 6.15 Item 14, subsection 173(1A) 6.16 Item 15, subsection 173(2A) 6.16 Item 16, section 173A 6.17 Item 17, section 174A 6.18 312


Index Item 18, subsection 177A(2) 6.31 Item 18, subsection 177A(3) 6.34 Item 18, section 177B 6.37 Item 18, sections 177D and 177E 6.38 Item 18, subsection 177F(1) 6.39 Item 18, subsection 177F(2) 6.41 Item 18, subsection 177F(5) 6.42 Item 18, section 177G 6.44 Item 18, section 175A 6.19 Item 18, section 175C and 175E 6.21 Item 18, section 175D 6.21 Item 18, subsection 175C(4) 6.22 Item 18, section 175F 6.23 Item 18, section 175G 6.24 Item 18, section 175H 6.25 Item 18, subsection 175H(2) 6.25 Item 18, section 175J 6.29 Item 18, subsection 177A(1) 6.30 Item 19 6.87 Item 20 6.45 Item 21 6.35, 6.80 Item 22, section 178A 6.48 Item 23, section 179 (heading) 6.49 Item 24, subsection 179H(4) 6.63 Item 24, section 179J 6.64 Item 24, section 179K 6.65 Item 24, section 179L 6.65 Item 24, section 179M 6.67 Item 24, section 179N 6.67 Item 24, section 179P 6.67 Item 24, section 179Q 6.67 Item 24, section 179R 6.68 Item 24, subsection 179S(1) 6.71 Item 24, section 179S(2) 6.72 Item 24, section 179T 6.74 Item 24, section 179U 6.75, 6.76 Item 24, section 179V 6.75, 6.78 313


Consumer Credit Legislation Amendment (Enhancements) Bill 2012 Item 24, section 179W 6.80 Item 24, section 179A 6.50 Item 24, section 179B 6.51 Item 24, section 179C 6.53 Item 24, section 179D 6.54 Item 24, subsection 179D(3) 6.55 Item 24, section 179E 6.56 Item 24, subsection 179F(1) 6.57 Item 24, subsection 179F(2) 6.58 Item 24, subsection 179F(3) 6.60 Item 24, section 179G 6.62 Item 24, section 179H 6.63 Item 25, subsection 204(1) 6.61 Item 27, subsection 204(1) 6.82 Item 28, subsection 204(1) 6.82 Item 29, subsection 204(1) 6.82 Item 30, subsection 204(1) 6.82 Item 31, subsection 204(1) 6.82 Item 32, subsection 204(1) 6.82 Item 33, subsection 204(1) 6.82 Item 34, subsection 204(1) 6.82 Item 35, subsection 204(1) 6.82 Item 36, subsection 204(1) 6.82 Item 37, subsection 204(1) 6.82 Item 38, section 204 6.82 Schedule 6: Application provisions Bill reference Paragraph number Item 4, section 128 7.3 Item 4, section 180A 7.3 Item 4, section 124 7.4 Item 4, subsections 179(6) and (7) 7.6 Item 4, subsection 17(15A) 7.6 Item 4, subsection 26(6) 7.6 Item 4, section 18A 7.7 314


Index Item 4, section 33 7.8 Item 4, subsections 88(1) and (2) 7.10 Item 4, paragraphs 124A(1)(b) and 133CA(1)(b) 7.11 Item 4, sections 31A, 31B, 39A, 39B and 39C 7.12 Item 4, sections 32AA and paragraphs 111(1)(k) and (2)(fb) 7.13 Item 4, subsection 199(2) 7.14 Schedule 7: Lay-by agreements etc Bill reference Paragraph number Items 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15, subsections 8.5 96(1), 96(2), 96(3), 96(4), 97(1), 97(2), 97(3), 103(1), 188(1), 189(1), 189(3), 190(1), 191(1), section 98 and paragraph 190(2)(c) Item 16, section 288 8.10 Item 16, section 289 8.11 Item 16, section 290 8.12 315