The Government is looking at a two-phase process focused on legislative protection of vulnerable consumers, competitive pressure on credit card issuers and consumers' information.
On Friday 6 May 2016, the Treasurer released a Consultation Paper Credit Cards: Improving Consumer Outcomes and Enhancing Competition which provided the Government's response to the Senate Economics References Committee's report into matters relating to credit card interest rates with the Government supporting seven out of the Senate Committee's eleven recommendations.
Overall, the Government's recommendations focus on strengthening legislative protection of vulnerable consumers, exerting more competitive pressure on credit card issuers and providing consumers with information they can use to make the best choices about credit cards. Businesses should review the recommendations and make submissions by Friday, 17 June 2016.
Background to the Consultation Paper
On 24 June 2015, the Senate referred an inquiry into matters relating to credit card interest rates to the Senate Economics References Committee where 37 submissions were received. On 18 December 2015, the Senate Committee released its report, "Interest rates and informed choice in the Australian credit card market", containing 11 recommendations. The Consultation Paper is a response to the Senate Committee's report.
Consistent with the Senate Committee's findings, the Consultation Paper found a relative lack of competition on ongoing interest rates in the credit card market (a major cause being the complexity of how the interest rate is calculated) and behavioural biases that encourage card holders to borrow more and repay less than they otherwise would intend to, resulting in higher than intended credit card debt levels. These findings are reflected from the context where a small but significant subset of consumers persistently incur very high credit card interest charges due to patterns of usage and the inappropriate selection and provision of credit cards.
Summary of recommendations
The Government has proposed two phases for its reforms. Phase 1 consists of four recommendations where following stakeholder feedback, the Government plans to develop and release exposure draft legislation in the near term.
Phase 2 consists of five recommendations and the decision whether to implement these measures will depend on the results of consumer behavioural testing and the extent to which industry presents solutions of its own accord.
Phase 1: possible exposure draft legislation
In support of two of the Senate Committee's recommendations, the Government has proposed:
- tightening responsible lending obligations to ensure card issuers assess a consumer's ability to repay the credit limit within a reasonable time; and
- requiring card issuers to provide consumers with online options to initiate a card cancellation or reduction of credit limit.
In the Consultation Paper, the Government also recommends to prohibit issuers from:
- making unsolicited credit limit increase offers using all forms of communication and their ability to seek prior consent; and
- backdating interest charges and charging interest on the portion of the balance that has been paid off. Currently, if the interest-free period is forfeited, interest will be charged from the date of the purchases on the full purchase cost and under the proposed change, interest will be charged on the amount outstanding at the end of the statement period (hence taking into account partial payments) and from the end of the statement period.
Phase 2: consumer testing
In support of five of the Senate Committee's recommendations, the Government has recommended:
- advertising and marketing material to prominently display a card's interest rate and annual fee;
- card issuers to clearly display annual fees in monthly statements and via electronic tools;
- card issuers to provide consumers with information on the annual costs of consumer's card use (such as year-to-date interest charges, ongoing annual fees, average balance and repayment behaviour). The Government will also consider the outcomes of the Productivity Commission's inquiry into data access and use when the Productivity Commission's final report is released in early 2017;
- card issuers to provide consumers with timely electronic notifications regarding the expiry of introductory offers (and card utilisation) and with information on potential savings from alternative products (where available); and
- card issuers to provide consumers the option to commit to higher repayments and proactively contact consumers persistently making small repayments.
The Government noted four recommendations by the Senate Committee proposing that the Government:
- undertake a review into innovations which might help facilitate switching, including feasibility of account number portability. The Government viewed that the more significant barriers to switching are a lack of consumer awareness and their difficulties when comparing credit card products, and that the proposed reforms should positively impact switching;
- consider introducing minimum repayment requirements and alternative means for reducing the use of credit cards as long-term debt facilities. The Government noted that this recommendation is worthy of further work and stakeholder feedback;
- consider expanding financial literacy programs. The Government noted that funding for these programs are considered in line with other spending measures as part of the Budget process; and
- consider a Productivity Commission inquiry into the value and competitive neutrality of payments regulation, particularly interchange fees. The Government noted that the implementation of recommendations relating to interchange fees is currently being considered by the Payments System Board and in December 2015, the ACCC was given new powers to enforce the ban on excessive card payment surcharging.
Next steps: submissions due by Friday, 17 June 2016
The proposals outlined in the Consultation Paper are aimed at balancing the objectives of improving consumer outcomes and enhancing competition while minimising potential of unintended outcomes and unnecessary compliance costs for the industry. The Government has invited feedback on its Consultation Paper which may be supplemented by targeted consultations or roundtables. If you would like to make a submission, you must do so by Friday, 17 June 2016.