ASIC has released Report 580 Credit card lending in Australia and Consultation Paper 303 Credit cards: Responsible lending assessments (CP303), which detail ASIC’s findings following a review of the credit card market in Australia and proposed next steps. The review, conducted between 2012 and 2017, involving twelve credit providers (including the major banks and a combination of mid-tier and foreign banks, customer-owned banking institutions and non-bank lenders), found that more than 1 in 6 consumers are struggling with credit card debt.
ASIC’s review was focused on the following three key areas:
- consumer outcomes – seeking to identify debt outcomes for consumers with credit card products;
- balance transfers – analysing when and how balance transfers are used and repaid, as well as their effect on debt levels over time; and
- effectiveness of key reforms – analysing disclosures intended to assist consumers, as well as requirements standardising how repayments are allocated to outstanding balances.
A summary of key findings are outlined below.
- Consumer outcomes
- Credit card debt is problematic for many consumers and can persist over time, with 18.5% of consumers satisfying at least one of the problematic debt indicators developed by ASIC, as at June 2017.
- Some consumers are being issued credit cards which are not well suited to their behaviours or needs.
- Few credit providers are taking proactive steps to address persistent debt, low repayments or unsuitable products.
- Balance transfers
- More common with certain types of consumers and credit providers, especially consumers with a higher level of credit card debt across all their cards.
- The risk of a ‘debt trap’ is a reality for one-third of consumers after a balance transfer. Consistent repayments may help consumers who transfer balances to reduce their debt, but credit providers can do more. ASIC found that half of the 10 credit providers reviewed who offer promotional rates do not take proactive steps to remind customers when the promotional period is ending soon.
- A majority of consumers (over 63%) who transferred balances did not cancel any of their credit cards and continue to use them, resulting in interest charges.
- Effectiveness of key reforms
- Many consumers are not using the Key Facts Sheet, a standardised one-page document which assists consumers choose a suitable credit card for their needs, when selecting a credit card.
- The requirement to firstly allocate repayments to balances with higher interest rates saves consumers money.
- No evidence of a repayment ‘spike’ at the two year amount disclosed on the minimum repayment warning.
In response to these findings, ASIC proposed three action points, namely:
- enhancing responsible lending practices through the implementation of recent reforms – ASIC proposes to prescribe a period of three years for such responsible lending assessments, as outlined in CP303 (see below);
- updating information on ASIC’s MoneySmart website – by 30 September 2018, ASIC intends to publish information about credit providers who:
- have committed to develop and introduce proactive measures to combat problematic credit card debt and unsuitable products;
- are taking fair approaches to additional purchases on balance transfers; and
- are not providing notice to consumers before balance transfer promotional periods end,
- undertaking follow-up work on credit cards – ASIC has stated that a follow-up review will be undertaken in two years to track problematic credit card debt, the effect of balance transfers on debt outcomes and whether card cancellation rates have changed.
In CP303, ASIC has outlined their rationale in seeking to prescribe a three year period to be used for assessing whether a credit card contract or credit limit increase is unsuitable for responsible lending assessments. This new requirement will apply to credit licensees that are credit providers or provide credit assistance in relation to both new and existing credit card contracts from 1 January 2019. ASIC has also prepared a draft instrument to provide an indication as to how the resultant legislative instrument will appear, pursuant to the National Consumer Credit Protection Act 2009 (Cth).
The need for legislative reform was initiated by the Senate’s referral of matters relating to credit card interest rates to the Senate Economics References Committee for inquiry and report in June 2015 (Senate Inquiry). The Senate Inquiry found that a problem arises where consumers use their card as a borrowing facility to pay outstanding balances, rather than to manage cash, and recommended that responsible lending assessments should be based on ability to pay off debt over a reasonable period.
The Government confirmed its support of the Senate Inquiry recommendation in May 2016 and noted that credit providers’ practice of assessing a consumer’s ability to meet minimum repayments could lead to cumulative interest charges resulting in substantial financial hardship.
In response, ASIC has taken prepared the draft instrument and taken the view that a three-year period achieves an appropriate balance between preventing consumers from being in unsuitable credit card contracts and ensuring they have reasonable access to credit through these contracts.
ASIC has also obtained confirmation from the Office of Best Practice Regulation that the implementation of the credit card responsible lending reform through the proposed instrument is compliant with the Government’s regulatory impact analysis requirements.
From a global perspective, ASIC has noted that such a period is in line with the United Kingdom’s (UK’s) approach. The UK’s Financial Conduct Authority (FCA) regulates the conduct of credit card providers under its Consumer Credit Sourcebook (CONC). If a consumer remains in persistent debt for 3 years, the CONC states that credit card providers must assist the consumer by proposing quicker repayment methods within a reasonable period. The FCA expects that period to be between three and four years.
Comments on CP303 are due on 31 July 2018.
A one-stop shop for the most frequently asked legal questions by in-house counsel, providing expert tips, example clauses and usage guides.