The regulation of credit card lending in Australia has been the subject of major reform since 2009, with increased government scrutiny focused on the consumer protection of credit card customers. The National Consumer Credit Protection Act 2009 introduced a national regime requiring all organisations who provide credit to consumers to be licensed with the Australian Securities and Investments Commission (ASIC), and to comply with responsible lending laws.
In 2015, the Senate Economics References Committee conducted an inquiry and published a report on a range of issues affecting the Australian credit card market, including the enforcement of responsible lending laws and the national consumer credit regime (Senate Inquiry). The Government responded to the findings and recommendations of the Senate Inquiry by conducting an extensive ASIC review of the credit card market, and by introducing the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 (Cth).
ASIC Report 580: Credit card lending in Australia
On 4 July 2018, ASIC released Report 580 (the Report), which analyses the findings of ASIC’s review of credit card lending in Australia between 2012 and 2017. The Report examines consumer debt outcomes over the review period, with particular attention placed on consumer characteristics that ASIC has classified as “problematic”.
The Report’s main areas of focus are on the large number of credit card customers displaying these problematic repayment characteristics; certain attractive credit card features or promotions which lead to consumers carrying more debt over time (such as balance transfers); and the challenges faced by consumers when trying to select a suitable credit card.
Problematic credit card debt
Credit cards have become a critical component of the Australian payments system, with an increase of 300,000 open credit card accounts across ASIC’s review period alone, totalling $45 billion in outstanding balances as at June 2017. Of the 12.3 million people holding credit cards, almost one fifth were recorded by ASIC as displaying “potentially problematic" debt behaviours.
These problematic characteristics included situations where, over a 12 month period:
- the consumer had made repeated low repayments and interest had been charged;
- the average balance of the credit card had been 90% of the credit limit and interest had been charged;
- the account was more than 60 days overdue; or
- the account had been written off or reported to ASIC by the credit card provider.
ASIC identified two areas of particular concern – that young people and consumers with multiple cards were more likely to have problematic debt; and that almost 900,000 people who had problematic debt in 2013 still met problematic debt indicators in 2017. The high incidence of consumers who had made repeated low repayments or retained persistent debt over the review period suggested to ASIC that there is scope for further regulatory measures to help these consumers.
The Report found that many credit providers were in the practice of promoting cards with higher rates of interest that offered additional ‘lifestyle’ benefits such as reward programs and longer interest-free periods, encouraging consumers to select cards that were not suited to their behaviours. Consumers whose cards were unsuited to their behaviours were also more likely to display problematic debt indicators.
The Report examines the use of credit card balance transfers, which is a feature that allows a credit card customer to move some or all of their debt from one card to another. The transferred debt attracts a lower interest rate for a certain period of time, following which any unpaid transferred amount attracts a higher interest rate. By comparing the total balance of all the consumer’s cards at the start of the transfer to the total balance shortly after the promotional period had ended, ASIC identified a “debt trap”. In this debt trap, consumers who transferred more than one balance were more likely to increase their total credit card debt during the promotional period, but achieved relatively better outcomes on later transfers. ASIC also identified a high incidence of consumers failing to cancel credit cards after transferring balances, making them more likely to increase their total debt during the promotional period.
Contributing to this deepening debt, half of all credit providers offering promotional rates on balance transfers failed to take proactive steps to remind customers who hadn’t paid the transferred amount that the promotional period was drawing to a close.
Proactivity of providers
The Report sets out ASIC’s expectations of credit card providers in response to the specific consumer protection issues identified during the review period, and outlines the follow up steps that ASIC intends to implement.
ASIC strongly encourages credit providers to adopt a proactive approach to the difficulties that consumers with problematic debt characteristics commonly face, by taking steps to:
- proactively look for signs of problematic credit card debt;
- minimise extra credit provided to consumers who regularly exceed their credit limit;
- help consumers repay their balance transfers, including by giving consumers 30 days’ notice before the promotional period for balance transfer ends;
- encourage consumers to review the credit cards they hold when they transfer a balance, cancelling any that are no longer required;
- exclude balances with a 0% promotional rate from the amount that needs to be repaid for an interest-free period to be repaid;
- develop tools to help consumers choose credit cards that reflect their actual needs and use; and
- apply the repayment allocation requirement imposed under the National Credit Act to all credit cards, including those opened prior to the establishment of the requirement.
ASIC intends to improve responsible lending practices by implementing recent reforms which encourage credit providers to use more robust criteria with which to assess its credit card contracts and credit limit increases; engaging with industry about how they should address ASIC’s findings; publishing on ASIC’s MoneySmart website information about complaint and non-compliant credit providers; and conducting a follow-up review in 2020.
Treasury Laws Amendment
In response to the recommendations of the Senate Inquiry, the Government also implemented the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 (Cth) (Banking Measures Act). This statutory amendment introduces stricter requirements on credit card providers.
The main areas of reform include:
- Responsible lending: from 1 January 2019, affordability assessments are to be based on a consumer’s ability to repay the credit limit within three years.
- Unsolicited credit limit offers: from 1 July 2018, credit card providers must not make unsolicited offers to credit card holders inviting them to increase the limit of a credit card contract.
- Changes to interest calculations: from 1 January 2019, credit providers cannot impose retrospective interest charges.
- Credit limit reduction and cancellation: for all credit card contracts entered into after 1 January 2019 credit providers must ensure that consumers have the option to cancel cards or reduce limits online.