Significant changes impacting credit cards have been proposed, with ASIC recommending a three year ‘prescribed period’ for assessing whether a credit contract or credit limit increase would be unsuitable. ASIC’s Report called Credit card lending in Australia (July 2018) (Report) builds on the previous Senate Inquiry into credit card interest rates1 (Senate Inquiry) and recent legislative reforms. The Report focuses on three key concerns of credit card lending, being:
Consumer debt outcomes
Balance transfers, and
The effectiveness of key reforms.
ASIC found that credit card debt is a problem for many consumers, with 18.5% of consumers in circumstances that typically lead to credit card default. ASIC is concerned that some credit providers allow consumers to access credit substantially above their credit limit, and fail to take proactive steps to assist consumers in circumstances who are facing financial hardship.
ASIC confirmed the Senate Inquiry’s theory of the balance transfer ‘debt trap’ that a substantial proportion of customers face, with over 63% of customers who transferred their balance not cancelling their old cards. ASIC found that half of the credit providers that participated in its report did not provide customers with a warning when the promotional period on their balance transfer was about to end, despite the Senate Inquiry prompting them to do so.
ASIC also examined the effectiveness of three recent reforms. Findings showed that the requirement to provide consumers with a Key Facts Sheet was not effective in reaching consumers that opened accounts online. ASIC found four of the twelve participating credit providers did not adhere to the requirement that repayments must first be allocated to the balance with the highest interest rate. Finally, ASIC found no evidence of an increase in repayment amounts following the introduction in 2012 of a requirement for credit providers to include a minimum repayment warning – a comparison between the total cost of making only minimum repayments and payments sufficient to repay the debt within 2 years – on statements.
The review involved participation from twelve various credit card providers, including large banks, foreign banks and non-bank lenders. The Report outlines several measures ASIC expects credit providers to implement to better protect consumers from the issues that persist in the Australian credit card market.
ASIC’s proposed three-year ‘prescribed period’ in its Consultation Paper, Credit Cards: Responsible Lending Assessments (July 2018) (Consultation Paper) was considered suitable to allow consumers reasonable access to credit, whilst preventing consumers entering into unsuitable credit card contracts. In deciding on the three-year period, ASIC considered the current industry practice of basing serviceability assessments on a 5 year repayment period but found that this would not materially improve consumer outcomes.
Submissions on the Consultation Paper are open until 31 July 2018, with the final instrument to be released in August/September 2018.
1 Senate Economics References Committee, Parliament of Australia, Interest rates and informed choice in the Australian credit card market (2015).