Amanda Rishworth (Kingston, Australian Labor Party) Share this | Link to this | Hansard source

I am very pleased today to rise to support the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 because I believe this is a crucial and important piece of legislation to protect consumers. The introduction of this bill clearly demonstrates the Labor government's ability to deliver on its election commit­ments. More importantly, this legislation represents a crackdown on the unfair treatment of ordinary working Australians who may use a credit card but may not be fully aware of some of the issues surrounding that. This government has listened to the concerns of consumers, and this bill finally recognises that Australians should have more say over how they use their credit cards and that they should also be provided with detailed information clearly explaining exactly what they are signing themselves up for.

There are approximately 15 million credit card accounts in Australia. The reality is that most Australian families use credit cards as a way to perhaps meet their financial obligations, purchase things they might not be able to afford and do a range of other things. While these credit cards are very important, Australians deserve a system that has their interests in mind, not just the interests of the banks.

Credit card providers currently allow accounts to exceed their credit limits and then charge the account an over-limit fee. This process is a vicious trap that places heavy financial burdens upon Australians using this credit card facility. It is a trap that sees credit card providers gain approximately $225 million per year in over-limit fees. The reforms included in this bill will set the amount by which credit accounts can go over their limits to a maximum of 10 per cent, at the discretion of the lender, and abolish the fee that this usually attracts. This will prevent many Australians from unintentionally slipping into unsustainable levels of debt and often trying to keep up with it—if they have to pay these over-limit fees.

Another unnecessary tactic used by credit card lenders is to allocate initial repayments to the part of the debt that attracts the lowest rate of interest. This makes it extremely difficult for individuals who have exceeded their credit limits to even restore their debt to manageable levels. This bill will simply reverse this order, allowing consumers to pay off their higher interest bearing debt first. This is a much more reasonable approach from credit card lenders and could result in consumers saving a potential $360 per year. This measure is a simple intervention that will assist many Australians with their credit card debts and ensure that others are prevented from spiralling into unnecessary and never-ending debt.

It is unreasonable for the banks to be capitalising on Australians' use of credit cards by employing financial tactics that are not made clear to consumers. This government recognises that many Australians already struggle with the cost of living. Therefore, this bill seeks to provide a little relief for these Australians by ensuring that they are protected from unfair bank fees and contract fine print.

The bill also includes measures to ban unsolicited credit limit extension offers. Such letters are often sent to consumers to provide them with the option of increasing their credit limit and in many cases result in Australian families taking on unsustainable levels of credit card debt. Consumers are bombarded with these tick-and-flick preapproval offers to increase their credit that do not provide adequate information concerning a consumer's financial health and are therefore very misleading. Unsuspecting consumers simply see an opportunity to increase their credit limit as suggested by their financial institution and approve it without properly considering the implications. I spoke already in this place about unsolicited credit increases in private members' business back in 2008. At that time it was brought to my attention by a number of constituents in my electorate that these unsolicited letters offering credit limit increases seem to be sent only when customers are paying interest on their credit card debt. For example, one constituent indicated to me that they had not had to pay interest for some time. They had regularly paid off their credit card to the full amount each month. It was only when they got caught one month and could not pay the full amount that they attracted interest on their credit card. It was then that the automatic pre-approval was sent, pretty much identifying that when they paid interest and could not pay back the full amount—a change in their trend of normally paying off the full amount—they were automatically encouraged to increase their limit. There was no asking, 'What's happening here? How can you best manage this?' They were automatically told, 'The answer is to increase your credit limit.' This is definitely an issue that I think is very poor, because it does not properly look at an individual credit card user's history. It does not look at what they might be able to afford but instead just directly targets them to encourage them to increase their limit when they have not been able to make their regular repayments. This is a really big problem. It is something that often gets people into difficult situations.

The objective of this bill is to encourage Australians to use their credit cards in an informed and responsible manner and it seeks to empower consumers to make wise financial decisions. One of the ways it achieves this is by requiring credit card application forms to include a facts sheet to inform consumers. The sheet will provide consumers with a credit card's interest rates on purchases and cash advances, the annual fee and other relevant fees.

The bill before the House today also protects Australians from credit card debt by preventing lenders from charging fees to customers who go over their credit limit. As I have said, this is incredibly important. The bill will also introduce regulations that require lenders to warn consumers about the consequences of making only minimum repayments. This is really important because often people see the minimum repayment and think, 'If I keep just paying this it will be okay.' Increased levels of information will greatly assist householders in managing their budgets and in making informed decisions about how much they should pay off to ensure they keep their heads above water.

Many Australians often have the routine of paying back only the minimum amount. This of course leaves interest to accumulate significantly over time and forces many Australians into a lifetime of debt repayment that they will never get ahead of. It is important that consumers are informed about what the consequences are of just making these minimum repayments.

Finally, this bill also introduces a standardised one-page facts sheet that will allow customers to compare home loans. This is really important for many people who perhaps are looking at buying their first home or investing. It is a very big decision and it is very hard to compare these products. Often people feel that they have to go to mortgage brokers to help them compare these home loans. Otherwise they perhaps just go to the institution they know without properly shopping around because it is quite complicated to understand the exit fees, the entry fees, the minimum repayments and whether to take out a variable loan or a fixed loan. All of these are difficult to compare between institutions, so these one-page facts sheets will enable families to directly compare the relative costs of mortgages from different financial institutions so that they can choose a loan that suits their budget and their needs.

This reform will improve competition in the mortgage market and force banks and other home loan providers to really be clear with Australian families about the products that they are offering. This is an important reform before the House today. This bill places some power back in the hands of consumers, making the information clear and concise, ensuring that people can objectively look at the different products that are available, whether they be credit cards or home loans, and allowing them to have some control and have information about these products. I am really pleased that it is this Labor government that has been committed to creating a fairer, simpler banking system. I believe that these reforms are part of an important step forward.

I hope that the Senate will also accept our exit fee legislation. I understand that there are some issues and the coalition in the Senate are trying to stop this. It seems a very odd situation when we here on the government side are trying to improve competition within the banking sector and trying to put choice under the control of householders. One of the ways of doing that is by banning unfair exit fees, something that I would expect both sides of the House to agree with, to ensure that there is competition within the banking sector. I hope that the Senate and the coalition members in the Senate see sense and pass that important legislation.

The legislation here before the House is one of the other important steps towards making a fairer, simpler banking system. I hope that this legislation here and the legislation in the Senate get passed because I think that they will make a real difference to local families in managing their credit and finances. On that note, I commend the bill to the House.

Daryl Melham (Banks, Australian Labor Party) Share this | Link to this | Hansard source

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 is about protecting Australians from unfair treatment in relation to credit card debt and helping them deal effectively with the banking system. It fulfils an election commitment by the government to assist in empowering consumers. The bill, firstly, seeks to regulate the circumstances in which borrowers go over their credit card limit and to abolish fees when they do so, except where the consumer has provided informed consent to opt in. At the moment, credit card providers usually allow credit card holders to spend over their limit and charge the cardholder an over the limit fee, which currently stands at about $225 per annum. The proposed reforms will allow consumers to go 10 per cent over the limit at the discretion of the lender and abolish the fee when the consumer does so. This discretion is important so that the lender can honour a critical payment, such as for an electricity bill. Consumers will be able to opt out of this default buffer or ask the lender for a larger buffer, depending on their individual circumstances.

Second, the bill seeks to ban unsolicited invitations to extend credit limits on credit cards. Unsolicited credit card limit extension offers can result in consumers ending up with much higher credit limits where they may only be able to repay the credit debt over a long period of time. This legislation will ban unsolicited extension offers from being sent to credit card holders unless they have previously given the organisation permission to send them.

Third, the bill seeks to require credit card providers to allocate payments to higher interest-bearing debts first. Currently, when consumers make repayments on debt the lenders automatically apply that repayment to the part of the debt on which the lowest rate of interest is charged. This bill reverses that so the repayments are applied to the higher interest-bearing debt first.

Fourth, the bill seeks to ensure that credit card application forms include a clear summary of key account features. This will ensure that consumers have the information about the key features up-front and hopefully these will be easily understood. It is anticipated that the facts sheet will include the interest rate on purchases, cash advances, promotional offers and other relevant fees.

Fifth, the bill seeks to require home loan lenders to give potential home loan borrowers a key facts sheet in order for the borrower to compare various home loans. This measure means that lenders must set out the costs of their standard home loans in a consistent and clear manner on a single page. In consumer testing of this proposal consumers found it extremely helpful and, because it was standardised across lenders, that it provided an easy comparison of home loan products.

This bill was sent to the House Standing Committee on Economics on 11 May this year. The committee recommended that the bill be adopted with one amendment. That amendment relates to the commencement date for clause 2—the key facts sheet for home loans. The committee recommended that the commencement date be amended to 1 January 2012 to allow banks more time to implement the reforms. The original date for implementation was 1 September 2011. This was confirmed by Treasury at the public hearing. The committee report noted, on page 13:

As with many reforms, there may be some teething issues and the committee would like to see some flexibility with enforcement in the early weeks. This would be especially so, given the traditionally high volume of credit transactions at the end of each calendar year.

The committee chair, the member for Dobell, Craig Thomson, noted in his foreword to the report:

The most important reform concerns unsolicited credit limit increase offers to individuals. The committee heard consistent evidence during the inquiry that the aggressive marketing by banks of limit increases was a key reason why some consumers have credit problems

The transcript of the public hearing, held on 25 May, is very interesting reading. Of particular significance was the evidence given by National Legal Aid and the Consumer Credit Legal Centre on the amount of work they do in representing people who are in debt because of credit cards. Mr Andrew Crockett, the chair of National Legal Aid, stated on page 24 of the transcript:

There was research done by the Law and Justice Foundation of New South Wales in 2006 in a number of disadvantaged areas in New South Wales and they found a very high incidence of legal events in people's lives. And 55 per cent of the events reported by respondents to that survey concerned consumer credit and debt issues. Similarly, in a more recent survey of legal needs in Australia commissioned by National Legal Aid, while we are still awaiting the final report of that survey, in the preliminary results, for the ACT anyway, we find about 26 per cent of reported legal events in people's lives relate to consumer and credit debt issues.

In essence, of the participants in the survey referred to, 55 per cent of the events were about credit card debt issues. We are all aware in this House of constituents who come to us for assistance when they are simply overwhelmed by the situation in which they find themselves because of credit card debt. Mr Coorey, a solicitor with National Legal Aid, went on to say that credit card debt is one of the most significant issues facing their more disadvantaged clients. He stated that economically and socially disadvantaged clients are more likely to end up in debt because of unsolicited credit card limit increases.

Later on in the hearing, during an interchange between Mr Brading from Wesley Community Legal Service and the member for Moncrieff—page 28 of the transcript—Mr Ciobo posed the question:

Are you saying that the most profitable group for a lender are those people who cannot afford to pay back the full balance every month? Is that what I am hearing from you?

Mr Brading replied: 'Correct.'

It is those people who are desperate to use their credit card and then find themselves only able to pay back the interest who enter into an almost unwinnable cycle of debt. Many people are in a position to pay off their credit card monthly, so the banks receive no interest from them. As Mr Brading said, it is those in the community who are in the most difficult financial circumstances that the banks benefit from, as they pay interest.

Ms Bond from the Consumer Action Law Centre provided an example—on page 29 of the transcript—of how this would occur. She said:

It is not that people get in trouble and then go out and get a credit card, but they start to get into trouble and perhaps they get a limit increase offer. Their mortgage is overdue and they have the offer, and so sometimes they accept these limit increases when they are in trouble, but it really is a combination of life events and the ease of use of credit and of increases when they are in trouble already.

The legislation before the House today also delivers on the government's commitment to introducing a compulsory one-page facts sheet for new home loan customers. There is no doubt that a home loan borrower is now faced with a bewildering array of choices when it comes to deciding the most appropriate home loan package. This is hardly made easier by the complexity of the materials provided by home loan lenders. Through the introduction of the facts sheet, the borrower will be in a better position to make an informed decision based on a side-by-side comparison. We know that choosing the best package for a home loan is one of the most important decisions that any of us can make. A mistake of half of one per cent can cost thousands of dollars, even tens of thousands, over the period of the loan. It is crucial that we have the information we need to make an informed decision presented in a format that allows easy comparison.

The explanatory memorandum provides some detail of what this facts sheet will provide, in part 3-2A. The terms of a home loan and types of contracts are usually regulated by the National Consumer Credit Protection Act 2009. The proposed key facts sheet for standard home loans will contain information and will comply with the regulations under the act. It is proposed that the key facts sheet will be prescribed by the regulations.

Chapter 2, item 2.11 of the explanatory memorandum outlines the summary of information to be provided by the facts sheet: the interest rate; the all-in rate—that is, the total cost including interest plus fees; the total cost of the home loan; particular product features; fees; and an explanation of how monthly payments will be affected if interest rates increase. With this simple facts sheet, home loan borrowers will be able to make a simple, straightforward comparison of the various options available to them.

What I find particularly pleasing about this legislation is that it comes from a COAG agreement. This is what good governance is about—states and territories working together with the Commonwealth to ensure equitable outcomes for all Australians, regardless of which state or territory they live in. I commend the bill to the House.

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

The 'Money' section in the Age, in an article by John Collett on 16 March 2011 about the legislation before us, supported these reforms, noting:

The proposed new laws on credit cards should be passed by parliament as they will help to limit the dangers of the not-so-fantastic plastic.

That sums up in essence what this legislation is all about. The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 will amend the National Consumer Credit Protection Act 2009 to give effect to the government's Fairer, Simpler Banking policy and introduce a requirement for lenders to give borrowers a simple one-page key facts sheet for home loans to help them shop around for a better deal.

The bill delivers on the government's election commitment to crack down on what people generally believe to be unfair treatment of Australians with credit cards and to help them get a better deal in the banking system. It is intended to give a better deal to the consumer, who I would have thought was the most important person in the banking system. The bill will give consumers more say over how they use their credit cards and help them better understand what they are signing up to. This is an important reform for the many households and businesses that use credit cards, whether sporadically or every day. Credit cards are here to stay, so we want a fairer system surrounding credit cards.

The measures in this bill build on the government's new national responsible lending reforms by giving credit card holders more control over the amount of money they borrow and ensuring that they are not charged excessive fees. This is about credit limits and the fees that go with such borrowing. It is all about sticking up for consumers against the big banks, stopping price gouging and reducing credit traps for the unwary. The main measures in this bill are in the areas of over-limit fees, the allocation of debt payments and credit extensions.

What do we mean by over-limit fees? Consumers want and need a credit card market that is transparent, that competes hard for customers and has built-in protections to help stop them falling into credit card debt traps that they may not be able to get out of. As the former speaker, the member for Banks, quite rightly pointed out, those people that can least afford it are those that are trapped in credit debt. Of course, a lot of us could not survive without our credit cards, especially in terms of convenience, but a large proportion of credit card revenue in fact comes from penalty fees, which include fees for exceeding the card limit. Credit card providers currently charge approximately $225 million a year in over-limit fees. Credit card providers generally allow accounts to go over their credit limits, with the credit provider then charging the borrower what we call an over-limit fee.

The reforms will ban over-limit fees unless a consumer has specifically asked for the ability to go over their limit and has indicated that they are prepared to pay a fee for this service. Without this agreement, lenders will be able to provide credit over a consumer's limit provided no fees are charged. It is important to allow lenders this discretion. For example, it is in the interests of a borrower for their lender to honour a payment of an electricity bill so their power is not shut off. Consumers can opt out of this default buffer if that is best for them. Indeed, they may consider it would help them to manage their finances better. They will also be able to ask their lender, if they so choose, for a larger buffer if they decide they are prepared to pay a fee for this service. It is about clear, transparent communications in what is, after all, one of the major relationships that takes place in our community.

What do we mean by the allocation of repayments? The measures we are putting in place in this legislation will force credit card lenders to allocate repayments to higher interest debts first rather than last, as it currently stands. Most credit card providers charge more interest for things like cash advances, as is their right. This bill will mean that credit card users who find that they need a cash advance for an unexpected bill, for example, will not have to wait to pay off all other credit card debt before the higher interest rate debt is reduced. The bill will reverse this order so that the consumers can pay off their higher-interest-bearing debts first, resulting in reduced interest charges. This is a very simple matter, and it is a welcome change. It is estimated that a credit card user could save $360 a year or more depending on their spending habits and credit limit. This approach has already been adopted in the UK and the United States of America. In response to the government's election announcement, the NAB has already introduced this change—all part of its marketing strategy now that it is a different bank—and that has benefits for consumers, particularly in terms of competition.

What do we mean by unsolicited credit limit extension offers? Sometimes consum­ers are offered credit limit extensions that require only a click of the mouse, an answer of 'yes' on the phone or a tick on a reply paid form. Only that! This can result in consumers extending their credit limits without due consideration of the implic­ations, which may include more debt and reduced lending capacity for home loans, personal loans and so on. Some consumers think: 'The bank is offering me this limit; I must be able to afford it. Surely the bank wouldn't offer me something if they didn't responsibly think I could afford it.' Forget it.

Relatively high limits might mean a debt can only be repaid over many years, incurring considerable costs in interest and potentially causing financial difficulty, if not ruination. The legislation will ban unsolicited credit limit extension offers from being sent to credit card holders unless they have specifically given previous permission to receive them. It is better to have that box ticked 'yes' than to give a willy-nilly blank-cheque credit extension. This will make sure that lenders give consumers more say over nominating their own credit limit. The government will introduce amendments to the bill to clarify that consents obtained before commencement will be valid for the purposes of sending unsolicited credit limit increase offers.

Other reforms announced as part of the Fairer, Simpler Banking policy are intended to be introduced through regulations to the National Consumer Credit Protection Act 2009, which I mentioned earlier. These include another important measure, to ensure that lenders tell consumers the implications of making only minimum repayments, such as repayment time frames et cetera. This is a very important one. It will help consumers avoid long-term credit card debt put on the never-never, resulting in higher debts and interest payments. The calculation of interest will also be standardised within these regulations to enhance comparability between credit cards. Lenders will also be required to ask consumers to nominate a credit limit when they apply for a credit card.

What about the application forms? The bill will require application forms for credit to include a key facts sheet for potential credit card users. This will give consumers upfront information in plain English about the key features of the credit card for which they are about to apply. Such information will include the interest rates on purchases, cash advances and promotional offers, the annual fee and other relevant fees.

The greater credit package also delivers on our commitment last year to introduce a compulsory, one-page key facts sheet for new home loan customers. This will allow consumers to easily compare loans they are offered by a big bank side-by-side with what will often be a better deal from their local credit union or building society, so people can clearly make the comparison in a table. We want consumers informed through better information so that they can compare deals, which will encourage banks and non-bank lenders to put forward better deals. Reform of the regulation of credit cards is part of phase 2 of the national credit reforms. These reforms are part of COAG's national credit reform agenda, as agreed by the Business Regulation and Competition Working Group chaired by Senator Sherry—from my own neck of the woods, Tassie—and Senator Wong.

The key facts sheet for home loans measure was part of the government's banking package, announced in December 2010. Lenders must set out on key facts sheets the costs of their standard home loans in a consistent and clear single-page format. It will allow consumers to easily compare home loans, particularly in relation to costs. Consumer testing in January 2011 showed that consumers found the information to be very helpful and that the standardised nature of the document permitted easy comparison between home loan products. Consumers who already had home loans stated a wish that the key facts sheet had been available when they were shopping for a home loan.

The prohibition on unsolicited credit limit extension offers and the election commit­ment to include advice about minimum repayments on statements, which is to be implemented in the regulations, will apply to both new and existing credit card contracts. That is a very important point to make. It will also involve and apply to existing credit card contracts. The government has strong legal advice from the Australian Government Solicitor that this is appropriate, because these reforms do not affect the original contract signed between the lender and the borrower. Finally, this government has a terrific record in maintaining a more competitive and sustainable banking system. Let me remind members of the House: banning exit fees outright on new home loans from 1 July 2011, boosting consumer flexibility to transfer deposits and mortgages, introducing a mandatory key facts sheet for new home loan customers, empowering the ACCC to prosecute anticompetitive price signalling, fast-tracking legislation to get a better deal for Australians with credit cards and the launching of a national community awareness campaign to empower consumers in banking. I want to remain positive about not just this legislation but our record, so I will not raise the opposition's very poor and inconsistent record of assisting consumers with credit cards, loans and home loans. I commend the legislation to the House.

Kirsten Livermore (Capricornia, Australian Labor Party) Share this | Link to this | Hansard source

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill puts in place a series of measures that fulfil the government's election promise to deliver a fairer and simpler banking system, a banking system that works for borrowers and credit card holders and other bank customers rather than simply growing profits for the banks.

The measures in this bill include improvements to credit card contracts and banking practices such as banning unsol­icited offers to borrowers to increase their credit limit, preventing banks from charging fees to customers who go over their credit limit and including a warning on monthly statements about the costs of only paying minimum repayments off credit card debt.

The bill builds on the substantial work we have done in the area of banking reform and consumer protection since coming to office in 2007. That work has been supported by the Council of Australian Governments and is motivated by the recognition by this government that the interests of consumers were not adequately protected against the enormous market power of the banks. Reforms since then have been designed to drive greater competition in the banking industry through providing customers with more information and more power to exercise their rights as consumers. Ultimately we want these reforms to reduce people's debt and save them money.

The bill amends the National Consumer Credit Protection Act 2009. That was landmark legislation which for the first time established a national consumer credit regime. Among other things that act provides for responsible lending conduct requirements on financial institutions. That means banks and other lenders are not allowed to provide credit products and services that are unsuitable for the consumer's needs and that the consumer does not have the capacity to repay. It also includes enhanced enforcement powers for ASIC and expanded consumer protection.

We always recognised that there would be more work needed to help consumers better manage their financial arrangements and to protect them from banking industry practices that relied on a lack of transparency and that risked creating debt traps for consumers. During the last election we announced our Fairer, Simpler Banking policy which takes our banking and consumer reforms further and particularly focuses on giving people a better deal on their credit cards. Credit cards have become a fact of life for most Australians. There are around 15 million credit card accounts in Australia today and many individuals and families have more than one card. Credit cards can be a convenient way for people to shop and are indispensable for many transactions, especially those carried out over the internet. They are also a source of enormous revenue for banks in both interest charges and fees. Both of these points are good reasons for the government to give special attention to credit cards and give consideration to appropriate regulation for that part of the lending sector.

There is also growing evidence that credit cards warrant such regulation going beyond the responsible lending obligations already in place. Credit cards have a number of unique features that can lead to problems for bank customers. They have high interest rates and holders are only required to repay a relatively small amount each month. Many customers can make that arrangement work for them but it can also mean that credit card debts can mount up very quickly and result in people paying interest month after month with little capacity to repay the principal. Credit cards are also the subject of particularly aggressive marketing by lenders, which often obscures the full financial implications of what is being offered to people. Given all of that, it is not surprising that financial counsellors and those working with struggling families—organisations like Wesley Mission—name credit card debt as the 'No. 1 cause of financial stress and consequent psychological problems'.

This government wants to make sure that Australian credit card holders can get the benefits of having a credit card without leaving themselves open to excessive fees and interest charges. That requires consumers to be fully informed about how their credit card operates and it requires lenders to provide information that can be easily understood and compared to other products in the market. The additional requirements on financial institutions contained in this bill were made plain during the election and since then there has been extensive consultation by Treasury with the banking sector and consumer representatives. There has also been an inquiry conducted by the House of Representatives Standing Committee on Economics which resulted in a unanimous report recommending support for the bill before us today.

During the course of the consultations, and in submissions put to the inquiry, there was a lot of resistance to the bill coming from banks and other lenders. It is easy to see why, when the Reserve Bank in its June quarter 2010 bulletin reported that fees charged to customers for exceeding credit card limits including late payments totalled $470 million for the year to 30 June 2009. That is just one example, but it gives the game away as far as the banking industry is concerned. They have a lot riding on this. They have a lot riding on the particular nature of credit card contracts and the business model built on that. But if the banks have a lot riding on this reform then it stands to reason that so have consumers: if banks are making a lot of money out of credit cards then consumers are losing a lot of money. That is why the government is determined to go ahead with this bill and the protections it will introduce.

In his second reading speech the Treasurer gave a number of examples of how credit card holders could save surprisingly large amounts of money by making small changes to the way they manage their credit cards based on the information that will be provided to them and the restrictions placed on lenders as a result of this bill. That might be increasing the amount they repay each month over and above the minimum monthly repayment. It might be by avoiding penalties for exceeding their credit limit by a small amount. Or it might be by putting card holders more firmly in control of how and when they increase their credit limit. We want to empower Australian consumers to better manage their credit card debts and avoid debt traps that are far too easy to fall into today. We also want banks and other lenders to embrace the opportunities that increased competition in the sector can bring.

I note that while other banks were making the case against these reforms, one bank—the National Australia Bank—was offering some of the same measures to its customers and selling them as a feature of its credit card products. For some time now the National Australia Bank has been aggressively marketing its cuts to fees and charges, two of which will come into effect across the industry under this bill. From January this year the NAB started applying repayments to the component of a cardholder's debt with the highest interest rate. This is in addition to an earlier decision by the NAB to abolish over-the-limit fees on all credit cards. I have seen reports where the National Australia Bank estimates these measures to save customers $170 a year. That is $170 of hard-earned money that previously customers were paying for no benefit to themselves and purely into the bottom line of the National Australia Bank. For its part the bank estimates that just the change to the debt repayment hierarchy will cost it $4 million. That just goes to show that what we are talking about in this bill is not some hypothetical wishful thinking. That is $4 million that will not come out of customers' pockets. These reforms will change the balance between banks and their customers—change it in the customers' favour and in ways that they will be able to measure in real dollars and cents.

I will turn now to the specific measures in the bill. They are all important changes but, according to the evidence before the parliamentary inquiry, the most significant one is the ban on unsolicited offers to borrowers to increase their credit limit. It has become common practice for lenders to send out material to their customers offering increases in their credit limit using words like 'preapproved' and making it as simple as signing a 'tick and flick' form. The submission to the House of Representatives Standing Committee on Economics from the Consumer Action Law Centre referred to a 2009 study in Victoria which showed that 84 per cent of credit card holders in that state had received an unsolicited credit card limit offer increase. That rate was consistent across demographic groups, including people who were unemployed or healthcare card holders.

In evidence before the committee the coordinator of the Consumer Credit Legal Centre talked of 'countless examples over the years of people on very low incomes who have accepted a series of credit limit increases'. The higher the credit limit the less likely it is that the full balance will be paid off each month. People end up on a debt treadmill, paying off a little each month while the interest on the outstanding amount grows to unmanageable and very stressful levels. They are not defaulting entirely, so the banks are happy, but these are the people who are finding themselves in a position where they can never get ahead either. We do not think that is fair and it should not continue. Under these changes people will be able to make considered decisions about whether it is necessary for them to increase their limit but they will not be bombarded with offers enticing them down a path that could result in higher levels of debt than they need or than they can manage to repay.

This bill will also require lenders to include on the monthly statements they send out to customers a clear warning about the consequences of making only minimum repayments. This will stop customers falling into the trap of paying the minimum repayment while the total continues to incur high rates of interest. The difference of paying even a slightly higher amount off the outstanding debt can add up to significant savings over time, and it is certainly better than giving that money to the bank as interest that could have been avoided. We want people to have the knowledge they need to make their money work as hard as it can for them, not the banks' shareholders.

For similar reasons the bill forces lenders to allocate the payments made by customers to higher interest debts first. The most obvious example is where a customer's bill includes an amount for cash advances and an amount for regular purchases. Previously the bank would credit the payment received against the regular transactions, which attract a lower interest rate, while the full amount of the cash advances would continue to accrue the higher rate of interest that applies to those transactions. This is the change the National Australia Bank estimates could save card holders $170 a year. Treasury puts the figure even higher. Whatever the amount is, it is better off in the pocket of the family who earned it than inflating the bank's profit result.

One of the largest sources of fees going to banks from credit cards comes from transactions that take customers over their card's debt limit. Currently lenders allow customers to exceed their limit, but the customer is then liable for an over-limit fee, usually around $20 to $25. This bank revenue is reported by the Reserve Bank as running into hundreds of millions of dollars annually. From now on lenders will be prevented from charging fees to customers who go over their credit limit unless they have expressly asked for this service. Lenders will have the discretion to allow transactions over the credit limit up to a default buffer of 10 per cent of the card's limit, but if they allow that to happen it cannot incur a fee back to the customer.

Finally, the bill seeks to provide customers with easy-to-use information about credit products like home loans and credit cards. Lenders will be required to produce a key facts sheet for standard home loans, setting out in a standardised format pricing and other information, allowing consumers to readily compare different home loans. A similar requirement will apply to credit cards so that credit card applications will include key information about the annual percentage rate and other contract terms. People will be able to compare the offerings of different institutions and work out what will cost them the least and what will work for them. That is exactly what we are trying to achieve in this bill. This bill is another way the government is helping Australians to get the most out of their hard-earned money. We want bank customers to have the knowledge and capacity to make sound financial decisions and informed choices so that they can access the financial products that they need. Above all, we want to make sure that people's hard-earned money can work for them.

Sharon Bird (Cunningham, Australian Labor Party) Share this | Link to this | Hansard source

I rise to support the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011. The purpose of the bill is to amend the National Consumer Credit Protection Act 2009, which includes the National Credit Code, and it continues this government's commitment to effective credit reform— in particular, our Fairer, Simpler Banking policy. The bill delivers on the government's election commitment to take actions to provide greater protections for Australians in their use of credit cards and most importantly to ensure they are not being charged excessive fees for this usage. I seek to speak in this debate because I am acutely conscious of the increasing role of credit in modern life. When I was in my young married days we had a home loan and store cards, and it was not long before credit cards were added to that. Now, many people also have credit on things like mobile phones, and the extension of credit throughout their lives has continued. On top of that, there is far more comprehensive calculation of and shared information about people's credit histories, so it has an even more far-reaching impact on their lives. It is critically important that as a national government we are actively engaged in this area.

In addressing the bill I will first outline the progress of the reform program of which this bill is a part. Then I will outline the specific details of the bill and, finally, I will address some of the important local implications of the bill for my own constituents. I turn first to the broader context. The government has been committed to building national responsible lending reforms, and we have been progressing this important agenda as part of COAG's national credit reform agenda. The Fairer, Simpler Banking reforms were announced during the 2010 election campaign, with the reforms to be implemented by mid-2012. Consequently, legislation was introduced in the first sitting of parliament this year which requires lenders to meet the new obligations from 1 July 2012. This particular bill will give consumers greater control over how they use their credit cards and will help them to be better informed about the credit agreement that they are undertaking.

To achieve this the bill covers five specific areas of reform. First, it regulates overlimit fees. A problem arises because credit card providers generally allow accounts to go over their specified credit limit, but the customer is then charged a higher overlimit borrowing fee for that activity. It is reported that credit card providers currently charge approximately $225 million per year in such fees. The reforms in this bill will ban overlimit fees unless the customer has asked for the facility—that is, they want the ability to go over their limit and they indicate that they are aware of and are willing to pay an additional charge for the facility. More generally, lenders will be allowed to provide credit in excess of the customer's agreed limit providing they do not charge a fee for their decision to allow the customer to overdraw on their credit. It is important to allow lenders this discretion, as in a range of circumstances they would allow an overdraw, but that should not draw an additional charge unless such an arrangement is explicitly previously agreed to by the customer. On the other hand, customers will also have the power to opt out of this default buffer if they feel that is a good option for them. Consumers will also be able to ask their credit provider, if they so choose, for a larger buffer for which they are prepared to pay an access fee.

The second area of reform in this bill is the allocation of repayments. It is currently the case, and my colleague the member for Capricornia outlined this very effectively, that the vast majority of credit card lenders allocate repayments firstly towards that part of the debt which is attracting the lowest interest rate. The example the member for Capricornia gave was that cash advances attract a higher rate than standard purchases, and so the lenders' policy is clearly detrimental to the borrower as the effect of the repayment is not maximised. This bill will reverse the order so that consumers can pay off their higher interest-bearing debts first. This will enable a credit card user to save an estimated $360 per year or more, depending on their spending habits and their credit limit. This approach has already been adopted in the United Kingdom and United States jurisdictions. I would also point out, as other speakers have, that since the announcement was made in the 2010 campaign the NAB in Australia has also introduced this change and is using it as a competitive argument.

The third area of reform in the bill goes to the practice of unsolicited credit limit extension offers, which have also been discussed by some of my colleagues. This is where unsolicited approaches are made, often by letter or, today, even by email or contact on the web when banking services are accessed. They offer preapproved, ready to go, immediate access to a higher limit, requiring very little engagement with the customer other than a yes or the tick of a box to up their limit. The problem is that consecutive decisions can very quickly end up with people having relatively high limits which are often beyond their capacity to manage. This increases the likelihood of repayment defaults and credit users falling into arrears, and it compounds the effect of the financial difficulties people find themselves in. This legislation will ban unsolicited credit limit extension offers being sent to credit card holders unless they have, again, previously given permission for such invitations to be sent to them. The original bill has been amended to clarify that consents obtained before the commencement will be valid for the purposes of this bill.

Many of the most important features of credit card services are encompassed in the application forms that are originally completed by the customer. This bill will require application forms to include a key facts sheet for potential credit card borrowers. This is intended to give customers upfront information about the key features of the particular credit card for which they are about to apply and can include information such as interest rates on purchases, cash advances and promotional offers, and the annual fee and other relevant fees. It should also be noted that further reforms that were part of the Fairer, Simpler Banking policy are intended to be introduced through regulations to the National Consumer Credit Protection Act 2009. These will include the requirement that lenders inform customers about the implications of paying only minimum repayments on their statements—a situation that often ends up in higher debt and higher interest payments and the feeling of being on the treadmill of never getting on top of your debt. They will also include standardisation in the calculation of interest to enhance comparability between credit cards and the requirement on lenders to ask customers to nominate a credit limit when they apply for a credit card.

This bill will also fulfil the commitment of the government to provide a key facts sheet for home loans. This was part of the government's banking package announced in December 2010. It will provide information on standard home loans in a consistent— (Quorum formed) In the time that is left to me I will address some of the local issues I want to speak about, given that my colleagues such as the member for Braddon have very effectively covered the full details of the bill in their contributions to the debate. In the final part of my contribution I would like to speak about an aspect of credit that is important, which I raised at the beginning of my contribution, around people managing their credit responsibilities and the implications that occur for them when they have difficulties with that.

There was an important pilot project on credit that I was able to launch in my local area in May. Many of us would be well aware of the ease with which people, particularly when they are vulnerable or in difficult circumstances, can fall into poor credit practices and end up in difficult financial circumstances, which leads to negative credit ratings. The implications of this poor rating on their ability to access credit, to get a rental property, to purchase telephone services and on many other aspects of normal daily life are profound. The repercussions drive them even further into financial difficulties and, all too often, into the grasp of aggressive and unscrupulous lenders in the general market place.

The Minister for Families, Housing, Community Services and Indigenous Affairs announced on 17 February this year that the federal government would provide $6.27 million for a pilot to be run by five community development finance institutions across Australia to provide individuals and organisations with appropriate financial product loans that they would otherwise be excluded from accessing. This measure recognises that Australia has a well-established banking industry but that there are individuals who suffer financial exclusion, maybe from low levels of financial literacy or poor knowledge of financial products and services. For these people the standard services may be denied because of previous poor records or they may exclude themselves because of their lack of trust or knowledge of those services. Sadly, all too often, these people can also fall prey to people like day lenders and so forth, who charge extremely high rates of interest. This often leads them into real financial distress. It is clear from many studies that this sort of pressure is devastating on families and can contribute to problems such as conflict and family breakdown.

The CDFI pilot seeks to build the capacity and resilience of disadvantaged and financially excluded individuals by attracting investment and injecting funds into community finance organisations which will offer them appropriate products supported by education and services to manage the repayment of these loans. They will provide financial literacy skills and, importantly, improve the saving and loan repayment record of the individual. This is an important program and in the Illawarra the two local partners have been funded with $2.3 million to deliver the pilot. The launch was organised by Mr Peter Quarmby, who is the executive director of strategic development at Community Sector Banking, which is headquartered and was established in Corrimal in my electorate. CSB in Australia's only specialist banking service for not-for-profit organisations and is joined by another excellent local service, Access Community Group, to deliver this important project to people in my electorate.

I commend the bill and the broader thrust of the government in credit reform to the House.

Tony Zappia (Makin, Australian Labor Party) Share this | Link to this | Hansard source

Between 1996 and 2007, credit card debt in Australia rose from $6.6 billion to $42 billion. Currently it sits at around $49 billion. Monthly figures for total credit card transactions—that is, cash advances and purchases—went from $2.1 billion in March 1996 to $18.3 billion in November 2007. For March this year, the figure was around $21.6 billion. In the last decade the collective profits of the four major banks rose from around $8 billion in 2001 to nearly $21 billion in 2010.

I make two observations from those statistics. Firstly, credit card debt blew out under the previous coalition government. Secondly, bank profits have risen as credit card use and credit card debt have increased. The obvious link between credit card debt and bank profits is simple, and other speakers on this bill have made reference to it. Firstly, there are more fees and charges—in particular, overlimit fees, which both the member for Cunningham and the member for Capricornia alluded to in their remarks on this bill. Secondly, the interest rate charged for credit card debt is generally much higher than for normal mortgage loan or overdraft debts.

In years gone by, the four credit cards were not used as prevalently as they are today. Bank customers might have sought a temporary overdraft or a personal loan, and a temporary overdraft or a personal loan would have generally attracted an interest of two or three per cent above mortgage loan rates. Credit card loans, which is effectively what they are when people use the credit facilities allowed to them under their credit card, are more in the vicinity of 18 to 20 per cent—that is, two to 2½ times higher than getting those same credit advances in years gone by.

There is no question that, in recent decades, Australians have changed the way in which credit is used. Since the introduction of Bankcard in 1974, our credit card culture has become entrenched. It has been largely driven by a push from the banking sector to encourage the use of credit cards as we head more and more towards a cashless society. A survey undertaken by the Australia Institute last year confirmed what anyone can see merely by opening their mail or taking notice of advertising—that is, banks are actively encouraging their customers to use credit.

The survey results, which were published in'Money and Power: the case for better regulation in banking', show the extent to which unsolicited offers were made for new credit cards, personal loans or increased credit card limits. Over a 12-month period, from mid-2009 to mid-2010, two out of three respondents had received an unsolicited offer for a new credit card, one in two had received an unsolicited offer to increase their credit card limit, one in three had received an offer for a personal loan and one in five had received an offer to increase the available credit on their home loan.

The banks will say that these offers were made by banks to existing customers who had demonstrated over an extended period of time a capacity to determine whether a higher credit card limit would be of service to them. The response that banks made offers to extend credit limits only to persons capable of making an informed decision, based on their capacity to repay the loan, may seem reasonable. However, in the context of a society driven by consumption, this situation warrants closer scrutiny.

As a society we are dedicating a lot of energy to addressing problems such as anxiety and depression. Financial hardship and insurmountable debt are often causes of anxiety and depression. Over the last decade, credit card debt rose from $16 billion in $2001 to $49 billion in April 2011. This represents an increase of over 300 per cent in the level of credit card debt Australians have incurred over the last decade. Using credit may not be anything new, but the level of debt being incurred is of concern. The measures in this legislation will assist individuals and families to manage their finances.

Turning to the specifics of the bill, the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 gives effect to the government's Fairer, Simpler Banking policy. These reforms will regulate the circumstances in which borrowers can go over their credit limits and will abolish fees when they do so, except in situations where the consumer has provided informed consent to opt in. They will require credit card payments be allocated to repayments of higher interest bearing debts first, and other speakers have referred to the importance of that matter. The reforms will ban unsolicited credit limit extension invitations that encourage borrowers to increase their credit limit, except where the consumer has provided consent to opt in. The reforms will make it mandatory for credit card application forms to include a clear summary of key account features and, finally, the reforms will introduce a requirement for home loan lenders to give potential borrowers a key facts sheet so that they can compare home loans.

Other aspects of the Fairer, Simpler Banking policy will be introduced through regulations to the National Consumer Credit Protection Act 2009. Regulating the circumstances in which borrowers can go over their credit limits is an appropriate measure to ensure that individuals do not find themselves in debt that they are unable to overcome. Indeed, I have to ask why such features are possible to begin with. The requirement that credit card payments are first made to higher interest bearing debts is logical and takes some pressure off individuals navigating their way out of debt. Banning unsolicited credit limit extension invitations that encourage borrowers to increase their credit limit, except for where the consumer has provided consent to opt in, may help banks to once again balance their role to one that is between a business seeking to maximise profits and a service provider to the community.

Bank workers in Australia are often paid a commission or have targets imposed on them to sell their bank's products, and encouraging customers to take on a heavier credit burden can be part of their employment demands. Less scrutiny is also being applied to providing consumers with additional credit. I recall listening some 12 months ago to a radio interview with a person who had got into enormous financial difficulty through credit granted to them by their bank. Ultimately, the person was taking a new credit card, with the credit that went with it, in order to pay off the previous one. This became a chain reaction, with one credit card after another being taken out by the consumer in order to secure credit to make the minimum payments on the previous credit card debt that the person had incurred. In the end, the person was simply unable to cope with the financial demands on them and I understand that the bank had to write off the debts. The problem with writing off the debts is that it does not really help the consumer at all—that consumer finds that they are now a credit risk and unable to secure credit in the future. Just as importantly, banks' bad debts are inevitably costed into their operations, which effectively means that every customer shares, in a sense, the cost to the bank of the bad debts incurred.

Historically, bankers have asked two questions when approving credit. Firstly, they asked about the availability of collateral. Secondly, they asked whether the client could demonstrate a capacity to make full repayment, including the interest that would be accrued. That no longer appears to be the case. I believe that regulation is critical to ensuring that the banks understand that their role goes beyond a narrow pursuit of profit but indeed plays a critical role in the lives of Australians and in the workings of the national economy.

These reforms also seek to ensure that potential customers have access to valuable information which they can use to make an informed decision about whether a particular account is the best option available to them. Providing a clear summary of key account features will do that. Similarly, a requirement that home loan lenders provide a key facts sheet so that potential borrowers can compare home loans is a simple reform which gives Australians the best chance of selecting a home loan that best suits their circumstances. It is not always easy for someone purchasing their first home to compare loans and understand the full implications of the undertakings they are about to embark on. Finally, I note that this legislation was referred to the House of Representatives Standing Committee on Economics and that the committee, in reviewing the legislation, recommended its adoption. I therefore commend this bill to the House.

Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 delivers on the government's election commitment to crack down on unfair treatment of Australians with credit cards and to help them get a better deal with their credit cards and home loans. The measures in this bill build on the government's first phase of consumer credit reforms and reflect the government's ongoing commitment to empowering consumers. I am indebted to the contributions of the many members of parliament, from all sides, who have spoken in this debate, in particular the most recent address by the member for Makin. As he highlighted, these reforms address the two most common credit products in Australia—credit cards and home loans. In relation to credit cards, the bill delivers on the government's election commitment and implements the most significant reforms in this area in 15 years. It will build on our new national responsible lending credit reforms by giving credit card holders more control over the amount they borrow.

Contrary to the claims of some in the House, these reforms did not appear mysteriously out of nowhere. We have had an extensive consultation process. My predecessor launched the green paper on 7 July 2010. Then we announced, during the 2010 election campaign, that we would implement these very reforms. Since that time, we have worked hard to consult with the banking industry to ensure these reforms were commercially workable while minimising implementation costs for industry. For example, in the lead-up to the Deputy Prime Minister's announcement of the Gillard government's comprehensive banking reform package—in the period prior, from July to December 2010—the Department of the Treasury met with the Australian Bankers' Association in no less than nine highly productive, face-to-face meetings. The government has continued to work closely with industry on implem­entation. The result is a bill that minimises the implementation costs for industry while also meeting our objective to get Australian families a better deal on credit cards.

This bill will give consumers more say over how they use their credit cards and will ensure that they are fully informed about what they are signing up to. The bill prohibits lenders from sending unsolicited invitations to borrowers to increase their credit limit. Currently, consumers who receive tick-a-box offers can end up overindebted; they can end up with credit limits for amounts they cannot easily repay and with arrangements which cost them more over the long term. Consumers will of course still have the opportunity to increase their credit limit if they decide that is what they want, but this bill will put a stop to consumers being bombarded, every time they open the mail, with preapproved tick-and-flick offers to increase their credit limit. The bill prevents lenders charging exorbitant fees to customers who go over their credit limit, unless those customers have expressly asked for this service. This important reform will mean an end to most credit limit overdraw fees and will mean significant savings for Australian families and all consumers. The bill requires lenders to allocate repayments to higher interest debts first so that families do not pay more interest than they should. A cash advance will be paid off before an interest-free purchase, saving consumers money.

In addition, we will also make regulations requiring all lenders to include clear infor­mation on monthly credit card statements warning consumers of the consequences of only making minimum repayments. Consumers will be encouraged to make higher payments rather than carrying debt at credit card interest rates. The bill also delivers on our commitment last year to introduce a compulsory key facts sheet for home loan customers. The Deputy Prime Minister announced in December that the Gillard government would take further action in three broad streams of reform—to empower consumers to get a better deal in the banking system, to support our smaller lenders so they can put more competitive pressure on the big banks and to secure the long-term safety and sustainability of the financial system so it can continue to provide reasonably priced credit to Australian households and small business.

To have a competitive banking system, consumers have to be able to walk down the street and get a better deal for the family. To do that, consumers need two things: firstly, to be rid of unfair exit fees and, secondly, to have the tools and the information to be able to compare the offerings of different lenders. That is why the introduction of the key facts sheet is so important. Families will be able to compare the cost of different home loans by putting facts sheets from different lenders side by side. They will be able to tell at a single glance the savings they could make between different home loans every year and over the life of the loan. This reform is all about forcing banks and other home loan providers to be transparent and honest with Australian families and promoting compet­ition in our banking system. Choosing the wrong loan can be expensive. Half a per cent more interest on a $250,000 loan can cost a borrower $30,000 more over 30 years. It is a very important step in empowering Australians to be able to make the best financial decisions for themselves.

I will shortly introduce some minor amendments to this bill which are the result of feedback from stakeholders. These amendments will make it easier for lenders to comply but do not in any way reduce the effectiveness of the measures we are introd­ucing. The Gillard government is changing the way banks do business and putting power back into the hands of the consumers. These reforms will help Australians with credit cards and home loans manage their debt so that every dollar of a borrower's hard-earned repayments works harder for them.

As the consumer representatives pointed out at the House of Representatives Standing Committee on Economics hearings into this bill, this is an important piece of legislation. This bill is part of our commitment to always stand on the side of consumers. I encourage all members of the House to do the same. I present a supplementary explanatory memorandum to the bill.

Question agreed to.

Bill read a second time.