Consultation Regulatory Impact

Contents

SUBMISSIONS........................................................................................................................................................ 3

EXECUTIVE SUMMARY................................................................................................................................... 4

1. OVERVIEW OF THE INDUSTRY........................................................................................................ 14

1.1 INDUSTRY PARTICIPANTS............................................................................................................... 14

1.2 SIZE AND VALUE OF THE INDUSTRY............................................................................................ 14

2. STATEMENT OF THE PROBLEM..................................................................................................... 15

2.1 SIZE AND IMPACT OF THE PROBLEM............................................................................................ 15

2.1.1 Default, write-offs and minimum repayments.................................................................. 16

2.1.2 Debt Collection..................................................................................................................... 16

2.1.3 Bankruptcies.......................................................................................................................... 17

2.1.4 Impact on consumers and potential wider impact......................................................... 17

2.2 WHO IS AFFECTED AND WHY?....................................................................................................... 18

2.3 CURRENT REGULATORY STRUCTURE........................................................................................... 19

2.4 PROBLEMS WITH DISCLOSURE BASED REGULATION................................................................. 23

2.5 GENERATING FUTURE GROWTH IN THE CREDIT CARD MARKET............................................. 23

2.6 REGULATORY FAILURE.................................................................................................................. 26

2.6.1 Application process and timing and nature of information........................................ 26

2.7 SETTING THE CREDIT LIMIT.......................................................................................................... 27

2.7.1 Assessment method............................................................................................................... 31

2.7.2 No incentive for card issuers to change the system....................................................... 31

2.8 MINIMUM REPAYMENT PERCENTAGES....................................................................................... 32

2.8.1 Redress.................................................................................................................................... 33

2.8.2 Enforcement and penalties................................................................................................. 33

2.9 APPROACH TAKEN IN OTHER COUNTRIES TO ADDRESS CREDIT CARD ISSUES..................... 34

3. OBJECTIVES OF GOVERNMENT INTERVENTION................................................................... 35

3.1 GROUPS POTENTIALLY AFFECTED BY GOVERNMENT INTERVENTION.................................. 35

4. POLICY OPTIONS.................................................................................................................................... 36

4.1 OPTION 1: MAINTAIN THE STATUS QUO..................................................................................... 36

4.2 OPTION 2: INCREASED PENALTIES AND BETTER ENFORCEMENT OF THE CURRENT LAW. 37

4.3 OPTION 3: EDUCATION AND INFORMATION.............................................................................. 38

4.4 OPTION 4: SELF REGULATION...................................................................................................... 39

4.5 OPTION 5: CO-REGULATION.......................................................................................................... 40

4.6 OPTION 6: REGULATION................................................................................................................ 41

4.6.1 Option 6.1: change the timing of essential information disclosure........................... 41

4.6.2 Option 6.2: require credit providers to allow consumers to nominate the credit limit

sought.................................................................................................................................... 42

4.6.3 Option 6.3: Prohibit the card issuer from providing more credit than the consumer

can repay from income without substantial hardship................................................. 42

4.6.4 Option 6.4: Provide relief for consumers by making the debt unenforceable to the
extent that it exceeds an amount granted in accordance with Option 6.3, including

interest charged.................................................................................................................. 44

4.6.5 Option 6.5: Require card issuers to warn consumers about the effect of paying only

the minimum repayments................................................................................................... 45

4.6.6 Option 6.6: Require card issuers to increase the minimum repayment percentage

for new credit card contracts and for offers of increased credit limits on current

cards...................................................................................................................................... 46

4.7 RECOMMENDED OPTION................................................................................................................ 47

5. IMPACT ANALYSIS................................................................................................................................. 47

5.1 OPTION 1: MAINTAIN THE STATUS QUO..................................................................................... 47

5.1.1 Evaluation............................................................................................................................. 49

5.2 OPTION 2: INCREASED PENALTIES AND BETTER ENFORCEMENT OF THE CURRENT LAW. 50

5.2.1 Evaluation............................................................................................................................. 51

5.3 OPTION 3: EDUCATION AND INFORMATION.............................................................................. 52

5.3.1 Evaluation............................................................................................................................. 53

5.4 OPTION 4: SELF REGULATION...................................................................................................... 54

5.5 OPTION 5: CO-REGULATION......................................................................................................... 54

5.6 OPTION 6: REGULATION................................................................................................................ 54

5.7 OPTION 6.1: CHANGE THE TIMING OF ESSENTIAL INFORMATION DISCLOSURE.................. 54

5.7.1 Evaluation............................................................................................................................. 55

5.8 OPTION 6.2: REQUIRE CREDIT PROVIDERS TO ALLOW CONSUMERS TO NOMINATE THE CREDIT

LIMIT SOUGHT.................................................................................................................................. 55

5.8.1 Evaluation............................................................................................................................. 57

5.9 OPTION 6.3: PROHIBIT THE CARD ISSUER FROM PROVIDING MORE CREDIT THAN THE

CONSUMER CAN REPAY FROM INCOME WITHOUT SUBSTANTIAL HARDSHIP........................ 58

5.9.1 Evaluation............................................................................................................................. 61

5.10 OPTION 6.4: PROVIDE RELIEF FOR CONSUMERS BY MAKING THE DEBT UNENFORCEABLE TO

THE EXTENT THAT IT EXCEEDS AN AMOUNT GRANTED IN ACCORDANCE WITH OPTION 6.3,

INCLUDING INTEREST CHARGED................................................................................................... 62

5.10.1 Evaluation........................................................................................................................... 64

5.11 OPTION 6.5: REQUIRE CARD ISSUERS TO WARN CONSUMERS ABOUT THE EFFECT OF PAYING

ONLY THE MINIMUM REPAYMENTS............................................................................................. 64

5.11.1 Evaluation........................................................................................................................... 66

5.12 OPTION 6.6: REQUIRE CARD ISSUERS TO INCREASE THE MINIMUM REPAYMENT PERCENTAGE

FOR NEW CREDIT CARD CONTRACTS AND FOR OFFERS OF INCREASED CREDIT LIMITS ON

CURRENT CARDS............................................................................................................................... 66

5.12.1 Evaluation........................................................................................................................... 68

6. CONSULTATION...................................................................................................................................... 68

6.1 FUTURE CONSULTATION PROCESS................................................................................................ 71

7. EVALUATION AND REVIEW............................................................................................................... 71

Submissions

All interested individuals and organisations are invited to comment on the Ministerial Council on Consumer Affairs’ Responsible Lending Practices in Relation to Consumer Credit Cards Consultation Regulatory Impact Statement.

The Regulatory Impact Statement is available for downloading at:
www.consumer.gov.au and: www.fairtrading.nsw.gov.au

Businesses affected by this legislation should identify in their submissions any costs and benefits they might anticipate from the proposals in qualitative and quantitative terms. These should relate to individual options and not be in terms of unsupported general comments.

Comments in writing should be emailed, posted or faxed to:

Senior Project Manager (Credit)

Policy & Strategy Division
NSW Office of Fair Trading
PO Box 972

PARRAMATTA NSW 2124

Fax: (02) 9338 8918

e-mail: policy@oft.commerce.nsw.gov.au

Closing date for submissions is 3 October 2008.

Executive Summary

The problem this consultation regulatory impact statement seeks to address is that asmall percentage, but substantial number of consumers are burdened with ongoingunmanageable credit card debt which appears to be occasioned by a number of factors, including inadequate protection from consumer credit laws.

While the percentage of affected consumers is relatively small compared to the much larger percentage of consumers who manage their cards successfully, the impact on the affected consumers is severe, both financially and in its social impact.

Major intervention in the consumer credit market has already occurred with the commencement of the Consumer Credit Code (the Code) in all jurisdictions in 1996.

The Code provides relevant information to consumers about the costs and conduct of the loan. In the event that consumers are treated unfairly, the Code relies on consumers taking independent action to deal with unfair practices.

The consumers that are the centre of concern in this paperare those who have low financial literacy and do not appreciate the implications of, first, spending to the limitand second, paying only the minimum repayment. Others may have an unrealistic appreciation of their capacity to repay. This group of consumers generally consists of low income, less well educated consumers, and may include the demographic found to have the lowest financial literacy - young people and the elderly.

The problems outlined in this paper suggest that the following are factors that contribute to problematic levels of consumer credit card debt:

•Essential information is received at a time when it is unlikely to be useful;

•Credit providers’ assessment practices maximise the amount of credit
granted;

•Minimum repayment percentages are set at a very low level;

•The legislative requirements are remedial, not preventative, and the remedy
does not have a systematic effect.

Government intervention therefore will aim to:

1. Assist consumer choice of competitively priced credit card products;

2. Adequately protect consumers, especially vulnerable or disadvantaged consumers, from lending practices which irresponsibly provide continuing credit at levels which cannot be repaid without substantial hardship;

While at the same time:

3. Minimising the effect on consumers who manage their cards satisfactorily.

Credit card debt issues are relevant to all jurisdictions. The Ministerial Council on Consumer Affairs has acknowledged the importance of this issue by including it on the national agenda.

Proposals for standard setting and regulatory initiatives which are made at a national level and which have the potential to restrict competition are required to include evidence that the competitive effects of the regulation have been considered; that the benefits outweigh the likely costs; and that any proposed response is no more restrictive than necessary in the public interest.

This document sets out the problems reported in the marketplace and identifies those structural elements which are considered to be an impediment to effective marketplace solutions.

Possible regulatory and non-regulatory approaches are canvassed and options are set out, with analysis of the potential costs and benefits to the community.

Comparisons of relative benefits and costs of policy options

The objective is always to quantify benefits and costs of proposed options as much as possible. However, when dollars and cent values are not available, a qualitative assessment of potential costs and benefits is useful, as is the relative capacity of the option to meet the objectives of intervention.

Tabular presentation can assist comparison. This will help if, as is likely, a suite of policy instruments is to be considered (eg education and information combined with one or more regulatory options).

The benefits (‘pros’) and costs (‘cons’) of these options are summarised in the tables
below.

Interested parties are asked to contribute to the information contained in these tables by supplying financial impact data for the purposes of obtaining the most accurate set of benefits and costs, and other knowledge, on which to base final decisions.

The options are:

Option 1: Maintain the status quo

Option 2: Increased penalties and better enforcement of the current law

Option 3: Education and information

Option 4: Self-regulation

Option 5: Co-regulation

Regulatory options:

Option 6.1: Change the timing of essential information disclosure

Option 6.2: Require credit card providers to allow consumers to nominate the credit limit sought

Option 6.3: Prohibit the card issuer from providing more credit than the consumer can repay from income without substantial hardship

Option 6.4: Provide relief for consumers by making the debt unenforceable to the extent it exceeds an amount granted in accordance with option 6.3, including interest charged

Option 6.5: Require card issuers to warn consumers about the effect of paying only the minimum repayments