|
| |
Defined Terms and Documents
Financially Uneducated And Vulnerable Australian
Credit Cardholders or Vulnerable Cohort means approx.
20% of Credit Cardholders,
which include
Persistent Revolvers
and some
Occasional Revolvers,
in Australia who are over 18 years of age and -
1.
Lack Financial Acumen due to
possessing low
Financial Literacy Skills;
and/or
2. suffer from
Compulsive Buying
Disorder,
who have paid
high
Usurious Unsecured Interest Rates
thereby contributing grossly disproportionate
Interest And
Penalty Fees
Revenue on
Credit Cards and
are classified by the below mentioned
Productivity Commission Staff Working Paper as
'level 1' or 'level 2'
Financial Literacy Capacity
Australians.
The Financial
Literacy Foundation's Australians understanding money survey of 1,500
Australians in 2007 found:
•
72 per cent of adults reported having at least one credit card;
• 20 per cent of
adults fail to regularly pay off the total balance owing on credit cards; and
• 13 per cent say
they usually pay only the minimum amount owing.
Hence, 13% of Australian
Credit Cardholders
usually
only paid the
minimum repayment in 2007.
The below extracts from the Productivity
Commission's Staff Working Paper
Links Between Literacy and Numeracy
Skills and Labour Market Outcomes (August 2010)
establish that the
Numeracy And Literacy Range Of
Australians vary markedly, whereupon only a tad over half the population possess
minimum required numeracy and
Financial Literacy
skills to meet the complex demands of
everyday life and work in the emerging knowledge-based economy:
–
for nearly half of the
population were assessed at either levels 1 (the lowest level) or 2, both of
which are below the minimum level deemed necessary to participate in a
knowledge-based economy (level 3).
In 2006, the
proportion of the working-age population (15–64 years) who had Language Literacy Numeracy
(LLN) skills at
levels 1 or 2, supposedly lower than the minimum required, was 44 per cent for
prose literacy and document literacy, and 50 per cent for numeracy (figure F.1). The proportion at level 3 was 39 per cent for prose literacy, 37 per cent for
document literacy and 33 per cent for numeracy.
level 3 is regarded by the survey developers as the ‘minimum required for
individuals to meet the complex demands of everyday life and work in the
emerging knowledge-based economy’.
Read:
Summary of Productivity
Commission's Staff Working Paper Links Between Literacy and Numeracy
Skills and Labour Market Outcomes dated Aug
2010.
Thousands of
Financially Uneducated And Vulnerable Australians who have paid in excess of $5,000 in interest and fees on
Credit Cards over a three year period can readily be contacted
by the
44
community organisations in Australia that employ about 500 financial
counsellors to provide free, confidential advice for people who are
struggling to pay their bills explained in
Australian
Governments allocate $43 million annually to 44 Australian charities to provide
financial counselling to Australians.
Consumer Credit Reform and Behavioural Economics: Regulating Australia’s Credit Card Industry - May 2012
includes:
"The
majority of credit card users (by number) in Australia are
‘transactors’, consumers who pay outstanding balances in full on or before the time the minimum monthly
repayments fall due and thus do not incur interest rate or penalty charges.4
4
The number of Australians paying their credit card balances
in full every month has risen since the mid 2000s to over 63 % by 2009 according to statistics from the
Household, Income and Labour Dynamics in
Australia survey: see Ellis Connolly and Daisy McGregor, ‘Household Borrowing
Behaviour: Evidence from HILDA’ (2011) March Quarter Reserve
Bank Bulletin 9, 13. This is consistent
with credit card use in other mature economies, including the United States: Robert J Mann,
Charging Ahead: The Growth and
Regulation of Payment Card Markets (2006, Cambridge University Press) 75. However, the Reserve Bank of
Australia statistics indicate that revolvers account for a majority by value of the aggregate balance
outstanding on credit cards: Reserve Bank of Australia, Statistical Table C1: Credit and Charge Card Statistics
(Last updated 14 Nov 2011) (since August 2002,
when the Reserve Bank first published this information, the aggregate amount of
balances accruing interest has consistently accounted for a majority of the total balances outstanding).
‘Revolvers’, who make up
the other category of credit card user (and who account for the majority of total outstanding
balances on credit cards), pay the minimum monthly repayments or some larger fraction of the
outstanding balance and are exposed to the typically high interest rates levied
on the unpaid amount.5"
5
The 2011 Dunn and
Bradstreet Consumer Credit Expectations Survey found that 34% of Australian
households expect to face some level of difficulty meeting credit card
repayments, with 8% of participants stating that meeting repayments would be ‘very difficult’: Dunn and Bradstreet,
Consumer Debt Expectation Survey
(June 2011) 34. The 2010 Australian Debt Study found that 12% of survey participants
had missed a minimum credit card bill repayment: Galaxy Research, Australian Debt Study Report,
March 2010.
For a small but
significant group of consumers (who fall into the category of revolvers), credit
card use can lead to financial
hardship, 9
including bankruptcy.10
From a Government and consumer advocate perspective, although
the percentage of consumers experiencing financial hardship is small, this group
is significant because the
impact of financial hardship is severe.11
Family breakdown, violence, social exclusion, crime and a
long term impact on the capacity to provide for housing, health, education and retirement are serious
consequences of financial hardship.12
This increases the demand on government and community agencies.
The recent reforms to credit card lending are designed to alter credit card usage and thus consumer
behaviour with the express purpose of reducing the rates of unmanageable credit card debt causing
financial hardship.
This note explores the
recent reforms enacted under the
National Consumer Credit Protection Amendment (Home Loans
and Credit Cards) Act 2011 (‘Amendment Act’)
and
Regulations. The note links the reforms to
behavioural economics by identifying how the reforms address two key consumer
biases – optimism and imperfect
self‐control. The note examines how the reforms seek to alter the behaviour of consumers vulnerable
to financial hardship as an alternative to uniform or ‘blanket’ disclosure.
Increased blanket
disclosure, which involves providing standardised, non‐customer‐specific
information
about the risks and
benefits of financial products, is the predominant response to customer
protection and the predatory sale
of financial products by lenders. Vulnerable consumers often display low levels
of financial literacy
(which may undermine the utility of blanket disclosure for these consumers), and
the increased vulnerability
to financial hardship increases the need for regulatory intervention.13
Behavioural economics
and financial literacy research offers insight into how regulation can respond
to sub‐optimal financial
behaviour through targeted disclosure as a regulatory alternative.
| |
|