Other Documents That Recognise 'Vulnerable (At Risk) Credit Cardholders

Chapter 9 - Other issues: Utilities, credit, gambling of SENATE STANDING COMMITTEES ON COMMUNITY AFFAIRS - REPORTS ON COMPLETED INQUIRIES - 2002 - 2004

Consumer credit regulation - Footnotes

9.9        Concerns were expressed during the inquiry at the lending practices of some credit providers and the problems caused by the easy availability of credit, especially as it impacts on low income households. One witness noted that:

The financial cost to individuals who use credit, payday lenders or sell or pawn their belongings in order to survive is excessive and again highlights the inequalities in this society that allows the financially vulnerable to be exploited.[11]

9.10    The Australian Consumers' Association (ACA) articulated this concern:

...we have become increasingly alarmed at levels of debt among Australian households. While that is certainly spread across all income levels and encompasses a variety of sources of credit – not just credit cards but personal loans and, of course, mortgages – we are particularly concerned about the impact on low-income households who have quite high debt to income ratios and their capacity to manage that debt, particularly in the case of illness or other unexpected life events such as unemployment, and to maintain their capacity to stay out of bankruptcy in particular.[12]

9.11    The Australian Consumers' Association stated that, based on numerous studies, it was single parents, renters and others on low incomes that experienced the most difficulties in managing credit card debt. The ACA noted that not only are increasing numbers of these people presenting to financial counsellors with problems arising out of credit card use and other inappropriate levels of lending by financial institutions, but it is also exacerbating the degree to which they can be caught in a poverty cycle through debt traps.

Not only are these people going through the stress of being in a situation of being overcommitted when it comes to their debt levels and their credit card use, but they then become targets for refinancing and the churning that goes on by a variety of agencies wishing to charge them fees to put them into other credit products and further exacerbate the extent to which they are caught in that debt trap.[13]

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Commonwealth Government Consumer and Financial Literacy Taskforce - Australian Consumers and Money — Discussion Paper - Executive summary - 31 Aug 2004

While not actually breaching any laws, it is an unfortunate fact that many business operators in Australia continue to act in unethical or unhelpful ways to consumers. A good example of this is the way in which some credit services are marketed towards vulnerable consumers.

This is why the Taskforce proposes a pincer approach — improving consumer and financial literacy while at the same time, improving business practices. Smarter consumers drive better choices in the market while responsible businesses drive longer term profits by building trust with consumers. This is clearly a good outcome for both businesses and consumers.

Governments also have a role to play in providing proper regulatory frameworks that improve information flow and protect against consumer detriment. An unintended consequence of this can sometimes be complexity and bureaucracy which leads to confusion and frustration amongst consumers and high compliance costs for business which are, in turn, passed on to consumers.

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Responsible lending practices in relation to consumer credit cards - Prepared for the Ministerial Council on Consumer Affairs (now the Consumer Affairs Foundation) - August 2008 - State of New South Wales through the Office of Fair Trading, 2008

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;

2.1.3 Bankruptcies

Excessive use of credit was the underlying cause of insolvency in 27.2% (5555 bankruptcies) of non-business related personal insolvencies in 2006-7 across Australia, an increase of almost 1.4% compared with the previous financial year.
This was second only to unemployment at 32.03%, which decreased from 33.4% in the same period⁷. The bankruptcy figures do not include those recorded for debt agreements (2682) and personal insolvency agreements (31) for the category of excessive use of credit. These constitute 40.59% and 24.22% respectively of debt and personal insolvency agreements.

A partner at chartered accountant Hall Chadwick, Mr Paul Leroy, was quoted in March 2007 as saying that the inability to meet credit card payments is the biggest reason people go bankrupt.⁸

2.1.4 Impact on consumers and potential wider impact

The issue of concern in this paper is that a relatively small sector of the community is vulnerable to exploitation by card issuers and, because of a small income base, once in a situation where all income is totally committed to maintenance and servicing debt, there is no way that the consumer can reverse the circumstances in which they have unwittingly become involved. This group of affected consumers will be referred to in this paper as “disadvantaged.”

The personal and social impact of debt can be severe: it can lead to family
breakdown and violence, social exclusion and crime. Wesley Mission research conducted in 2006 from a random sample of 400 households reported that 58 percent of the people who responded said that financial stress had an impact on themselves, their family or the broader community in the past six years. Of the total sample 5.8% said worry about money contributed to relationship breakdown; 3.5% said worry about money contributed to substance abuse; 3.3% said it contributed to increased or frequent gambling, and 1.3% said it contributed to violence in the relationship.

As well, the ongoing commitment to interest payments on credit card debt has a major impact on a person’s long term capacity to provide for themselves in respect of housing, health, education and retirement. It is clear that this commitment will exclude expenditure on other goods and services, some of which may be for essential items or health care.

There may therefore be increased demands on all helping agencies whether government or community based, to assist those who are unable to provide for themselves, and has implications for pensions, health provision, housing and other government services.

The Commonwealth Government Consumer and Financial Literacy Taskforce was set up in February 2004 to develop a national strategy for consumer and financial literacy. The Taskforce noted that “while not actually breaching any laws, it is an unfortunate fact that many business operators in Australia continue to act in unethical or unhelpful ways to consumers. A good example of this is the way in which some credit services are marketed towards vulnerable consumers.”

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Submission to the 'Responsible lending practices in relation to consumer credit cards' - Nov 2008 from the Consumer Credit Legal Centre (NSW) Inc

Summary of submissions

•       CCLC considers credit card debt to be the largest single cause of debt problems in the consumer credit market, despite the lower amounts involved as compared to housing finance.

•       While housing finance has a greater potential effect on the wider economy, credit card debt interacts with housing debt in obscure and insidious ways, negatively impacting on the ability of many borrowers to meet their mortgage commitments in the longer term.

•       CCLC does not support any option short of additional regulation of lending in the credit card market.

•       Responsible lending obligations should apply across the market, not just in relation to credit cards.

•       Responsible lending legislation should provide an incentive for lenders to review their practices carefully to ensure they do not lend irresponsibly.

•       Responsible lending legislation should provide a fair remedy for affected consumers.

•       There should be a set period (perhaps 3 years) after which no further draw downs should be allowed on existing accounts, with borrowers who qualify for new accounts with higher minimum repayments being able to apply for alternative products as appropriate.

The RIS refers to “a relatively small section of the community”.. “vulnerable to exploitation by card issuers” …”because of a small income base”. Of the callers analysed by CCLC from the 2004-2006 period, the caller’s income was low in 58% of cases (below $26,000 per annum) and medium (below $52,000) in a further 15%. Three per cent identified an income level of over $52,000 and the remainder (24%) did not specify their income level. This suggests that although credit card debt is a particular burden for very low-income consumers, it certainly extends into the middle-income bracket and beyond.

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The financial literacy of young Australians: An empirical study and implications for consumer protection and ASIC’s National Financial Literacy Strategy - Paul Ali, Malcolm Anderson, Cosima McRae and Ian Ramsay of Melbourne Law School, University of Melb - 2014

While these objectives are laudable, Australian and international advocates for vulnerable and low-income consumers have warned that financial literacy, with its focus on consumer education,
should not be implemented at the expense of strong regulation. Assisting consumers who are particularly vulnerable to exploitation and unmanageable debt requires more than financial literacy education. Further, consumer advocates submit it is erroneous to assume that all detriment, particularly for low-income and vulnerable consumers, is caused by low financial literacy.