2

Over the course of the last 12 months we have received an increasing number of

questioned the initial approval of the credit card facility, many have concerned

increases to existing credit card limits.

The disputes raise issues about whether the lending arose as a result of

unconscionable or misleading conduct, whether the contract was unjust in

accordance with the provisions of the Uniform Consumer Credit Code

(“UCCC”) or whether there was maladministration in the decision to lend in

accordance with our Terms of Reference. The usual claim is that the credit card

holder should not have to repay all or part of the credit provided.

In Bulletins 26 (September 2000) and 33 (March 2002) we set out our approach

to issues arising in disputes concerning credit cards. Each of those Bulletins

touched on the issue of maladministration in the context of the granting of

credit cards and increases in limits applicable to those credit cards. This

Bulletin sets out in detail the rationale for our approach to disputes about

maladministration in granting credit on credit card accounts and illustrates our

approach to loss and the resolution of disputes. We also make some comments

about cases that raise a possible claim that the contract was unjust.

A note on the language used in this Bulletin: we have used the term

“appropriate credit limit” to refer to the credit limit which would be regarded

as the limit which would have been appropriate if the member properly applied

its credit assessment method used for new applications to a complete and

correct application. References to “excess credit” are to amounts of credit

available above the appropriate credit limit.

The appropriate credit limit reflects the assessment issues which arise under

our maladministration jurisdiction and the obligations to assess capacity to

repay which arise under the Code of Banking Practice (“CBP”) and the UCCC.

The focus of this Bulletin is maladministration. While there is discussion about

(“Contracts Review Act”), cases which raise those claims require a different

analysis of the circumstances and may also require a different approach to

compensation.

3

When reading this Bulletin it is important to keep in mind that the primary role

of the Ombudsman is dispute resolution on a case by case basis. The

Ombudsman also has a responsibility to identify and report on systemic issues

and this office contributes to discussions on policies and decisions which affect

our members and their customers. However, it is not for this office to take on a

regulatory role whether explicitly or implicitly via its decisions.

The Independent Review of the Scheme completed in December 2004 noted that

the Scheme was somewhat unfairly the subject of some frustration because it

does not take on a regulatory role. As the Review confirmed, the Scheme’s role

questions around the prevalence of credit cards in Australia and the general

level of credit card debt are outside the scope of the Ombudsman’s powers and

so, this Bulletin.

The Ombudsman operates under Terms of Reference that describe the types of

disputes he can consider. Clause 5.1(a) of the Ombudsman’s Terms of

Reference says:

It is likely that financial institutions will respond differently to an application

for credit from the same applicant because of their different considerations of

credit risk and the profile of the applicant. The Ombudsman is not able to

interfere with the lending policies of its members to the extent that they reflect

the lender’s commercial judgment. So disputes solely about a lender’s decision

not to advance credit or its decision to demand repayment of a debt properly

owed and exercise its legal entitlements to recover the debt are about the

lender’s commercial decision and, as long as no other claims arise, are matters

which are outside the Ombudsman’s jurisdiction.

4

If, however, a dispute raises a question about whether there was

maladministration in a decision about lending or security, it falls within clause

5.1(a) of the Terms of Reference.

The Terms of Reference also specify the criteria for decision making. Clause 1.3

states that the Ombudsman must have regard to the law, applicable industry

codes or guidelines, good industry practice and fairness in all the

circumstances.

Accordingly, when assessing disputes that raise issues of maladministration in

the decision to lend we will also take into account:

section 70;

applicable;

circumstances of the case give rise to a claim of unconscionable or

resident and/or

has adopted the CBP.

Whilst the focus of this Bulletin is on maladministration in lending, we have

also commented further in this Bulletin on the UCCC and Contracts Review Act

provisions.

The first and most important principle is that we consider each dispute on its

particular facts and so we apply the general approach to maladministration

discussed here with care. The specific circumstances of a case may require

broader considerations and the resolution may be different from the outcome

described here.

5

Our approach has always been that, in determining whether there has been

maladministration in the lender’s decision, the issue of the applicant’s ability to

repay is critical. This is reinforced by clause 25.1 of the CBP and sub section

70(2)(l) of the UCCC.

Section 70 of the UCCC gives a court the power to reopen contracts it concludes

are unjust. One of the factors the court may have regard to when assessing a

particular contract is the enquiry made of the debtor as to his or her capacity to

repay as set out in s. 70(2)(l):

Our approach to disputes raising a claim of maladministration in lending on a

credit card account is to:

1. Consider the information obtained and provided in the application

process;

2. Consider whether the amount of credit approved was appropriate at

the time the application for new credit or an increased limit was offered

and accepted; and

3. Assess what amount should be repaid if the credit limit approved was

not appropriate and there was maladministration in lending.

Situations when credit is provided on a credit card account include:

(a) a new application for credit;

(b) an application by a cardholder for an increase in the credit limit; and

(c) an unsolicited offer to increase the credit limit.

6

As long as the amount of credit is not increased, the transfer of credit from one

lender to another is unlikely to lead to maladministration in lending because

the consumer’s overall credit position is not changed by such transfers.

New applications

We expect lenders to obtain sufficient information from the consumer about

his/her personal and financial position to assess the capacity to repay the debt.

We take the view that in most cases the lender is entitled to rely on the

information provided by the consumer. However, we will consider whether

the information provided was clearly incorrect or nonsensical or ought to be

regarded as questionable because of other information held by the lender.

The following questions may be asked in the course of an investigation:

his/her personal and financial position to assess the capacity to repay

the debt?

current financial position as sought on the application form?

If not, and the lender assessed the application on the basis of the

information provided, there is unlikely to be maladministration in the

decision to lend.

further enquiry from a diligent and prudent lender?

Failure to make further enquiry may lead to maladministration in the

decision to lend.

An applicant for a credit card completed an application stating that his gross

monthly income was $80,000, that he had property and other assets totalling

$151,000 which included $100 in a bank account and liabilities requiring

monthly repayments of $80. Rather than contacting the applicant to ask about

the income figure and for supporting documents for his financial position, the

lender processed the application treating the stated gross income as annual

rather than monthly.

to complete the application that resulted in the provision of inaccurate

information?

7

A young woman had commenced work at a telephone research company and

received her first weekly wage. When she applied for a credit card she said

that she was told by a bank officer to multiply that weekly amount by 52 to

ascertain her annual income which was required to complete the application.

As her hours varied considerably over the following months, that calculation

was considerably in excess of her actual annual income.

by the applicant without checking the accuracy with the applicant?

If so, such action may lead to maladministration in lending.

Applications by the cardholder for an increase in the credit limit

his/her personal and financial position to assess the capacity to repay

the debt?

If not, there may be maladministration in lending.

financial position as sought on the application form?

If not, and the lender assessed the application on the basis of the

information provided, there is unlikely to be maladministration in the

decision to lend.

further enquiry from a diligent and prudent lender?

Failure to make further enquiry may lead to maladministration in the

decision to lend.

by the applicant without checking the accuracy with the applicant?

If so, such action may lead to maladministration in lending.

Unsolicited offers for credit limit increases

Unsolicited offers for credit limit increases are usually based on behavioural

scoring. We understand that lenders believe that behavioural scoring is a good

indicator of the chance of default and is a cost effective method for determining

unsolicited credit limit offers. However, from the cases we have seen, a small

number of cardholders obtain credit far in excess of what would have been

granted had the lender made enquiries about their current financial position.

8

Our view is that the failure to make enquiry of the cardholder to reveal his/her

current income and their level of credit commitment at the time the offer is

made may lead to an inappropriate offer of credit. This is because there needs

to be enquiry about whether there has been a change in the cardholder’s

circumstances, such as cessation of employment, change to a fixed income such

as a disability or age pension or an increase in their financial commitments.

Assumptions about the cardholder’s financial position based on the payment

history may be false if the cardholder is obtaining assistance with the debt

repayment from a third party or is using other sources of credit to maintain the

minimum monthly payment. Further, in the absence of additional enquiry, the

ability to repay the minimum monthly payment on the approved credit limit

does not necessarily mean that the cardholder has the ability to service or repay

an increased level of credit.

Increases in the credit limit to accommodate persistent over the limit spending

may also amount to maladministration in lending.

In order to make an assessment of the decision to lend, we ask the following

questions:

What was the financial position of the disputant at the time of the application or

credit limit increase?

If this information was not sought by the lender at the time of the credit limit

increase we will require the disputant to provide details of his or her financial

position at the time the credit was approved. This is effectively a retrospective

statement of financial position with supporting documentation. Such

information will include details of the disputant’s gross income at the time,

financial commitments, including mortgage payments or rent, and number of

dependents.

Was the approved credit limit appropriate?

The information provided by the disputant about his/her financial position at

the time the credit was advanced will be provided to the lender. We will ask:

applications for credit at that time, after obtaining relevant information

about the applicant’s financial commitments and his/her capacity to

service the credit limit, what amount of new credit or increased limit

would have been approved?

9

Depending on the amount of time which has passed since the approval, a

lender may be able to process a ‘dummy’ application using the appropriate

credit assessment method or it may be necessary for a manual assessment to be

made by an experienced credit officer.

While different lenders may approve differing amounts of credit depending on

their lending policy, we will identify if the credit provision appears not to be in

accordance with the conduct of a prudent lender by utilising the expertise of the

Ombudsman’s banking adviser and consulting with the industry.

If there is maladministration in the provision of credit we encourage the parties

to resolve the dispute by negotiation. If the dispute cannot be resolved by the

parties we will assess how much of the debt is repayable and in appropriate

cases, we may assist the parties reach a mutually acceptable repayment

arrangement.

The following discussion explains the rationale behind the assessment of how

much of the credit card debt should be repaid when we consider there was

maladministration in the decision to lend.

The reported cases and commentary we have reviewed have not dealt directly

with sub-section 70(2)(l) of the UCCC. While that sub-section is untested, the

reported cases and commentary suggest that a failure to make enquiries of the

type referred to in sub-section 70(2)(l) of the UCCC would not be a sufficient

basis alone to conclude that the contract was unjust under the UCCC. The cases

which may be regarded as comparable indicate that a person who has had use

of credit provided by a lender will not ordinarily be relieved from the

In most cases where we consider there has been maladministration in granting

credit on a credit card account, the cardholder will be liable for the principal

advanced (by way of purchases or cash advances) but the lender will not be

able to collect interest or fees on the credit that was advanced beyond the

appropriate credit limit.

However, in some of the cases we have seen when credit is provided above an

appropriate credit limit, repayment of the resultant debt can cause hardship.

We encourage lenders to take into account the disputant’s personal position

and current financial circumstances to reach a resolution of the dispute which is

commercially practical and does not cause unnecessary hardship.

10

If there is maladministration, what amount should be repaid?

When assessing the amount repayable in claims of maladministration we take

the following approach. It is important to stress again that the Ombudsman

considers disputes on a case by case basis and the general approach described

here may be varied depending on the circumstances of the case.

It should also be noted that it is not intended that we will undertake a complex

and time consuming accounting exercise but rather calculate our best estimate.

will calculate (a) the sum of the cash advances and purchases, excluding

interest and fees charged, and (b) the repayments made to the credit

card account;

the appropriate credit limit together with any interest which applied to

the appropriate credit limit and any annual fee charged;

will be repayable with interest at the usual rate under the credit

contract;

appropriate credit limit will then be repayable but without interest and

fees (“outstanding principal debt”);

credit limit with interest are applied to reduce the outstanding principal

debt; and

in repayment.

In several cases we have found in broad terms that, once the repayments which

had been made were applied to the amount of credit repayable with interest,

only the outstanding principal debt was left due. The repayments made may

also reduce the outstanding principal debt.

The following example illustrates the approach although the particular case was

resolved by negotiated settlement.

11

Mr X, who was on a disability pension, had been given access to a $12,000

credit limit on his Visa card. The appropriate credit limit for Mr X was $1,000.

The credit card statements showed the following use of funds and the

payments made, after the appropriate limit of $1,000 was exceeded:

Nov 03 $ 5,100 $ 0

Dec 03 $ 3,000 $ 150

Jan 04 $ 3,450 $ 600

Feb 04 $ 200 $ 300 Sub-total (a) $1,050

Mar 04 $ 200 $ 250

Apr 04 $ 260 $ 350

May 04 $ 0 $ 140

June 04 $ 0 $ 150 Sub-total (b) $890

$1,000 do not accrue interest or charges, and therefore all interest and

charges detailed on the credit card statements between November

2003 and June 2004 were disregarded.

(sub-total (a)) were sufficient to repay the appropriate credit limit

with interest at the applicable interest rate.

reduce the outstanding principal debt of $12,210.

In order to resolve the dispute the bank offered to reduce the debt to $8,369, interest

free, payable at the rate of $30 per month. Mr X accepted the bank’s offer.

What repayment arrangements are appropriate?

It should be understood by all parties that the assessment of maladministration

in the decision to lend applies to the disputant’s circumstances at the time the

credit was granted. However, negotiations between the parties about a

repayment arrangement are often taking place some months or years after the

granting of credit and in some cases, the disputant’s financial position has

deteriorated.

12

As stated previously, we encourage lenders to take into account the disputant’s

personal position and current financial circumstances to reach a resolution of

the dispute which is commercially practical and does not cause unnecessary

hardship. Such an approach is consistent with an adopting bank’s undertaking

to assist consumers overcome their financial difficulties as set out in clause 25.2

of the CBP.

One approach for establishing an arrangement for repayment of the interestfree

principal is to take into account the minimum monthly repayment

determined by the lender on the appropriate credit limit. This repayment

amount and the time it would take the consumer to repay the debt at this rate

could be taken into consideration by the parties when negotiating a repayment

arrangement. If a shorter time frame is appropriate because of the consumer’s

circumstances or age, the resolution of the dispute may involve a waiver of

some or all of the outstanding principal debt.

Practical considerations for repayment

We understand that financial service providers can separate debts into interest

bearing and non-interest bearing components. While that may not be done

within a credit card account, we understand that it can be done in other ways.

In some cases it may be that a lender would prefer to forgo interest on all

amounts to make the account management easier. The implementation of our

approach may vary by agreement of the parties from case to case.

We will consider the particular facts of the case to decide if, in addition to a

claim of maladministration, the dispute raises a question about whether the

contract (or a change to that contract) was unjust, unfair or unconscionable.

Such cases may require a different approach to compensation as compared to

that discussed above. The following are some relevant matters for

consideration in relation to unjust contracts under the UCCC or the Contracts

Review Act.

Both section 70 of the UCCC and section 7 of the Contracts Review Act provide

a remedy where a contract contains provisions which are unfair (substantive

injustice) or where the circumstances or conduct which induced entry into the

Unjust is defined in both the UCCC and the Contracts Review Act as including

Court cannot have regard to any injustice arising from circumstances which

13

Each of the Acts refer to certain matters to which a court is to have regard: the

and to all of the circumstances of the case. There is also a separate list of other

factors in each Act. There are some differences between the factors listed in the

two Acts, in particular the inclusion in the UCCC of subclause (2)(l) (whether

there were any enquiries made of the debtor regarding capacity to repay) and

(2)(m) (the risk to the credit provider from the transaction).

There are a number of other factors in the UCCC which may require

consideration in some cases – eg whether any of the provisions of the contract

impose conditions that are unreasonably difficult to comply with, or not

reasonably necessary for the protection of the legitimate interests of a party to

the contract (e); whether the disputant could protect their interests having

regard for their age or physical or mental condition (f); whether independent

advice was obtained (h); the extent of the explanation and the understanding of

the disputant about a change in the contract (i) & (k); and whether unfair

pressure, undue influence or unfair tactics were present (j).

Having regard to these provisions, in the cases we deal with it is appropriate to

consider what information was sought and received by the lender, any different

or unusual terms of the contract and any other circumstances which raise

concerns of the type mentioned.

It is clear that the provisions of the two Acts are concerned to provide relief

where a contract which may not reach the threshold of being declared

unconscionable, harsh or oppressive at law is nevertheless regarded as unjust.

Section 71 of the UCCC sets out the remedies available to a court which has

determined that a contract or a change to a contract was unjust. The remedies

include:

(a) The reopening of an account already taken between the parties;

(b) Relieving the debtor from payment of any amount in excess of such

amount as is considered, having regard to the risk involved and all

other circumstances, to be reasonably payable; and

(c) Setting aside either wholly or in part or revising or altering an

agreement made in connection with the transaction.

the context of credit cards:

14

interests to enter into it or because the claimant cannot perform when

transaction – it is the former which is to be considered under the

legislation to determine whether the contract was substantively or

failure to comply with other terms of the UCCC are unlikely of

themselves to amount to unfair conduct but they would be matters to

take into consideration.

Account must be taken of the fact that a number of the court decisions relate to

contracts where security was provided and so part of the analysis concerned the

imbalance between the risk position of the borrower/debtor and the financier

arising from this. In the case of credit cards, security is only rarely offered and

so that form of inequality does not ordinarily arise.

In the absence of more decided cases dealing with credit cards under section 70,

it is difficult for this office to express a view about how the law ought to be

applied in any general sense.

The approach set out above has been reached having had regard to our Terms

of Reference and a broad range of other matters.

Under clause 5.5 of the Terms of Reference, the Ombudsman can only consider

a dispute if the dispute was lodged in writing with the financial services

provider within six years of the events giving rise to the dispute. This means

that we will only be able to consider disputes about maladministration in

granting credit on a credit card account if the application or increase in the

credit limit occurred within six years of the complaint being made in writing to

the financial services provider or BFSO.

For example, if a disputant wrote to the Ombudsman on 1 March 2005 about a

credit limit increase which occurred seven years before, in January 1998, the

Ombudsman would not consider the dispute unless the disputant wrote to the

financial services provider about the dispute within six years, that is, by

January 2004.

15

If the funds have been spent by the disputant then, in general terms, it would

amount to unjust enrichment if repayment was not required.

Disputes regarding credit card limits can be distinguished from disputes

regarding mistaken payments. In cases of mistaken payments we may consider

the nature of the spending and the obligation to repay may not arise when the

funds are given away or spent on one off purchases/expenses which would not

usually be made. This is in part because the recipient of the funds believed that

the funds were his or hers to spend.

In the case of credit obtained by use of a credit card, though, usually the funds

were spent by the disputant with the knowledge that they were required to be

repaid with interest. Accordingly the distinctions between forms of

expenditure made in mistake cases do not arise here.

In several cases gambling is raised by the disputant to explain the expenditure

and in some cases is cited as a reason why the debt should be waived.

A variety of courts have considered gambling. The contexts have ranged from

whether gambling winnings amount to assessable income and gambling losses

said to be a gambling addiction amounted to mental incompetence under the

There is little case law though which has looked at gambling in the context of

lending or other advances. However, in the decision of the NSW Court of

consider whether the cashing of cheques by the RSL Club amounted to

negligence and/or unconscionable conduct. One of the matters raised was

whether the recipient of the cash funds did receive a benefit where those funds

were used at least in part for gambling. The court concluded that he did.

It is sometimes said that an individual is a compulsive gambler such that he or

she could not be said to have benefited from the funds and that this effectively

amounts to a psychiatric condition. In order to prove such a claim, medical

evidence would be required. Because we cannot test an expert’s opinion by

cross-examination under oath, it is our view that these claims are best dealt

with in a court.

16

The relationship between a financial services provider and its customer is a

contractual one. As a general proposition, an account holder is entitled to

operate his or her account to withdraw credit funds and spend them and a

financial services provider is entitled to rely on the authority of the account

holder to pay over the available funds. Generally, a financial services provider

is not required to concern itself with how a customer chooses to expend his or

her own funds. In the absence of a fiduciary obligation or an express

agreement, the financial services provider does not have to take particular care

to protect a customer from his or her own actions.

In a particular case there may be no information showing that a credit card

account holder had a special disability within the law dealing with

unconscionable conduct, about which the lender was aware, which prevented

the customer from properly controlling his or her own affairs. In such a case, a

financial services provider could not be held liable for the withdrawal and

spending of funds from the credit card account.

In one case the parents of the disputant advised the bank that their son had a

drug and gambling problem and made arrangements to limit his access to his

own accounts. The bank agreed to those limitations being imposed without

confirming the instructions with its customer. The disputant later revoked the

instructions and then accessed funds and, according to his parents spent at

least some of them on gambling. In that case it was concluded that there was

no information to confirm the funds were used for gambling and no

information showing that the disputant was under a special disability within

the terms of unconscionable conduct. The case manager concluded that, in the

absence of unconscionable conduct or a fiduciary relationship arising and

bank to monitor or limit the disputant’s access to his own funds.

We have noted with interest that some of the unsolicited offers issued by

members now contain statements inviting card holders to consider whether the

offer should be accepted if their circumstances have changed. In others,

information is included in the letter stating what minium monthly payments

are required on the then current fully drawn limit and what they would be if

the new limit was fully drawn. In the case of at least one member, in order for

an existing cardholder to act on an unsolicited offer of an increased limit, it is

now necessary to provide updated financial information including income and

expenses.

While the contents of such offers provide some additional information for

cardholders to consider, unless current financial information is sought from the

cardholder, maladministration could still arise.

17

As is always the case, we welcome feedback on this Bulletin.

the possible links between household debt, demand for imported goods and Australia’s current

account deficit

(Vic) does not arise in these cases

trial judge concluded that, although a loan for an investment in a property and business was

unjust under the Contracts Review Act, the principal borrowed to purchase the property was

guarantee which was found to be unconscionable supported an advance which included funds

which discharged a debt of the guarantor, repayment of that amount was required with

difficult to imagine circumstances where a debtor who had received the benefit of the whole

55-938 where the NSW Supreme Court said that neither the Credit Act nor the law support a

proposition that not to seek confirmatory evidence of matters going to ability to repay is alone

sufficient to make a contract unjust.

also referring to that decision

the High Court was rejected in August 2002