Written Questions (re Credit Cards)  

 

 

Snapshot of Question 2: 

 

As the RBA retains the 'extensive powers' under Section 50 of the Banking Act 1959 to set deposit and loan interest rates that it relied upon to set interest rates for commercial bank accounts and credit cards up until 1980, will the RBA re-introduce the 18% cap that existed until the RBA removed it in April 1985?  Will the RBA explain why the Payments System Board's 'Responsibilities and Powers' do not also list the Banking Act 1959 under legislation that governs the Payment Systems Board's responsibilities and powers.

 

Question 2

Will the Federal Treasurer ask the Reserve Bank that as it retains the 'extensive powers' under Section 50 of the Banking Act 1959 that it relied upon to regulate the maximum interest rates that Australian commercial banks could -

(i)         pay (from 1969 to 1980) on savings bank passbook accounts at 3¾% and on savings investment passbook accounts at 6½%,

(ii)        charge on overdrafts until February 1972; and

(iii)       charge on Credit Cards capped at 18% until April 1985,

to now re-regulate/cap the maximum interest rate for Purchases and Cash Advances on Australia's 16.1 million Credit Cards? 

The highest interest rate on a Credit Card offered in Australia for Purchases is presently 25.9%.  The highest interest rate offered in Australia on a Credit Card for Cash Advances is presently 29.49%  These are Usurious Interest Rates unashamedly targeted at Australians with poor Numeracy and Literacy Skills (by Predatory Advertising) identified by the Reserve Bank as Revolvers that hold 33% circa of the 16.1 million Credit Cards on issue in Australia as at Oct 2016.  Casual empiricism indicates that Persistent Revolvers, identified by the RBA Submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates - Aug 2015, hold a mere 12.58% circa of these 16.1 million Credit Cards, yet Persistent Revolvers incur 80% circa of all Interest and Penalty Fees Revenue levied by Credit Card Issuers.

Pursuant Section 10(2) of the Payment Systems (Regulation) Act 1998, and relying on Section 50 of the Banking Act 1959, will the Federal Treasurer ask the Reserve Bank to -

(A)        re-regulate the 18% cap on Credit Card interest rates that applied up to May 1985 to apply to Cash Advances on the basis that the '16.5% Differential' [between the Overnight Cash Rate (as at 27 Feb. 2017) of 1.5% and the 18% 'Cap On Credit Card Interest Rates' (for Purchases and Cash Advances)] could be 'locked in'; and

(B)        regulate the maximum interest rate for Purchases to be 15% p.a.,

whereupon if the Overnight Cash Rate increased to say 3%, the 'Cap On Credit Card Interest Rates' could increase to 19.5% p.a. ('16.5% Differential' + 3%) for Cash Advances and 16.5% p.a. for Purchases.

Will the Federal Treasurer ask the Reserve Bank why the Payments System Board's 'Responsibilities and Powers' do not also list the Banking Act 1959 under key legislation that governs the Payment Systems Board's responsibilities and powers?

Background to Question 2

Chapter 5 notes that prior to 1985, the maximum rate that could be charged on credit cards had been set at 18% pa by the Reserve Bank.  In April 1985, this rate cap was deregulated.

In June 1992, seven years after the Reserve Bank removed the 18% cap on Credit Card interest rates, the Reserve Bank issued a Discussion Paper titled: LOAN RATE STICKINESS: THEORY AND EVIDENCE  -  RBA 1992 written by Philip Lowe and Thomas Rohling. That Discussion Paper evidences:

A).     The 'iron fist control' that the Reserve Bank had over setting the maximum commercial bank interest rates, both deposit and lending, until deregulation commenced in 1980, whereupon the money lenders began their 'Spinning; and

B).     that the price elasticity between variations in the wholesale cost of funds (Overnight Cash Rate) and changes in Credit Card interest rates was exceedingly Sticky when the (Overnight Cash Rate) fell.

The Defined Term, Persistent Revolvers (identified by the Reserve Bank in 2016) establishes that -

*           Revolvers represent 33% of all Credit Cardholders

*           Persistent Revolvers represent 38% circa of the 33% of Credit Cardholders that are Revolvers

*           Persistent Revolvers pay 80% circa of all Interest and Penalty Fees Revenue levied by Credit Card Issuers.

The findings in the afore-mentioned historic Discussion Paper have been reproven in a dozen or so subsequent Reserve Bank Copious Publications on Credit Cards in the subsequent 25 years that -

(A)     Transactors have been the big beneficiaries from the Reserve Bank removing the 18% interest rate cap on Credit Cards in 1985 because the 63% circa of Credit Cardholders that are Transactors enjoying a Free Ride, and

(B)       Persistent Revolvers have paid a hefty price because the User Pays Principle has been further eroded by 'Sweets', 'Sours' and 'Spiders' explained in Chapter 3, which include Predatory Advertising and deceitful disclosure of hidden costs in Credit Card Terms and Conditions booklets (up to 92 pages in 9 font) which a Credit Card Issuer recommends that all card users should read it in its entirety - see Chapter 1.

Below is an extract from Chapter 5:

"The RBA website page Cash Rate does not list Cash Rates prior to 23 Jan 1990.  On that (oldest) date, five years after the 18% cap on Credit Card interest rates was removed, the Overnight Cash Rate was almost the same as the 'abandoned Credit Card cap' at 17.5% on 23 Jan 1990 (using the Interactive hover mouse on that RBA webpage).  The below RBA Graph 6 (sourced from Developments in the Card Payments Market - Mar 2015) displays the Cash Rate at 14% in 1991.  The Overnight Cash Rate is now 1.5%, yet the highest Credit Card interest rate is now 29.49%.  

Below is an extract from BANKING LEGISLATION AMENDMENT BILL 1986:

        "For example, at the end of June 1985 interest rates were in the range 17.25% to 19%."

When Messrs. Lowe and Rohling wrote their Discussion Paper, LOAN RATE STICKINESS: THEORY AND EVIDENCE in 1992 seemingly on a topic of some significance, the variance between the Overnight Cash Rate and the highest Cash Advance Interest was almost 15%. 

That variance is now as high as 26.5% between the 1.5% pa Overnight Cash Rate and the highest Cash Advance Interest Rate of 29.49% after Latiitude Financial's cost of funds.  Persistent Revolvers discussed in Chapter 20 below have paid a hefty additional interest burden from removal of the 18% cap, to the material benefit of Transactors that have enjoyed a Free Ride. 

One can only ponder whether "Loan Rate Stickiness" is still a concern of the Reserve Bank, but it was in 1992:"

Chapter 15 notes that Section 10(2) of the Payment Systems (Regulation) Act 1998 states:

‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to ...........the economic prosperity and welfare of the people of Australia.

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