statistics released by the Reserve Bank of Australia, there were, as at September 2011, 14.9 million

credit card accounts in Australia with outstanding balances of $ 49.2 billion, representing an ownership

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

‘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

* Paul Ali is Associate Professor, Melbourne Law School, University of Melbourne, Cosima McRae is Research

Assistant for the Financial Literacy Project, Melbourne Law School, University of Melbourne and Ian Ramsay is the

Harold Ford Professor of Commercial Law and Director of the Centre for Corporate Law and Securities Regulation,

Melbourne Law School, University of Melbourne.

accounts, there were 6.5 million accounts with an aggregate outstanding balance of $5.1 billion. See also The

(December 2011) reported an increase of credit card ownership of 6 points to 71%, compared with 65% of

respondents surveyed in 2008, 41.

14.

Electronic copy available at: http://ssrn.com/abstract=2052615

2

When used responsibly, especially by transacting consumers, credit cards ‘smooth’ the irregularities in

funding consumption, credit cards play an important role in Australia’s economy. The Federal

Government has recognised this explicitly, stating that any reforms to credit card lending should not

see Ellis Connolly and Daisy McGregor, ‘Household Borrowing Behaviour: Evidence from HILDA’ (2011) March

Cambridge University Press) 75. However, the Reserve Bank of Australia statistics indicate that revolvers account

first published this information, the aggregate amount of balances accruing interest has consistently accounted for

a majority of the total balances outstanding).

expect to face some level of difficulty meeting credit card repayments, with 8% of participants stating that meeting

2010 Australian Debt Study found that 12% of survey participants had missed a minimum credit card bill

Literacy, Social Influences and Behavioural Economics’ (Financial Literacy Project Research Report, Centre for

Corporate Law and Securities Regulation, Melbourne Law School, March 2011), 188, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1793502

(July 2010), 32.

Electronic copy available at: http://ssrn.com/abstract=2052615

3

For a small but significant group of consumers (who fall into the category of revolvers), credit card use

perspective, although the percentage of consumers experiencing financial hardship is small, this group is

exclusion, crime and a long term impact on the capacity to provide for housing, health, education and

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.

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

increased vulnerability to financial hardship increases the need for regulatory intervention.13

unmanageable debt, in part due to the lack of consistent reporting by lenders. The recent ANZ Financial Literacy

Report indicates that 13% of respondents paid only the minimum repayments on credit card balances, and 23% of

respondents stated they had been charged interest on credit card debt in the last 12 months, above n 1, 46. It is

difficult to determine, however, what percentage of these revolving consumers fall into the category of those

experiencing unmanageable debt. RBA figures from 2001 analysed by the NSW Office of Fair Trading placed the

data from 2004 suggested that 0.8% of outstanding balances were in default, after 90 days of non‐payment:

unsecured debt owed by bankrupts to financial institutions was credit card debt, and 53% of unsecured debt owed

2010), pp 14, 26. Ronald Mann has linked the increase in credit card balances in five developed countries

(including Australia) with a rise in the number of personal bankruptcies: see Mann, above n, 4, 78‐80.

Consultation Regulatory Impact Statement, August 2008, 15.

4

To understand how the recent Australian credit card reforms are linked to behavioural economics, it is

necessary to explore certain behavioural economics concepts. Three developments have prompted a

resurgent scholarly interest in the regulation of consumer credit: the sub‐prime mortgage debt crisis in

the United States and 2008 global financial debt crisis, developments in the credit card industry, and an

credit utilises behavioural economics, which challenges the rational consumer orthodoxy underpinning

disclosure‐based regulation. Disclosure‐based regulation is predicated on the assumption that, provided

with sufficient information, consumers make informed, rational financial choices. Behavioural

economics identifies behavioural biases exhibited by consumers that contradict assumptions about

rational consumer behaviour. For the purposes of this note two behavioural biases are identified in

relation to credit card use that can result in sub‐optimal financial behaviour by causing consumers to

5

The first bias is optimism, which in certain contexts is a rational, normal process of human thinking but

can affect adversely the ability to estimate future repayment capacity. Optimistic consumers

underestimate or are blind to factors that can impede repayment of their credit card balances. The loss

of a job or unexpected expenses can cause a ‘liquidity shock’ that the consumer did not contemplate at

initially plan to repay credit card balances in full and on time, but imperfect self‐control (exhibited in

Disclosure‐based regulation is insufficient to address these biases in part because providing information

Unlike fixed term loans or mortgages, credit card repayments fluctuate, determined by individual

monthly purchasing and borrowing. Consumer behaviour over time can create a mismatch with initial

intentions, and uniform information about repayment obligations given at the beginning of the credit

card contract does not respond to later changes in consumer behaviour.

The assessment practices of lenders can contribute to credit card misuse. When an application is made,

the consumer does not specify a loan amount, but instead receives the card with an approved credit

limit after the lender has assessed their financial situation, which can result in a consumer having a

credit limit in excess of what they initially wanted. Disclosure‐based regulation does not target

assessment practices of lenders that are geared to increasing credit limits. The pricing structure of credit

estimates and intention and the reality of future borrowing and transacting. These time and preference

discrepancies mean the consumer ‘will overestimate her willpower, and consequently underestimate her future

borrowing’: Bar‐Gill, above n 15, 1396.

6

marketing low (sometimes below cost) annual fees, offering consumers ‘ teaser’ interest‐free periods,

‘free’ transfers of balances from other credit cards, and member reward schemes. To profit from credit

cards, lenders offset the low short term costs provided to consumers with high interest rates charged on

and product information and seek to attract customers via low introductory rates and annual fees. This

makes the overall costs, including the long term costs (high interest rates), very difficult for the average

not typically required lenders to provide targeted, plain language information that can assist consumers

with low financial literacy to ‘unbundle’ the complex pricing structures of credit cards.

To best address these behavioural biases, Oren Bar‐Gill suggests the following regulatory intervention:

1. Inserting individualised warnings in monthly statements, advising consumers about the realtime

consequences of minimum repayments and informing them of the time to extinguish the

information is effective because it is given at the critical time when consumers decide to pay in

credit card information by highlighting high interest rates incurred by credit cards as opposed to

7

the high long term costs of credit cards and addresses concerns about optimism biases that can

result from inflated consumer confidence at the time the credit card is acquired.

3. Increasing the minimum monthly repayment rate for all credit cards.

A significant consumer credit reform package was initiated by the Commonwealth Government in

Key reforms contained in the NCCP Act included:

licensing of credit lenders

enabling a consumer to apply to a lender to vary the repayment amount or contract term if they are reasonably

8

The regulation of credit card and home loan lending was left to Phase 2 of the reform process, which is

now being implemented. The Government released a second Green Paper in July 2010 and the

informed by the Ministerial Council on Consumer Affairs’ (MCCA) 2008 Regulatory Impact Statement

(‘RIS’) on responsible lending practices and credit cards. The focus of the RIS was those lending practices

and current regulatory failures that contribute to financial hardship of vulnerable consumers. The RIS

drew extensively on the reports and evidence of consumer groups and community organisations and

used behavioural economics and recent surveys of financial literacy to support its proposals for reform.

The MCCA identified the following Australian credit card lending practices and their impact on

vulnerable Australian consumers:

1. The timing of essential information. In particular there is no requirement to provide essential

a customer wants to reduce a credit limit they have been assessed for, they are unlikely to do

2. Assessment practices of lenders resulting in increased credit limits. The MCCA was critical of

lending industry assessment practices that ignore the intention of s 70(2)(I) of the now

superseded Credit Code, designed to prevent consumers being given credit in excess of their

9

capacity to repay without causing financial hardship. A key failure is assessment practices based

3. The impact of credit limit increases. Offers of credit limit increases by lenders can result in an

increased credit limit well in excess of the consumers’ ability to repay without causing financial

had received an unsolicited offer by their lender to increase their credit card limit in the last 12

majority of respondents who were either unemployed or in a household with a combined

while consumers are informed of the increase to monthly repayments following an increase in

their credit limit, they are not informed regarding how this will impact on their long‐term

4. The practice of setting low minimum monthly repayments allows consumers to continue to

purchase and borrow on their cards without discharging their monthly balance. The MCCA

found that the majority of Australian lenders set very low monthly minimum repayments, often

literacy, focused on immediate repayment obligations, do not appreciate the long‐term

consequences of paying only the minimum repayments.

The MCCA then set out the following six options for reform:

1. Changing the timing of essential information in credit card contracts

(Research Paper No. 4, The Australia Institute, August 2010) 17.

10

2. Requiring lenders to allow consumers to nominate the credit limit sought

3. Prohibiting lenders from allowing customers to take on more credit than they are able to repay

without incurring financial hardship

4. Making any debts incurred in excess of Option 3 unenforceable

5. Requiring warnings by lenders about the consequences of only making minimum repayments

6. Increasing minimum payments for new cards and credit limit increases on existing cards.

Underpinning these reform options was criticism by the MCCA of existing disclosure‐based regulation of

credit card lending. In particular, the MCCA questioned the efficacy of disclosure‐based regulation to

target vulnerable consumers in light of the findings of behavioural economics and financial literacy

The lending industry was unsupportive of the proposed reforms. The Australian Bankers Association

three of the four major banks uniformly advocated increased disclosure as opposed to targeted

intervention. For example, Westpac’s submission stated there was no demonstrated systemic industry

credit card statements) was untested in terms of altering consumer behaviour: Australian Bankers Association,

Submission to July 2010 Green Paper (11 August 2010), 10. ANZ submitted that lenders play only an ‘indirect role’

in financial hardship: ANZ, Submission to The Treasury, National Credit Reform Green Paper (11 August 2010) 16.

Westpac submitted that debt stress and financial illiteracy had no ‘dominant role’ in their customers financial

distress or default, and rejected the need for any targeted reforms: Westpac, Submission to Consumer Credit

Phase 2 Green Paper (12 August 2010) 6‐7. National Australia Bank submitted that credit card debt was not a

‘primary cause’ of financial distress for consumers, and contested that targeted disclosures would alter consumer

submission by the Commonwealth Bank.

11

preference for disclosure‐based regulation of credit card lending. This stands in stark contrast to the

submissions of consumer groups and community organisations that supported the MCCA’s statement

that targeted regulation is superior to increased disclosure for addressing financial hardship of

A comparison of the reform options proposed by the MCCA and those by Oren Bar‐Gill demonstrates

clear similarities. The MCCA reform proposals use behavioural economics concepts to address concerns

about credit card lending practices and vulnerable consumers and those concepts are embedded in the

recent credit card reforms.

The note now discusses those credit card reforms that address behavioural biases. Following

credit cards and home loan lending was enacted in July 2011, with most sections to commence

full, certain reforms have been implemented showing a direct response targeting consumer behaviour.

This responds to option 1 of the MCCA proposals by requiring lenders to provide information about

costs, fees and repayments at the time an application is made. Option 2 was not implemented.

2010) Consultation Process (18 August, 2010) 14, submitted that it was rising interest rates and mortgage

repayments that caused credit card delinquency or default, as consumers pay their mortgage debt first, 14.

2010) 9‐10; New South Wales Consumer Credit Legal Centre, Submission to the Responsible Lending Practices in

Relation to Consumer Credit Cards Consultation Regulatory Impact Statement August 2008 (November 2008), 10.

assented to on 3 November 2011. Treasury called for submissions from stakeholders after releasing draft Key Fact

Sheets for credit cards and credit card contracts in March 2011.

12

However, Regulation 28JA states that a lender must ‘make reasonable inquiries about the maximum

The reforms do not explicitly adopt option 3, but it is arguable that the ban on lenders offering credit

limit increases unless the consumer has consented to receiving the offer and Key Fact Sheet disclosure

requirements may address this issue by providing clearer information to consumers. Options 4 and 6

address behavioural biases. The ban on credit limit increase invitations except with the consent of the

consumer addresses the optimism bias. Regulation 28LH gives further guidance to s 133BE(5) of the

Written communication from a lender to a customer is banned if it includes an increase higher than the

the Explanatory Memoranda for not adopting option 2 but Regulation 28JA can be seen as a compromise as

regards that option.

Section 133BE.

133BF.

133BH.

these reform options.

Under Regulation 28LI a lender may seek permission from a consumer to receive credit limit increase offers if this

communication solely concerns an increase offer and a reasonable person would conclude that the consumer was

aware they were agreeing to receive offers. The Victorian Consumer Action Law Centre states that some lenders

will subvert Regulation 28LI by exploiting ‘inattentive’ or ‘impulsive’ consumer behaviour: for example by

providing a separate consent form along with applications: Victorian Consumer Action Law Centre, Submission to

13

Regulation 28LFA requires lenders to provide a KFS at the time an application for a credit card is made

by a consumer. The KFS must be contained on the application form itself, or given to the consumer on a

separate piece of paper with the application and the lender cannot merely refer to a website. Critically,

credit card fees, charges and interest rates are unbundled with the specification of a plain language,

large font table that separates fees, interest rates, minimum repayments and other charges. This

‘unbundling’ of fees and charges addresses the optimism bias by separating the short term low costs

(teaser fees and introductory rates) from longer term interest rates applying to balances. The timing of

disclosure occurs before the contract is signed, which may alter behaviour by prompting the consumer

to assess realistically their capacity to repay.

Regulation 28LJ requires lenders to take reasonable steps to notify consumers within two business days

if a card is used in excess of the credit limit. The Amendment Act also prohibits the lender imposing fees

providing targeted disclosure to the consumer that will alert them to behaviour that can lead to financial

hardship because the limit is exceeded.

Lenders must also include a warning on monthly statements. Regulation 79B states that this warning

must appear on the front page of a credit card statement and set out:

1. The amount of time it will take to discharge the closing balance if only minimum repayments are

made at the current rate of interest

2. An alternative monthly payment amount that would allow the balance to be extinguished in two

years at the current rate of interest

3. The difference in the total repayment amount between repayment options (1) and (2)

Treasury Exposure Draft ‐ National Consumer Credit Protection Amendment (Enhancements) Bill 2011 and Draft

Credit Card regulations (17 August 2011) 2‐3.

14

4. Lender contact details if the consumer is experiencing financial difficulties.

These warnings target consumer thinking by communicating a real time, individualised warning about

the effects of transacting. Oren Bar‐Gill states that individualised warnings are less likely to be dismissed

as an ‘abstraction’ by the consumer and he notes that warnings have been effective in changing

change consumer behaviour over the life of the contract by regularly informing consumers about the

consequences of minimum repayments and revolving debt and should, in contrast to blanket disclosure,

The position of the MCCA, consumer groups and community organisations was that targeted

intervention, and not increased blanket disclosure, was required to address concerns about credit card

lending and financial hardship. Although the Government has not implemented the MCCA

recommendations in full, this note has demonstrated explicit links between the reforms and key

consumer biases. These reforms can be contextualised as part of a broader regulatory trend to modify

are different interest rates attached to different purchases or amounts borrowed. The Regulations also clarify the

sections of the Code banning written credit increase invitations.

quickly after receipt. The government used a behavioural economics rationale (small amounts given in paychecks

as opposed to a lump sum) to design the tax handout: Drake Bennett, ‘Behavioral economics foils an Obama Tax

Cf the approach in the UK, where calls for credit lending reform by then Prime Minister Gordon Brown (see Alan

UK Department for Business Innovation and Skills. Instead the UK has opted to confer five ‘rights’ on consumers

and an agreement has been reached between the Government and lenders on responsible lending practices: see

15

This can be contrasted with blanket disclosure as a regulatory response. The National Financial Literacy

Strategy adopted by ASIC in 2011 acknowledged that to improve financial wellbeing it is necessary to

recognise the limits of information and respond with regulatory initiatives that drive behavioural

important step in assessing the efficacy of targeted disclosure (and, more broadly, behavioural

economics) in improving consumer financial wellbeing.

consumer behaviour through targeted, customised disclosure.

2011, 6.