From:                                         RBAInfo <RBAInfo@rba.gov.au>

Sent:                                           18 April, 2017 9:51 AM

To:                                               'Philip Johnston'

Subject:                                     RE: I have an interest in how regulation of an increasing complex financial services sector is administered, particularly ‘Which’ is responsible for ‘What’? [SEC=UNCLASSIFIED]

 

Phil

 

The response below was compiled by members of the Bank’s Payments Policy team.

 

The Access Regimes determined in 2004 can be found on the Reserve Bank’s website: http://www.rba.gov.au/payments-and-infrastructure/credit-cards/regulatory-decisions.html

Individually, here are links to the 2004 Access Regimes for the Bankcard, MasterCard and Visa systems. Please note that these are no longer in force.

Revised Access Regimes for the MasterCard and Visa systems were determined in December 2014.

 

All current and forthcoming Standards and Access Regimes under the Payment Systems (Regulation) Act 1998 can be found on the ‘Regulations’ page of the website: http://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/regulations.html.

 

Historical standards and access regimes can be accessed via the ‘Regulatory Decisions’ pages:

 

·         http://www.rba.gov.au/payments-and-infrastructure/credit-cards/regulatory-decisions.html

·         http://www.rba.gov.au/payments-and-infrastructure/debit-cards/regulatory-decisions.html

·         http://www.rba.gov.au/payments-and-infrastructure/atms/regulatory-decisions.html

 

The Reserve Bank has not set any other standards or regulations in relation to card payment systems.

 

It is not correct to say that the ACCC has no responsibilities in relation to credit cards. In addition to the Memorandum of Understanding cited, there is a short description of the role of the ACCC on the RBA website: http://www.rba.gov.au/about-rba/boards/psb-board.html#withACCC

 

I note that the Bank’s Media Office has assisted you in seeking responses to many questions posed over the past five months and is mindful of minimising the burden on one area of the Bank to answer questions on historical matters. The Bank publishes a large amount of information on payments system matters on its website and will not be able to provide answers to further detailed questions on these matters.

 

Regards

 

Ian 

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

Your personal information will be handled in accordance with the following notice. 

 

 

Ian

 

I welcome your response to my below email sent 16 March 2017.

 

 

 

Ian

 

I belated thank you for your below response sent 30 Jan.

 

In the early days of my 37 years career at CBA (late ‘70s), I dealt with four RBA colleagues in Note Issue Dept. (John Graham, Vince Laing, John Jewell and Lance Cochrane) at 65 Martin Place because back then RBA cash in major regional cities such as Wollongong and Newcastle was held in CBA strongrooms at those CBA branches.

 

Hence, because of that nexus with those four chaps, I have an interest in how regulation of an increasing complex financial services sector is administered, particularly ‘Which’ is responsible for ‘What’?  Because back then the RBA seemed to have it all to itself and the banks did what they were told to do by the RBA

 

I understand that on 23 Feb. 2004 the Payments System Board imposed an Access Regime on each of the three designated credit card schemes in Australia, Visa, MasterCard and Bankcard.

 

Can you either email to me a PDF (or email a URL) of the standards that the RBA has set for the Four Party Schemes, or alternatively just for Visa or MasterCard?  Because I am having difficulty finding the Standards set under the Access Regime that the RBA imposed back in 2004.

Prima facie it appears to me that the RBA has focused on standards for Interchange fees and Surcharge fees.  In addition, since 1 July 2012 financial institutions have been prohibited by the NCCP Act from sending written unsolicited credit limit increase offers to customers unless the customer has specifically opted in to receiving such offers.

Mindful (from my CBA branch days) that the RBA set max interest rates until 1980 (incl. a max of 18% on credit cards), seemingly relying on Section 50 of the Banking Act 1959 as amended, has the RBA ever ‘Set any Standards’ that cover the setting of –

·         credit card fees and charges to cardholders; or

·         interest rate caps (purchases or cash advances) on credit card borrowings?

 

If not, has the RBA ever issued any statements as to why it does not consider that credit card fees/interest charges are not in the public interest when the wholesale cost of funds is over 15% lower than when the RBA removed the 18% interest rate cap in 1985?

 

Re the ACCC, I note:

1.    that Wikipedia informs that The ACCC regulates anti-competitive behaviour.  However, it has an agreement with ASIC that ASIC oversees the majority of bank and financial service product and services providers.; and

2.    Points 3 & 4 under ‘Responsibilities’ of the attached MOU between ACCC and RBA dated 8 Sept. 1998 seem to indicate that (after 23 Feb. 2004 when the RBA ‘set standards’ under its newly created Access Regime for MasterCard/Visa) that the ACCC’s obligations to take actions to desist anti-competitive behaviour fell upon the RBA, specifically the PSB.

 

Am I correct that ACCC has had no responsibilities re credit cards since 23 Feb. 2004 when the RBA ‘set standards’ under its newly created Access Regime for MasterCard/Visa? 

 

If I am incorrect, can you elucidate as to what responsibilities that the ACCC has re credit cards?

 

NB:     I have again c.c. my old ANZ golfing amigo, Peter Meers.

 

 

 

Phil

 

Please see below a response from a member of the Bank’s Payments Policy team.

 

You are correct that the RBA is afforded substantial independence under the Reserve Bank Act 1959 to undertake its role.

 

The question ‘why is government action needed?’ is one of the questions that is generally required to be answered in preparing a Regulation Impact Statement (RIS). The RBA is a statutory agency and adheres to the RIS process for its regulatory actions. Accordingly, as you have identified, the RBA prepared a RIS for its Review of Card Payments Regulation.

 

‘Government action’ in the context that it is used in the quotes you have selected below, relates to its broader meaning, including actions undertaken by government departments, agencies or other bodies. This includes standards determined by the RBA.

 

We appreciate that the word ‘government’ can also be used in a narrower sense, to relate to the actions by a particular political party or coalition that has a majority in the House of Representatives. We infer from your follow-up question that you have interpreted it in this narrower sense. This narrower sense is not how it is used in the RIS requirements.

 

If used in this narrower sense, then the answer to your question is ‘no, there is no ‘government regulatory action’ that needs to be taken by the Government (presently the Liberal/National Coalition) for the RBA to determine new standards for interchange fees’.

 

Regards

 

Ian

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

Your personal information will be handled in accordance with the following notice.

 

 

 

Ian

 

Re my QUESTION 1 - what is the “…. government regulatory action…” needed for the RBA to impose any further regulations on “….interchange fees …”?

 

I am not the brightest crayon in the box.  I believed that the RBA is Australia’s independent central bank which is –

(i)         accountable to the Commonwealth Parliament; and

(ii)        separated from the sitting federal government (presently the Liberal Coalition) as –

·         decreed under the Reserve Bank Act 1959 – specifically Section 11. “Differences of opinion with Government on questions of policy”; and

·         reaffirmed by the Statement on the Conduct of Monetary Policy.

 

The below two extracts from the attached“- Regulation Impact Statement - May 2016” seems to be saying that the RBA needs Commonwealth government action for –

Either              for the RBA to regulate Interchange Fees (after Fed. Govt has provided its endorsement action);

Or perhaps    the Fed. Govt. to regulate Interchange Fees:

1.2 Why is government action needed?

Regulation is needed to limit interchange fees because competitive forces in the payments card market do not have the usual effect of bringing costs down. 

A wide range of stakeholders have called for some public sector involvement to ensure that surcharging is not excessive.  This was reflected in the Government’s decision to amend the Competition and Consumer Act 2010 to give the ACCC enforcement power over surcharges which are above the ‘permitted surcharge’ defined by the Reserve Bank. Accordingly, the Bank is amending its existing standard to make it simpler and more enforceable.

 

3.2.3    Need for government action

The increased complexity and dispersion of interchange fees, which reduce transparency to merchants, are not likely to be resolved without government regulatory action.  Schemes are likely to continue to respond to competitive pressures by creating new interchange categories and to strategically differentiate between merchants according to their market power. This would continue to drive interchange fees higher, to the detriment of smaller merchants and consumers that do not use high-rewards cards.

Your below answer to my QUESTION 1 seems to be saying that –

A.    the RBA is government; and

B.    the RBA, as government, possesses that statutory power pursuant to the Payment Systems (Regulation) Act 1998  - where incidentally the word ‘Government’ does not appear in the PSRA.

 

Accordingly, are you able to elucidate what is the “…. government regulatory action…” that is needed for the RBA to impose any further regulations on “….interchange fees …”, namely to enforce stringent percentage fee level caps, because –

(A)  the range of Interchange Fees has blown out materially since 2002; and

(B)  presently Credit Card Issuers are receiving as low as 0.20% and as high as 2% for performing the same services each time a Merchant presents a payment to its Acquirer Bank?

 

 

 

Phil

 

I replied to your email on Thursday, 12 January at 3.08pm (Sydney time). For your convenience, I have attached the same response below.

 

Phil

 

The response below came from a member of the Bank’s Payments Policy Department.

 

1. The “government regulatory action” referred to in the Regulation Impact Statement is regulatory action taken by the Reserve Bank, which has statutory powers under the Payment Systems (Regulation) Act 1998 (PSRA).

 

2. Under section 11 of the PSRA the Reserve Bank may designate a payment system if it considers that designating the system is in the public interest. For instance, designations of payment card systems can be found on the Bank’s website. The Reserve Bank has the power to impose an access regime or set standards for payment systems under sections 12 and 18 of the PSRA, respectively. Section 28 of the PSRA sets out the Reserve Bank’s consultation obligations, which must be fulfilled before it can impose access regimes or set standards for payment systems.

 

3. See (2) above.

 

4. Unfortunately, we do not have information on this aspect of your enquiry.

 

Regards

Ian

 

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

Your personal information will be handled in accordance with the following notice.

 

 

 

Ian

 

I refer to my below email sent 31 Dec 16 to you.

 

Having experienced the RBA regulations on the commercial banks when I commenced my career in CBA branches from 1970, I look fwd to answers to my below four Questions.

 

Regards

 

 

 

Ian

 

When I started my 37 years career at CBA in 1970, all Australian banks were restricted to paying no more than 3¾% on passbook accounts.  I understood that restriction was imposed by the RBA.  That max interest rate was lifted in 1980 following the Campbell Committee Report.

 

Jumping forward several years “Prior to 1985 the maximum rate that could be charged on credit cards had been set at 18 per cent per annum by the Reserve Bank of Australia. In April 1985, this rate was deregulated. (Footnote 2 of 3rd attachment).

 

I have a query after reading the above first two PDF Attachments re Review of Card Payments Regulation that each focus on steps for the RBA to exercise its ‘extensive powers’.  

 

Seemingly, the RBA requires Commonwealth “government regulatory action” to –

(i)            alter any interest rate eg. say re-impose the 18% credit card max interest rate (on Purchases or Cash Advances); or

(ii)          regulate any credit card fee eg. Surcharge fee, Interchange fee or Acquirer Bank fee.

 

Below are pertinent extracts from the initial two RBA Attachments:

 

1^st Attached RBA report “- Regulation Impact Statement - May 2016”

1.2 Why is government action needed?

Regulation is needed to limit interchange fees because competitive forces in the payments card market do not have the usual effect of bringing costs down. 

A wide range of stakeholders have called for some public sector involvement to ensure that surcharging is not excessive.  This was reflected in the Government’s decision to amend the Competition and Consumer Act 2010 to give the ACCC enforcement power over surcharges which are above the ‘permitted surcharge’ defined by the Reserve Bank. Accordingly, the Bank is amending its existing standard to make it simpler and more enforceable.

 

3.2.3    Need for government action

The increased complexity and dispersion of interchange fees, which reduce transparency to merchants, are not likely to be resolved without government regulatory action.  Schemes are likely to continue to respond to competitive pressures by creating new interchange categories and to strategically differentiate between merchants according to their market power. This would continue to drive interchange fees higher, to the detriment of smaller merchants and consumers that do not use high-rewards cards.

 

2^nd Attached RBA report “- Conclusions Paper - May 2016”

Below is an extract from Clause 2.2 “The Review process”:

 

“The Bank determined that it would be in the public interest to designate these systems and, following a resolution of the Board, did so in October. The designation of a system is the first of a number of steps that the Bank must take to exercise any of its powers, such as imposing an access regime or setting standards.”

 

QUESTION 1:
Re 3.2.3  above, what is the “…. government regulatory action…” needed for the RBA to impose any further regulations on “….interchange fees …”?

 

QUESTION 2:
Re Clause 2.2 “The Review process” above, does the RBA website (or one of the reports in PDF provided in the RBA website) set out the steps to enable the RBA to ‘designate’ a payments system in order to “….exercise any of its powers, such as imposing an access regime or setting standards? 

 

QUESTION 3:
If the RBA website does NOT provide the steps necessary for the RBA to exercise any of its ‘extensive powers’, such as imposing an access regime or setting standards, would you set out those steps?

 

QUESTION 4:
Did the RBA require “…. government regulatory action…” back in 1960 when the above-mentioned  max. “…3¾% on passbook accounts…” was imposed on banks but not NBFIs until 1980.

 

NB:      I have again c.c. my golfing mate, Peter Meers, who worked for ANZ for many years, as Pete is also interested in this ubiquitous “service” product, namely credit cards, that uniquely defies the User Pays Principle.

 

Regards

 

 

 

Thanks, Ian.

 

 

 

Phil

 

You can access all of the Bank’s media releases right through to 1988 here.

 

Thank you.

 

Regards

Ian

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

Your personal information will be handled in accordance with the following notice.

 

 

Ian

 

I recollect that about 3 years ago the RBA ruled that Credit Card Issuers –

(i)            could not offer a Zero Balance Transfer (say for one or two years) and then -
*                 apply monthly repayments (made by acceptors of their offer) for new Purchases to the Zero Balance Transfer debt; and
*                 charge say 20% on Purchases from date of each Purchase. 

(ii)          had to always apply repayments from Purchases to the highest interest rate debt.

 

Could you email me any link to a RBA press release or whatever which regulated that all repayments had to be applied to the highest interest rate debt?

 

Cheers

 

 

 

Ian

 

Thank you for providing Submission to the Financial System Inquiry,

 

It is a massive report that will keep me busy.

 

 

 

Phil

 

There is some discussion of the Wallis Inquiry and the RBA’s responsibilities in our Submission to the Financial System Inquiry, which may be of use.

 

The Bank’s website doesn’t contain a lot of information related to your request.

 

Regards

 

Ian

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

 

Ian

 

Thanks for your response.

 

My friend, Peter, that I mentioned in an earlier email and I are seeking to compile a history of credit cards in Australia from the humble Bankcard.

 

I have just applied on-line for a library card from the NSW State Library where a bicycle friend, Rex, volunteers.

 

Upon receipt, I should be able to access some files on-line, hopefully Report No.45 by the Prices Surveillance Authority “Inquiry into Credit Card Interest Rates” 15 October 1992.

 

Is there any info on the RBA website or elsewhere which chronicles the transfer of ‘extensive powers’ from the RBA to other regulatory authorities?

 

 

 

Phil

 

The response below came from the Bank’s Payments Policy team.

 

You are correct in assuming that the Reserve Bank did not have payments system regulatory responsibilities at that time.

 

In regards to your follow-up questions:

·         Prior to August 1993, the various State Credit Acts prohibited most credit card issuers from charging annual fees if they charged interest on credit card purchases (e.g. Credit Act 1984 (NSW) s 54).

·         Following a recommendation from the Prices Surveillance Authority’s 1992 Inquiry Into Credit Card Interest Rates, State legislatures issued exemption orders which allowed all financial institutions to charge both interest and fees on credit cards from 1 August 1993.

 

If you are interested in further information on this topic, you may find Report No.45 by the Prices Surveillance Authority “Inquiry into Credit Card Interest Rates” 15 October 1992 helpful. Although it does not appear to be available online, we understand that it may be accessed via the NSW State Library.

 

Regards

Ian

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

 

Ian

 

Thank you for you below explanation of the separate statistical information encompassed within “simple calculation”.

 

The attached PDF of Chapter  5. IMPACT ANALYSIS of an RBA publication, seemingly some 12 or so years ago, contains Figure 3: ‘Selected interest rates’ which points out ‘Introduction of annual fees August 1993’ for Credit Cards in Australia.

 

I understand that:

·         Charge Card Issuers could charge a monthly fee on Charge Cards (AMEX and Diners Club) but not on Credit Cards.

·         Restrictions on Credit Card Issuers charging of an annual fee upon a Credit Cardholder owning a Credit Card was removed in 1993.

 

Could you let me know –

1.    which Regulator removed that restriction in August 1993; and

2.    the section of the particular Parliamentary Act that the Regulator had relied upon to earlier impose the restriction on Credit Card Issuers charging an annual fee?  Or saying it another way, what section of what Parliamentary Act that the Regulator had relied upon to earlier deny the right for Credit Card Issuers to charge an annual fee?

 

Re 2. above, I understand that Credit Card Issuers outside Australia had charged an annual fee for many years before 1993, relying upon the ‘User Pays Principle’.  That is, it wasn’t a new idea in 1993 for Credit Card Issuers to charge an annual fee in Australia, but upon the lifting of a restriction.

 

If it was the RBA that imposed the restriction on charging an annual fee on Credit Cardholders, then I imagine that you would be able to answer both parts of my above question.

 

However, if it was by a predecessor of ASIC, APRA or ACCC that imposed the restriction and lifted the restriction in 1993, then understandably you may not know the Act that bestowed that Regulator the authority to deny charging an annual fee on Credit Cards ‘til 1993.

 

Phil Johnston aka  Bank Teller
0434 715.861

 

 

Hi Phil and Peter

 

The response below came from members of the Bank’s Payments Policy team.

 

Thank you for your query.

 

For (i), the main intuition is that in the June quarter 2015 there were about $24 billion new credit card transactions each month and about $24 billion in monthly credit card repayments, so that the stock of outstanding balances (i.e. debt) remained roughly unchanged over a given month (see the blue line in Graph 11, which was broadly flat over the period). Now, we can think of the total amount of credit card balances not accruing interest as purely ‘transactional’ balances – that is, they accumulate within the month as people make transactions but are repaid during the interest-free period. So, the approximate share of monthly credit card transactions that do not accrue interest = total balances not accruing interest (i.e. ‘transactional balances’) ÷ total value of credit card transactions in the month = (51.5–33.1) ÷ 24 ≈ 0.77.

 

There are a few statistics you mention in (ii), which all relate to interest-paying ‘revolvers’. In particular, revolvers account for:

·         30–40 per cent of accounts pay interest: this statistic, also mentioned on page 6 of the Bank’s submission, is derived from some industry estimates (e.g. CBA submission, p 5, where 57 per cent of credit cardholders do not pay interest);

·         20–25 per cent of transactions: this statistic is simply 1 minus the share of transactions that do not accrue interest (see (i) above);

·         close to two-thirds of outstanding debt: as mentioned in the paragraph, $33.1 billion out of $51.5 billion total credit card debt accrues interest (i.e. 65%).

 

Regards

Ian

 

Ian Chua| Senior Communications Officer | Media and Communications

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9720| E: rbainfo@rba.gov.au w: www.rba.gov.au

 

 

Below is an extract from page 15 of the attached:

 

“In the June quarter of 2015, new credit card transactions averaged around $24 billion per month. At the end of June, the total level of credit card debt was $51.5 billion (Graph 11). Of this amount, $33.1 billion, or around 65 per cent was bearing interest. A simple calculation would suggest that around 75-80 per cent of transactions on credit cards do not accrue interest. That is, interest-paying ‘revolvers’ account for about 30-40 per cent of accounts, about 20-25 per cent of transactions, but close to two-thirds of the outstanding stock of debt.9” 

 

Could you provide the simple calculation that quantifies –

(i)            around 75-80 per cent of transactions on credit cards do not accrue interest; and

(ii)          interest-paying ‘revolvers’ account for about 30-40 per cent of accounts, about 20-25 per cent of transactions, but close to two-thirds of the outstanding stock of debt.9

 

I have c.c. my friend, Peter Meers, who is also interested in the above.

 

We are both now retired.  I previously worked for CBA and Pete once worked for ANZ.  Neither of us worked in ‘Cards’.

 

Phil Johnston aka  Bank Teller
0434 715.861

 

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