Chapter 1

Introduction

Referral

1.1 On 21 June 2011, Senator Nick Xenophon introduced into the Senate the Consumer Credit Protection Amendment (Fees) Bill 2011. On 7 July 2011, the Senate referred the Bill to the Economics Legislation Committee for inquiry and report. The reporting date is 14 September 2011.

Summary of the Bill

1.2 The Bill includes two schedules. Schedule 1 seeks to amend the National Credit Code (contained in Schedule 1 to the National Consumer Credit Protection Act 2009) to provide that:

credit fees or charges relating to credit contracts must be reasonable; and
the Australian Securities and Investments Commission (ASIC) may apply for a court order to annul or reduce a credit fee or charge it determines not to be reasonable.

1.3 Schedule 2 seeks to amend the Banking Act 1959 to require the Australian Prudential Regulation Authority (APRA) to prohibit banks with a market share of more than 10 per cent from imposing early termination fees in relation to loan agreements or mortgage contracts. This prohibition will also apply to any subsidiary that a bank with more than 10 per cent market share owns 51 per cent or more of.

Conduct of the inquiry

1.4 The committee advertised the inquiry in The Australian and on its website. The committee also wrote to relevant Commonwealth departments and agencies, industry groups and other stakeholders inviting submissions. The committee received three submissions, which are listed in Appendix 1.

1.5 The issues relevant to the Bill, however, have been canvassed as part of recent Senate committee inquiries, other parliamentary processes and public consultation undertaken by the Government. As shown by Table 1.1, there were a number of policy and legislative developments related to fees or charges for consumer credit in the past financial year.

1.6 In particular, the committee was able to utilise the substantial amount of evidence gathered by the Senate Economics References Committee as part of its recent inquiry into competition in the Australian banking sector to help inform this report. The public submissions received by Treasury as part of its February 2011 consultation on amendments to the regulations related to the National Credit Code were also considered.

Table 1.1: Summary of developments in 2010–11 related to exit fees

Date	Development
1 July 2010	The National Credit Code (provisions of which deal with unconscionable early termination fees) and the aspects of the Australian Consumer Law related to unfair contract terms come into effect.
28 October 2010	The Senate refers to the Economics References Committee for inquiry the issue of competition in the Australian banking sector.
November 2010	NAB and ANZ announce they will abolish exit fees for variable rate mortgages.
November 2010	ASIC releases Regulatory Guide 220 which outlines its approach to enforcing the unconscionable provisions in relation to early termination fees for residential loans.
12 December 2010	The Government releases its Competitive and Sustainable Banking System package. As part of this package the Government announced it would ban exit fees outright for new loans entered into from 1 July 2011.
15 February 2011	Treasury commence public consultation on draft regulations intended to put the Government's ban on exit fees into effect.
23 March 2011	The Government makes amending regulations to give effect to its ban on exit fees (from 1 July 2011).
6 May 2011	The Economics Reference Committee's report is tabled. Two recommendations were directly related to exit fees: Recommendation 4 The Committee recommends that the Government reconsider its decision to ban exit fees, before the amended regulations come into effect, with a view to allowing enough time for the effectiveness of the existing ban on unfair and unconscionable exit fees (as implemented through ASIC Regulatory Guide 220) to be assessed. If it proceeds with the ban, it should only apply to authorised deposit-taking institutions Recommendation 17 The Committee recommends that the Government introduce regulation of mortgage early exit fees (including deferred establishment fees), requiring disclosure of these fees upfront in a simplified and comparable format.
21 June 2011	The bill before the committee is introduced by Senator Xenophon.
22 June 2011	Senators Cormann, Williams and Xenophon move a motion in the Senate to disallow the Government's regulations banning exit fees. The motion was negatived.
1 July 2011	The ban on exit fees made by the regulations comes into effect.

Consideration by the Senate Scrutiny of Bills Committee

1.7 The Senate Standing Committee for the Scrutiny of Bills assesses legislative proposals against a set of accountability standards that focus on the effect of proposed legislation on individual rights, liberties and obligations, and on parliamentary propriety. The Scrutiny of Bills Committee has stated that it has no comment on the Bill.[1]

Outline of the report

1.8 This report is divided into five chapters:

Chapter 2 examines Schedule 1 of the Bill. The chapter provides an overview of the current regulation of fees and charges associated with credit before scrutinising the amendments proposed by the Schedule (that require fees and charges related to consumer credit be reasonable) in detail.
Chapter 3 covers Schedule 2 of the Bill. The chapter begins by outlining the main arguments which favour a ban on certain early termination fees and arguments supporting smaller lenders being able to impose those fees. The chapter then outlines the main elements of Schedule 2 and the evidence the committee received regarding the proposal. Other issues which have been identified, including minor drafting issues, are also noted.
Chapter 4 discusses the interaction of Schedule 2 with other laws currently in place regarding early termination fees. In particular, the chapter focuses on the implications of these other laws for the ability of the proposal contained in Schedule 2 to meet its objective.
Chapter 5 provides the committee's overall view on the Bill and its recommendations.

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