Chapter 2
Schedule 1—Reasonable fees or charges
Current regulation of credit fees and charges
2.1
There are two key pieces of legislation currently in place which are
relevant to fees or charges relating to credit contracts. They are:
-
the National Consumer Credit Protection Act 2009 (NCCP
Act); of particular relevance is the National Credit Code which is contained in
Schedule 1 to that Act and the regulations made under the NCCP Act; and
- the Australian Consumer Law.
2.2
The Australian Securities and Investments Commission (ASIC), Australia's
corporate, markets and financial services regulator, is responsible for
administering and enforcing consumer credit matters covered by these laws.
National Credit Code
2.3
The National Credit Code (the Code) came into operation on 1 July 2010.
Its commencement gave effect to the Council of Australian Governments' (COAG)
agreements of 26 March and 3 July 2008 to transfer responsibility for
regulation of consumer credit, and a related cluster of additional financial
services, from the states and territories to the Commonwealth. The Code:
... provides a consumer protection framework for consumer
credit and related transactions ... The Code regulates many aspects of the provision
of certain types of credit, including upfront and ongoing disclosure
obligations, changes to the credit contract, advertising and marketing
requirements, termination of the credit contract and penalties and remedies.
The Code also regulates consumer leases.[1]
2.4 Under section 78 of the Code, the court may annul or reduce:
- a change to the annual percentage rate or rates under a consumer credit
contract; or
- an establishment fee or charge, or a fee or charge payable on
early termination of a consumer credit contract or for prepayment of an amount
under a consumer credit contract;
if the court is
satisfied that it is unconscionable.
2.5
For establishment fees and charges, the court is to have regard to:
... whether the amount of the fee or charge is equal to the
credit provider's reasonable costs of determining an application for credit and
the initial administrative costs of providing the credit or is equal to the
credit provider's average reasonable costs of those things in respect of that
class of contract.[2]
2.6
An early termination fee is unconscionable:
... if and only if it appears to the court that it exceeds
a reasonable estimate of the credit provider's loss arising from the early
termination or prepayment, including the credit provider's average reasonable administrative
costs in respect of such a termination or prepayment.[3]
2.7
Section 79 of the Code allows ASIC, if it considers that doing so is in
the public interest, to make an application to the court regarding
unconscionable interest and other charges.
2.8 ASIC has published guidance on its approach to enforcing the provisions
regarding unconscionable fees and charges. For instance, ASIC considers that for
the early termination fees covered by section 78 of the Code, a credit
provider's loss 'arises from the early termination of a loan only if it is caused
by the early termination'.[4]
2.9
The Australian Consumer Law includes provisions related to unfair
contract terms. Although the bulk of the Australian Consumer Law commenced on 1
January 2011, the unfair terms provisions commenced on 1 July 2010. ASIC is
responsible for the enforcement of matters related to financial services—these
aspects of the Australian Consumer Law are included in the Australian
Securities and Investments Commission Act 2001 (ASIC Act).
2.10
In relation to consumer credit matters, the unfair contract terms
provisions apply to 'standard form consumer contracts' for a financial product,
or the supply or possible supply of financial services. While the term standard
form contract is not defined in the legislation, ASIC considers it typically
would be one 'that has been prepared by one party to the contract and is not
subject to negotiation between the parties—that is, it is offered on a
"take it or leave it" basis'.[5]
2.11
Under section 12BG of the ASIC Act, a term in a consumer contract is
unfair if it:
- would cause a significant imbalance in the parties' rights and
obligations arising under the contract; and
- is not reasonably necessary in order to protect the legitimate
interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party
if it were to be applied or relied on.
2.12
In determining whether a term of a consumer contract is unfair a court
must take into account the extent to which the term is transparent (that is,
expressed in reasonably plain language, legible, presented clearly and readily
available to all parties), and the contract as a whole.
2.13
The unfair contract terms provisions do not apply to terms that:
- define the main subject matter of the contract;
- set the upfront price payable under the contract; or
- are required or expressly permitted by a law of the Commonwealth,
state or territory.[6]
2.14
The 'upfront price' exclusion makes it clear that the principal and
interest are excluded from the unfair contract terms provisions, however, other
fees and charges are likely to be captured:
... for example, terms that impose additional fees for a
default or exit, over and above the price for the goods or services acquired.[7]
2.15 ASIC's guidance, contained in its Regulatory Guide 220, notes:
An early termination fee that has the effect of penalising
the consumer for terminating the loan is not likely to be reasonably necessary
to protect the lender's legitimate interests. We consider that it also likely
to be unfair as the other elements of the test of unfairness are also likely to
be satisfied, namely that the term creates a significant imbalance in the
parties' rights and obligations and causes detriment.[8]
Ban on exit fees
2.16 As part of its Competitive and Sustainable Banking System package
announced in December 2010, the Government stated it would ban exit fees
outright for new variable home loans entered into after 1 July 2011.
2.17
After a consultation process undertaken between 15 February 2011 and
1 March 2011, amendments to the regulations related to the National Credit
Code were made on 23 March 2011.[9]
The amendments were subjected to a disallowance motion in the Senate, which was
negatived on 22 June 2011.
2.18
The ban on exit fees for variable home loans does not apply for existing
mortgages. In these cases, the provisions related to unconscionable fees in the
Code remain relevant. Treasury advised this is due to constitutional reasons
because such a measure:
... would be an acquisition of property. The property is
the property of the financial institution. We took legal advice on that.[10]
2.19
The Government also noted the continued relevance of the provisions
related to unconscionable fees when it announced its intention to ban exit
fees:
If any bank seeks to simply re-badge their current mortgage
exit fees as upfront entry fees—or recover exit fees through any other type of
fee—... ASIC ... has the power to pursue the bank if it appears that
the fee is 'unconscionable' under the Government’s new National Credit Code,
which applies to both existing and new mortgages.[11]
The provisions of Schedule 1 to the Bill
Overview
2.20
Schedule 1 to the Bill will insert a new section 30B into the National
Credit Code. Subsection 30B(1) would require that any credit fee or charge
payable by a debtor to a credit provider must be 'reasonable'. The Explanatory
Memorandum outlines how a reasonable fee or charge may be determined:
Under this section, a credit fee or charge must be
reasonable, which means that it must not materially exceed the credit
provider's reasonable costs of undertaking the activity or service to which the
fee relates, or the credit provider's average reasonable costs of undertaking
the activity or service to which the fee relates in respect of that class of contract.[12]
2.21
When assessing whether such a fee or charge is reasonable, the court
must have regard to whether the amount of the credit fee or charge the subject
of the application materially exceeds:
(a) the credit provider's reasonable costs of undertaking the activity or
service to which the credit fee or charge relates; or
(b) the credit provider's average reasonable costs of undertaking the
activity or service to which the credit fee or charge relates in respect of
that class of contract.[13]
Submitters' views
2.22
The Mortgage and Finance Association of Australia (MFAA), the peak
industry body for mortgage and finance brokers and non-bank lenders, supported
the amendments in Schedule 1:
... requiring that credit fees of charges must be
reasonable viz must not materially exceed the credit provider’s reasonable
costs of undertaking the activity or service to which the fee relates is
consistent with ASICs RG 220 and would be supported by MFAA.[14]
2.23
Professor Milind Sathye, Professor of Banking and Finance at the
University of Canberra, broadly supported Schedule 1 although he was of
the opinion that some elements warranted further consideration.[15]
2.24
The Australian Bankers' Association, however, was not in favour of the
amendments:
The ABA submits that the Bill would largely duplicate
recently enacted law and add another layer to the regulation of credit fees and
charges thereby creating uncertainty and potentially conflicting
interpretations.[16]
Interaction with existing law
related to credit fees and charges
2.25
It is apparent that the Schedule generally reflects the approach taken
by ASIC's Regulatory Guide 220, which provides ASIC's view on when an
early termination fee for a home loan or residential investment loan may be
unconscionable under the National Credit Code or unfair under the Australian
Consumer Law (see paragraphs 2.8 and 2.15).
2.26
A key difference, however, between the current provisions related to
unconscionable fees or charges and the proposal in the Bill is the scope. The
Bill would apply to all credit fees or charges payable by a debtor to a credit
provider whereas the unconscionable fee provisions in the National Credit Code
only apply to the specific categories of fees or charges listed in subsection
78(1) of the Code (see paragraph 2.4).
2.27
The similarities between the amendment and the approach taken by Regulatory
Guide 220 was one of the factors that resulted in submitters supporting the
Schedule.[17]
The MFAA noted:
RG 220 made good sense to MFAA and was supported by the
industry generally. In particular non-bank and other smaller lenders supported
the regulatory guidance because it enabled them to continue to utilise
reasonable exit fees ("deferred establishment fees") as a key tool in
their competition with the larger banks and providing choice to borrowers.[18]
2.28
A possible complication, however, is how the Bill's requirement that a
credit fee or charge must be reasonable would interact with the existing
provisions which allow for challenges by debtors or ASIC to unjust
transactions, such as unconscionable charges. To put it another way, where is
the line (or is there an overlap) between the provisions governing
unconscionable fees and the requirement that a fee must be reasonable?
Whether a credit fee or charge is
not 'reasonable'
Cost recovery
2.29
The concept of a cost being required to be 'reasonable' is not
unfamiliar to consumer credit law—for example, the courts are required to have
regard to whether a fee or charge is equal to a credit provider's reasonable
costs when determining whether an establishment fee or charge is
unconscionable.[19]
2.30
While not itself law, ASIC's Regulatory Guide 220 also considers
that in assessing if an early termination fee is unfair, whether the fee
reflects the lender's reasonable costs directly arising from the early termination
needs to be considered.[20]
2.31
For the purposes of determining whether a credit fee or charge is not
reasonable, new subsections 30B(3) and (4) of the Code proposed by the Bill refer
to the credit provider's reasonable costs and average reasonable costs
associated with undertaking the activity or service to which the fee or charge
relates.
2.32
The Australian Bankers' Association objected to fees being for cost
recovery purposes only:
The market and economic consequences of the proposed regulation
of credit fees and charges, by linking it to cost recovery, do not appear to
have been considered. If credit providers are confined to charge fees on a cost
recovery basis only, this would signal that income should be generated by
interest rates only.
The implication that credit providers should only make money
from interest is completely inappropriate, particularly in the cards space
where a significant proportion of customers do not revolve balances. By
regulating the fees and charges that can be imposed issuers will inevitably
increase interest rates and this will affect those that can least afford to pay
higher interest. In other words, those customers that do not pay off their
balances each month would be subject to higher interest to subsidise all others,
and the credit provider would not be able to earn any money from customers that
pay their balances off.[21]
2.33
The Australian Bankers' Association further explained their objection to
fees being considered to be unreasonable if they are not clearly linked to cost
recovery, noting specific issues for credit card products:
There are many valid instances where a fee is more than cost
recovery but may still be reasonable and not excessive. For example, the
application of the Bill to "all credit fees and charges" would be
particularly problematic for credit cards that carry an annual fee as annual
fees appear to be captured under the definition of fees and charges. Some
lenders may charge annual fees for their highest tier of credit card that range
above $500. However, the card will most likely offer benefits and other reward
points options that lower tier cards at a lower annual rate do not. A consumer
is always entirely free to choose a different product with a different and
lower annual fee. The annual fee is not currently tied to the exact cost to the
lender of providing those benefits. The Bill and the proposed linkage between
all credit fees or charges and costs to the credit provider could therefore
destroy innovation in the cards market.[22]
Determining credit providers' costs
2.34
A possible practical issue with the Schedule as it is currently drafted
is how the credit provider's reasonable costs would be determined. When the
question of whether a cost is reasonable is currently considered under the
National Credit Code or the NCCP Regulations, an allowance is made for an
estimate of the cost to be used.
2.35
For example, although changes to the NCCP Regulations have banned exit
fees, a credit provider may impose a discharge fee if it is based on
reimbursing the credit provider for the reasonable administrative cost of
terminating the credit contract. For this purpose, the Regulations consider an
administrative cost is reasonable only if it does not:
... exceed a reasonable estimate of the average
reasonable administrative cost to the credit provider of terminating that class
of credit contract.[23]
(emphasis added)
2.36
Additionally, section 78(4) of the National Credit Code states:
For the purposes of this section, a fee or charge payable on
early termination of the contract or a prepayment of an amount under the credit
contract is unconscionable if and only if it appears to the court that it
exceeds a reasonable estimate of the credit provider's loss arising from
the early termination or prepayment, including the credit provider's average
reasonable administrative costs in respect of such a termination or prepayment. [24]
(emphasis added)
2.37
On this basis, it may be appropriate to amend the Bill to allow for an
estimate of the credit provider's reasonable costs and average reasonable costs
to be used.
2.38
A related issue raised by Professor Sathye was the use of the phrase
'average reasonable costs of undertaking the activity or service' in the
factors ASIC must have regard to (paragraph 30B(3)(b)) and the matters the
court must have regard to (paragraph 30B(4)(b)) when determining whether the
credit provider's fee or charge is not reasonable. It was suggested that credit
providers:
... may be disadvantaged by this as lending decisions
including fees and charges would be based on 'marginal cost' rather than
average cost. This is especially true in the banking world where cost of funds
is quite volatile. [25]
Whether a credit fee or charge
'materially' exceeds reasonable costs
2.39
The use of the word 'materially' in the proposed subsections 30B(3) and
(4) implies there is some allowance for a credit fee or charge to exceed the
credit provider's reasonable costs related to providing that activity or
service. The degree of tolerance, however, is unclear.
2.40
Professor Sathye noted:
The National Credit Code
section 79(3) already provides that 'In determining whether an establishment
fee or charge is unconscionable, the court is to have regard to whether the
amount of the fee or charge is equal to the credit provider’s reasonable costs
of determining an application for credit and the initial administrative costs
of providing the credit or is equal to the credit provider’s average reasonable
costs of those things in respect of that class of contract'. The proposal
uses the term 'materially exceeds' which may have a different meaning than
unconscionable. Materially exceeding charge may not be necessarily
unconscionable (or oppressive) though the intention of the proposal it seems to
me is to really do away opportunities for unconscionable conduct.[26]
2.41
Professor Sathye then suggested:
The next question would be defining what 'materiality' in
this context is. If we apply the definition of materiality as used in the
auditing context, then an amount equal or exceeding 10 per cent of the base
amount is generally considered to be material. The proposal is leaving this to
the judgment of ASIC. I would support this.[27]
2.42
As a definition is not supplied for the purposes of this provision,
'materially' would likely need to be interpreted by the courts.
2.43
Proposed subsection 30B(2) provides that ASIC may, if satisfied on the
application of a debtor or guarantor that a credit fee or charge is not
reasonable, apply to the court for an order to annul or reduce the credit fee
or charge, and for other ancillary orders. Subsection (3) outlines what ASIC
must have regard to when deciding whether to lodge an application and
subsection (4) stipulates what the court must have regard to when considering
an application from ASIC.
2.44
It is apparent that the proposed section is drafted differently to
comparable existing sections in the Code. Other sections that relate to orders
by the court take a 'top down' approach—opening with the court being given the
power to make certain orders, and then adding qualifications or matters that
must/may be taken into account. For example, section 78 of the Code[28]
states:
The court may, if satisfied on the application of a debtor or
guarantor that ... [a fee or charge listed in the
section] ... is unconscionable, annul or reduce the change or fee or
charge and may make ancillary or consequential orders.
2.45
Section 79 of the Code then allows ASIC to make an application under
that provision if it considers it is in the public interest. The Bill does not
include this explicit requirement (although ASIC would still have some
discretion as the Bill only provides that ASIC 'may' apply to the court).
2.46
By diverging from the approach taken in drafting existing sections in
the Code, some aspects appear less clear. The proposed section 30B does not
explicitly state that a debtor or guarantor may apply to the court for these
types of orders themselves—the section outlines a process where a debtor or
guarantor first applies to ASIC, which may then apply to the court. Such an
interpretation is supported by subsection (4) which only outlines what the
court must have regard to when considering an application from ASIC.
The application process
2.47
The term 'application' is used in two different contexts within the
Schedule. The first context is the application made by a debtor or guarantor to
ASIC, and the second is ASIC's application to the court for orders.
2.48
The meaning in the second context is clear, as it is linked back to
subsection 30B(2) which uses the common legislative phrase of 'apply to the
court'. The first use may be more open to interpretation, as it is not clear
how formal the application from the debtor or guarantor needs to be or what it
needs to contain. If it is intended that a formal application needs to be
lodged, it is common in legislation that a provision be made for the
regulations to clarify these arrangements and the circumstances in which an
application is valid.[29]
2.49
In a practical sense, the need for both subsections (3) and (4) is not
obvious. Subsection (3) outlines what ASIC must have regard to when considering
whether a fee or charge is not reasonable. Subsection (4) then outlines what
the court must have regard to when considering an application by ASIC which
alleges that a fee or charge is not reasonable. Ultimately, the key provision
appears to be what the court must have regard to as it is reasonable to expect
that ASIC would not lodge an application with the court if it did not think it
had a reasonable prospect of satisfying the matters that the court is required
to have regard to.[30]
2.50
Another possible issue with the drafting of the Schedule is that it does
not appear that ASIC may apply to the court on its own initiative—the section
only provides that ASIC may 'if satisfied on the application of a debtor or
guarantor'. Also, in the example of section 79 of the Code noted above,
subsection (3) allows for ASIC to make an application that applies to one or
more credit contracts and may apply to all or any class of credit contracts
entered into by a credit provider during a specified period. The Bill's
proposal does not include this provision—as a result it appears that ASIC may
only be able to act on individual applications lodged by affected parties.
2.51
Professor Sathye queried the period of time that proceedings under proposed
section 30B could take, noting that the Bill does not provide a time limit for
them to be resolved. He suggested:
It may help if a time limit of say one month from the date
the complaint found acceptable by ASIC is put for submission of all relevant information
by the concerned bank ... If the case drags on the customer may not be
able to take advantage of the competitive rates available from other providers.[31]
2.52
While such a proposal may have some attractive elements, a fixed
statutory timeframe is generally more appropriate for when a statutory
authority makes a binding determinations under legislation, rather than when it
undertakes evidence gathering for potential legal proceedings. A fixed
statutory time limit also may not necessarily be helpful from ASIC's
perspective. Under Part 6-3 of the NCCP Act, ASIC has coercive information
gathering powers which can require the production of books (a term that is
broadly defined) relating to a credit activity engaged in by a person. If ASIC
determines it needs to use these powers, it would have useful flexibility
regarding the type of documents required and the timeframe for the production
of the documents.
2.53
Further, it is quite likely in most cases that the other stages of the
enforcement process (such as ASIC's initial assessment of the allegations, the need
to review any documents requested and provided, preparation for court and the
legal proceedings themselves) would each contribute more to the total time
taken for the matter to be resolved than delays in information being provided
to ASIC by the banks.
Court orders
2.54 While subsection 30B(2) states that ASIC may apply to the court
for an order annulling or reducing the credit fee or charge and for any other
ancillary or consequential orders, it does not expressly state that the court
may make those orders. This diverges from the approach taken in the example of
section 78 of the Code referred to earlier, in which it is expressly stated
that the court may 'annul or reduce the change or fee or charge and may make
ancillary or consequential orders'.
Technical issue—'determining'
2.55
Subsection (3), which deals with ASIC's assessment of an application
from a debtor or guarantor, states that:
In determining whether a credit fee or charge is not
reasonable, ASIC must have regard to ...
2.56
As ASIC's assessments are not binding and it is ultimately the courts
that will determine the matter, it may be appropriate that the first sentence
of subsection (3) be amended. One possibility is the following:
In determining whether it considers that a credit fee
or charge is not reasonable, ASIC must have regard to ...
Drafting error
2.57
The heading of Schedule 1 is titled:
Schedule 1—Amendment of the
National Consumer Credit Protection Amendment (Fees) Bill 2011
2.58
This heading mistakenly refers to the name of the Bill, rather than the
legislation it seeks to amend. Accordingly, the heading should be amended to
read:
Schedule 1—Amendment of the National Consumer Credit
Protection Act 2009
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