Introduction
2.1
This chapter examines stakeholder views on the provisions of the Financial Accountability Regime Bill 2022 (FAR bill); Financial Sector Reform Bill 2022 (FSR bill); Financial Services Compensation Scheme of Last Resort Levy Bill 2022 (CSLR Levy bill); and Finance Services Scheme of Last Resort Levy (Collection) Bill 2022 (CSLR Collection bill). It is informed by the bills’ explanatory materials, submissions received by this inquiry, evidence provided at a public hearing on 14 October 2022, and additional material submitted to the committee.
2.2
This chapter provides an indicative account of the key issues relating to the package of four bills and concludes with the committee’s views and recommendations on the bills.
2.3
The discussion is separated into the key high-level reforms in relation to
the establishment of a Financial Accountability Regime (FAR), Compensation Scheme of Last Resort (CSLR) and consumer credit reforms.
Financial Accountability Regime
Overall support for the bills
2.4
The majority of submissions to the inquiry supported the bills and their intent to establish a FAR. Many submitters argued the establishment of a FAR will improve the operating culture of entities in the banking, insurance and superannuation industries and increase transparency and accountability, both in relation to prudential and conduct related matters. Stakeholders also stated that the FAR will be integral part of the process to restore public trust in the system. These submissions reiterated those views voiced in the previous inquiry into the 2021 package.
2.5
Many of the submitters noted that the proposed bills implement recommendations of the Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry (Royal Commission) relating to the extension of the Banking Executive Accountability Regime (BEAR) to other Australian Prudential Regulatory Authority (APRA) regulated industries and to have APRA and the Australian Securities and Investments Commission (ASIC) jointly administer the extended regime.
2.6
Summarising the views of many stakeholders, the Australian Institute of Company Directors (AICD) stated:
The AICD supports passage of the bill in its current form and considers that, on balance, the FAR will result in accountability and broader governance improvements across APRA entities. Given the proposed reforms have been contemplated for some time, the AICD encourages swift passage of the bill to provide certainty to the financial services sector and allow for the expected benefits to commence as quickly as possible.
2.7
The Australian Banking Association (ABA) summarised its views on
the passage of the bill succinctly stating:
The ABA continues to support the passage of the four bills before this committee. The bills represent the final legislative reforms required to implement the government's response to the banking royal commission and further improve trust and confidence in the banking industry.
2.8
Finally, Mr Spiro Premetis from the Financial Services Council (FSC) advised the committee of the FSC’s unwavering support for the proposed measure to introduce the FAR, stating:
…I can say unambiguously that we support the legislation as is, unamended, passing the parliament…
Civil penalties
2.9
Despite supporting the general intent of the bill to strengthen accountability measures, some inquiry participants noted that the absence of civil penalties for individuals in the FAR would remove personal liability and consequences that deter senior leaders from engaging in misconduct.
2.10
Dr Andy Schmulow from the University of Wollongong expressed his concerns in relation to the lack of civil penalties in the FAR, and respectfully recommended that the bill be amended to include individual accountability in line with, for example, the measures contained in the UK:
Bar instances of non-compliance of a procedural nature (failure to provide documents requested by the Regulator), or instances in which an accountable person wilfully directs an accountable entity to break the law or ignore directions from the Regulator, this draft bill fails to establish any meaningful measure of individual accountability.
2.11
Expressing the view that there must be meaningful consequences for individuals who break the law, Choice stated:
…the draft legislation before the Committee does not include civil penalties for accountable individuals. It is critical that finance leaders are personally liable for misconduct. Consumer groups strongly support aligning maximum penalties for accountable persons under the FAR with the newly imposed maximum penalty framework under existing financial services laws.
2.12
However, the ABA, in reiterating its views presented to the committee earlier in the year, argued that the existence of banning powers and deferred remuneration arrangements within the remit of the FAR would be quite effective and would significantly guide behaviour. The ABA stated:
Our view is that the regime already includes significant personal consequences for those accountable persons and that individual civil penalties would further distort the liability of finance executives against executives in other sectors.
2.13
In terms of other penalties that operate, both the ABA and FSC highlighted
the existing Corporations Act arrangements that apply to directors and officers of companies. The FSC advised the committee that the existing framework ‘already contains a number of provisions that are going to directly impact the individual liability of senior executives, particularly directors’. Both organisations were of the view that the ancillary civil penalty provisions included in the draft bill strike the appropriate balance.
2.14
The FSC articulated that the robust set of core accountability obligations will effectively serve its purpose of holding entities and executives to account. It was further argued that the FAR would be ‘a positive development that will sharpen the focus of the industry going forward’.
2.15
The Australian Institute of Company Directors (AICD) stated that strongly supports the bill not containing direct civil penalties on accountable persons:
The Bill as drafted is already more stringent than what was contemplated in the recommendations of the Royal Commission in both scope and burden. To introduce direct personal liability would not only be unsupported by the Royal Commission, but also unnecessary in light of the existing extensive enforcement and penalty powers available to APRA and the Australian Securities & Investment Commission (ASIC).
2.16
In her evidence to the committee, Ms Mohita Zaheed from Treasury also confirmed the importance implementing the recommendations of the Royal Commission and striking an appropriate balance in the FAR:
There are a number of deterrents that have already been put into
the legislation as it relates to individual accountable persons within these entities. There are deferred remuneration obligations, and there's
the ability to be banned from being an accountable person. They're quite punitive and serious penalty provisions. They're not civil penalties, but they are mechanisms to ensure that, when an accountable person fails to undertake their role or fails to take reasonable steps to undertake their role, they are subject to recriminations.
Compensation Scheme of Last Resort
2.17
Overall, submitters and witnesses to the inquiry expressed support for establishment of a CSLR. Remarking that the proposed measures were the same as the package of bills that were examined by the committee within the last 12 months, many stakeholders reiterated the views that were expressed to the committee previously.
2.18
Submitters again noted that the bills would implement the Ramsay Review and Royal Commission's recommendations for a CSLR in Australia and, would improve consumer and small business access to redress by implementing an industry-funded, forward-looking targeted scheme that extends beyond personal financial advice failures.
2.19
The FSC argued that the scheme correctly balances the liability for industry, the provision of just compensation of claimants for the scheme contributors and, restoring confidence in the financial services sector as a whole.
CSLR Levy
2.20
The proposed CSLR framework creates a levy against relevant financial services industry entities to fund the scheme, to an overall scheme levy cap of $250 million. A sub-sector levy cap of $20 million is also proposed, though may be increased in the regulations or where a relevant ministerial determination is made.
2.21
Some stakeholders raised their concerns on the proposed CSLR levy. It was suggested that the levy would have an impact on industry due to a potential increase in administrative and operational costs. It was also argued that the levy would not be sustainable for industry members.
2.22
However, this view was not shared by all stakeholders, with many submitters articulating their support for a forward-looking, industry funded CSLR and the rationale for the framework.
2.23
Treasury argued that it was appropriate for the one-off levy to be funded by the top 10 firms, given their capacity to pay.
Consumer credit reforms
2.24
Unlike the other measures in the bills, views were divided on the proposed reforms to the amend the Credit Act to enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases.
2.25
While some stakeholders argued that the proposed reforms may lead to worse consumer outcomes, other stakeholders were adamant that the proposed changes were long overdue and would result in better outcomes for consumers.
The SACC and consumer leasing industry position
2.26
The committee received submissions, form letters and correspondence from businesses and peak bodies representing the consumer leasing industry.
2.27
Several submissions from these bodies raised concerns about the proposed Schedule 4 and the impact that it will have on the SACC and consumer leasing industry. Various peak bodies and lenders argued that the reforms are overly restrictive and that these loans facilitate financial inclusion for customers that would otherwise be excluded from the banking sector.
2.28
For example, the Consumer Household Equipment Rental Providers Association (CHERPA) argued that as a result of the proposed amendments, ‘consumers will be at severe risk of financial exclusion as an unintended consequence of the bill, among a range of other negative consequences’. CHERPA argued that these unintended consequences would lead consumers to seek other alternative and less desirable forms of credit with product providers offering reduced client services and support.
2.29
Nimble Australia (Nimble) and the Finance Industry Delegation also felt that the proposed reforms would have unintended adverse consequences for SACC lending. Specifically, it was argued that it would:
…provide a credit nightmare for consumers, substantially increasing
the number of vulnerable consumers who will be subject to illegal options and overcommitment, a compliance nightmare for licensees…a major issue of concern will not be Australian Credit Licensed lenders’ avoidance of the legislation, but consumers motivated by urgent and emergency situations being forced to avoid the protective provisions of the whole National Consumer Credit Protection Act (NCCP Act) in order to obtain their loans.
2.30
The National Credit Providers Association (NCPA) expressed concerns that financially excluded Australians ‘who cannot obtain credit from a bank or mainstream financial institution but still need access to credit’ would be impacted as a result. The NCPA also stated:
A lower protected earnings amount will not dampen demand. Without a viable alternative, this proposed change will only drive borrowers to unregulated lenders who provide products that cause real consumer harm and does nothing to assist those vulnerable Australians wanting access to credit when they need it most.
2.31
Cash Converters, NCPA, Semvia Finance and Nimble among others argued that the current regulations under the Credit Act provide adequate protection for consumers by limiting harm. Semvia Finance and Nimble argued that
the reforms are targeting the wrong area, compliant credit providers who offer SACCs are not the problem and that there is no need for further strengthening of the laws.
Support for the reforms
2.32
While there was some opposition to the consumer credit reforms, the majority of stakeholders on this issue were supportive.
2.33
In a joint submission, various consumer groups summarised the views held by many other stakeholders and argued that the reforms will address the harms that high-cost products continually cause to consumers:
Since the SACC review and over the last seven years, these products—and the harm caused by them—has not changed. If anything, it has got worse as people across Australia are getting hit by rising interest rates and cost of living pressures. We continue to help families who have been pushed into debt spirals by excessively expensive consumer leases and aggressively marketed payday loans. These credit products do not help people in financial hardship—they breed financial exclusion and almost always leave people worse off.
2.34
Similarly, NILS Network of Tasmania (NILS Tasmania) strongly urged
the government to pass the legislation to ‘better protect people from the debt spirals this predatory lending is responsible for’. It was argued that ‘cost of living issues continue to bite into our communities’ and that ‘the provisions in this bill will protect people from the harm this virtually unregulated lending has’.
2.35
Several submitters described the impact that SACCs and consumer leases have on consumers and the problems associated with falling into cyclical debt. In the view of consumer groups, charities, financial counselling and legal services, the bills’ provisions will assist in reducing the financial impacts that these credit products will have on consumers.
2.36
The committee was also provided with evidence demonstrating the significant and long-term financial harm suffered by consumers because of unregulated practices in this area of lending. Not only did submitters share their frustrations with SACCs but emphasised how regulation would act to effectively prevent harm being caused and that the reforms were imperative to resolve this ongoing issue.
2.37
On this point, WEstjustice submitted that the reforms are a welcome first step in addressing the harmful financial products and their harm on
the community:
This sector has remained under-regulated for too long, and these reforms will go a long way to addressing the ongoing harm that payday and consumer leases are doing to many within the community we serve…
2.38
Consumer groups provided evidence that suggested that much of the harm caused with consumer leases and SACCs is associated with the fact that they are too easy to obtain. Ms Lyndall Millburn, a Financial Counsellor from Care, highlighted one instance whereby a client was offered four SACC loans within a 40-day period, that the cyclical debt had caused her distress and had a negative impact on her mental health. Ms Millburn further added that due to the number of loans taken out by her client, a significant proportion of her income was consumed with repayment obligations, dwindling her income and ability to pay for essential costs even further.
2.39
The St Vincent de Paul Society highlighted that the reforms are overdue and needed as the current regulatory framework has continued to cause harm to consumers:
We urge that this legislation be passed expeditiously, without amendment, as this much needed regulatory reform is long overdue… Regulation of these products is more important than ever, given the growing financial stress being experienced in Australia and the growth in digital marketing and online loan applications, making payday loans more accessible than ever… Vulnerable Australians deserve to be better protected from exploitative payday lenders and rent to buy companies.
2.40
Indeed, NILS Tasmania argued that the government must focus on its duty to protect low income and vulnerable Australians as a priority:
We know from our work that turning to payday loans and consumer leases/rent to buy rarely ends well and people fall behind on utility bills, rent and don’t have enough for other essentials like food or clothing. This leads individuals to take out more payday loans and the debt spiral grows. People in crippling debt are unable to spend money on essentials and it can even lead to bankruptcy…
The industry markets itself heavily and misleadingly, particularly in low-income communities. People keep getting unsolicited offers for more and more debt.
2.41
Treasury highlighted to the committee that the consumer credit amendments will provide an appropriate balance of ensuring that consumers will be safeguarded from detriment but also, at the same time, will not remove the ability for consumers to access these forms of credit.
Comments on specific reform measures
2.42
In addition to a more general discussion on the consumer credit reforms, stakeholders made comments on specific aspects of the proposed reforms.
Protected Earnings Amount Caps
2.43
Schedule 4 of the FSR bill introduces a new regulation-making power to set a protected earnings amount (PEA) for both payday loans (SACCs) and consumer leases. It is expected that the regulations will provide a PEA of 10 per cent of a person’s net (after tax and other deductions) income for all consumers. This extends the existing PEA for SACCs and prevents a provider from offering, entering into, or accepting repayments for a SACC if a consumer's repayments would exceed the PEA.
2.44
Semvia Finance argued that mandating PEA caps which applies equally to all consumers ‘is an overreach of legislation’ and that the reforms will thus ‘[restrict] the choices of Australians as to how to spend their money’.
2.45
This view was not shared by consumer advocates who advocated for the PEA cap to be lowered. On this point, WEstjustice submitted:
…we strongly support the 10 per cent cap, noting the 20 per cent cap for SACCs for Centrelink recipients is too high and has not stopped SACCs causing people to fall into debt spirals. This measure will prevent substantial harm to consumers. Financially disadvantaged and vulnerable people will be protected from being sold multiple loans that they cannot afford with affordability assessments made far clearer and less susceptible to underestimates of living expenses.
2.46
Responsible Leasing Australia felt that while the exact detail of the PEA caps has been referred to legislative instrument, they support the proposal of a 10 per cent earning cap that can be used toward a consumer lease.
2.47
Importantly, consumer groups represented by Choice and CALC argued that 10 per cent cap will indeed encourage responsible lending and avoid situations of continual crippling financial situations whereby multiple products and consumers take on ‘too much debt that they’ve been aggressively sold and had marketed to them’.
2.48
Likewise, Mr Greg Kirk from ASIC advised the committee that PEA caps would positively impact existing consumer protections in this area:
One of those things we consider very helpful in the bill is the overall protected earnings amount. What that does is complement responsible lending—a principles-based regime with a bright line test—which provides clarity to lenders as much as it does additional protection for consumers.
2.49
Conversely, the Consumer Household Equipment Rental Providers Association (CHERPA) expressed concerns that the adoption of a 10 per cent PEA would negatively impact the industry and consumers, proposing instead the adoption of a PEA at 20 percent of net income.
Unsolicited communications
2.50
A number of submitters raised concerns about the proposed ban prohibiting providers from making unsolicited invitations to people who: have a current SACC with a provider; have had a SACC with the provider in the past two years; or a person who the provider knows has, or has recently had, a SACC with another provider.
2.51
Industry stakeholders argued that existing legislation such as the Credit, Privacy and Spam Acts encompassed appropriate protections in relation to
the use of personal information and receiving direct marketing correspondence. For example, Nimble submitted:
…the introduction of a prohibition on direct marketing of this nature will serve to unduly increase the marketing and acquisition costs of compliant credit providers, by needing to invest further into indirect, above the line marketing channels. That is inconsistent with a commercial approach to regulation that is designed to support a viable industry.
2.52
While agreeing that unsolicited communications for pre-approval products should not occur and that reforms of this nature are supported, NCPA stated that the proposed amendments are ‘not realistic and unworkable’ for lenders and that ‘credit providers need… communicate with their customers’.
2.53
Notwithstanding the above concerns, a majority of submitters argued that
the ban on unsolicited communications were indeed essential. For example, the Financial Rights Legal Centre succinctly summarised the issue presented by others stating:
We have seen aggressive and unfair sales practices used by lessors including door-to-door selling and other forms of aggressive and unsolicited selling. These have disproportionately impacted First Nations communities and continue to do so.
2.54
WEstjustice also expressed its strong support for the broad ban on unsolicited selling of SACCs and consumer leases ‘as a means of preventing aggressive and unsolicited selling tactics, including in remote communities where a lessor will aggressively sign people up to lease arrangements’.
2.55
The St Vincent de Paul Society, Financial Counselling Australia, and
the Consumer Credit Legal Service (WA) (CCLS) considered that bans on unsolicited offers of SACCs and consumer leases in person ‘are essential aspects of the bill to implemented as drafted’.
Anti-avoidance provisions
2.56
The proposed anti-avoidance measures in Parts 4 and 5 of Schedule 4 seek to encourage compliance with the Credit Act and are designed to minimise financial and other harm to consumers and disincentivise businesses from undertaking avoidance practices.
2.57
The CCLSWA, WEstjustice, St Vincent de Paul Society and the Financial Rights Legal Centre among others expressed strong support for the anti-avoidance provisions to capture organisations who have otherwise attempted to avoid regulation and ‘perpetrate harmful credit models outside of the law’.
2.58
Consumer groups and CCLCSA submitted that anti-avoidance provisions are ‘desperately needed to prohibit models that are clearly designed to avoid regulation’ and empower ASIC to effectively intervene and stop evasive lending models.
2.59
ASIC agreed with these views stating that, as avoidance behaviour has, and continues to be, a problematic issue for this sector, they welcome the proposed anti-avoidance provisions. ASIC stated that they are also ‘critical to
the integrity of the regime and to ensuring that consumers are not disadvantaged’.
2.60
Treasury articulated that the proposed anti-avoidance provisions are specifically directed at activities where people are trying to avoid the operation of SACC and consumer lease laws. Treasury advised the committee that:
It will complement past reforms such as the product intervention powers, which are actively being used by the regulator at the moment to try and address some of these concerning business models…the financial counselling sector, in particular, has been quite frustrated with some of these models—considering their concerns about harm, particularly to vulnerable cohorts—and this more general, principal based anti-avoidance provision hopefully will be a very effective tool in dealing with some of that conduct.
Stakeholder engagement
2.61
Several stakeholders, including the Australian Institute of Superannuation Trustees (AIST), Australian Financial Market Association (AFMA), Stockbrokers and Investment Advisers Association (SIAA), Financial Counselling Australia (FCA), and the Association of Superannuation Funds of Australia (ASFA), strongly supported the opportunity to provide feedback on the of bills. They also noted their substantial involvement in the numerous consultation processes undertaken by Treasury to obtain feedback from stakeholders in relation to the FAR, CSLR and consumer credit reforms.
2.62
Indeed, many financial peak bodies have been heavily involved in
the extensive consultation processes that have underscored the development of these reforms. In relation to the consultation process undertaken in relation to the CSLR, ASFA posited:
The model adopted in the CSLR Bills is the result of an extensive process of consultation, across many years and many inquiries and reviews. ASFA considers the proposed model to be appropriately targeted.
2.63
Similarly, the FSC stated that ‘the [CSLR] scheme… is based on prior extensive evidence, consultation, and recommendations of the Royal Commission’.
2.64
The AICD noted its extensive engagement in the consultation on
the development of the FAR, providing submissions on the exposure draft, the initial proposal paper in February 2020, and the committee’s inquiry into the 2021 package of bills in the 46th Parliament.
2.65
The Salvation Army commented that they have long advocated for stronger regulations regarding SACCs and consumer leases and ‘provided significant submissions on the issue of SACCs in the form of Committee inquiries, and consultations conducted by the Commonwealth Treasury’.
2.66
Similarly, CCLSWA expressed its ongoing involvement in the consumer lease reforms ‘for an extended period’.
2.67
Highlighting the extensive period over which many of these reforms have been discussed, the ABA commented that they are ‘delighted that this government is able to implement these reforms, because they’ve been discussed for about eight years now’.
2.68
In summarising the consultation process undertaken for the FAR, CSLR and reforms to SACCs and consumer leases, Treasury highlighted that
the processes were extensive and provided an opportunity for all stakeholders to convey their views on the measures.
Committee view
FAR and CSLR
2.69
The financial system not only plays an essential role in promoting economic growth but plays a critical role in the lives of everyday Australians.
The committee notes the broad support from stakeholders who contributed to the inquiry for the proposed FAR and CSLR, and argued that
the measures will indeed strengthen accountability in the financial services sector. The committee believes that the establishment of a well-functioning framework for resolving disputes within the financial system through a CSLR, is an essential part of safeguarding consumer trust and confidence.
2.70
The translation of the Royal Commission’s recommendations into legislation to establish both the FAR and CSLR were welcomed by submitters.
The committee agrees that the bills are vital to restoring trust in the financial services sector and will increase transparency and accountability and improve protections and access to redress for consumers.
2.71
While there was overall support for the bills, the committee notes the key concerns raised by inquiry participants in relation to the scope and design of the FAR and CSLR. The committee is of the view that accountability measures, such as the existence of banning powers and deferred remuneration arrangements, will complement existing penalties for entities and accountable persons contained in the Corporations Act. On balance, the committee believes that such measures will effectively guide behaviour and are the final step of implementing the recommendations made by Commissioner Hayne.
2.72
The committee recognises the concerns raised by stakeholders within the financial services sector regarding the proposed CSLR. While the committee acknowledges these concerns, it is reassured that Treasury has engaged in an extensive consultation and design process with industry, and that this process has produced a rational framework that addresses those concerns. The committee is persuaded by the evidence from Treasury and other submitters in the financial services sector who articulated their support for a forward-looking industry funded CSLR.
Consumer credit reforms
2.73
The inquiry has again highlighted the strong correlation between Australians experiencing financial vulnerability or hardship, and the use of consumer credit products.
2.74
The committee is acutely aware of the harm that unsuitable SACCs and consumer leases can cause vulnerable members of the community, and strongly supports the proposed enhancements to consumer protections for these products.
2.75
In addition to protecting vulnerable members of the community,
the committee believes the reforms proposed by the government will promote financial inclusion through the introduction of a new protected earnings amount and a cap on costs for consumer leases. The committee believes these reforms will reduce the risk that consumers are left unable to pay for their basic needs or will default on their other commitments.
2.76
Given the reviews and inquiries in recent years which support action being taken, and the fact that the substantive legislation was proposed and consulted by the previous government, the committee is firmly of the view that the strengthening of the law is crucial to protect vulnerable consumers who continue to fall into financial hardship and cyclical debt because of unregulated practices.
2.77
The committee appreciates the position of the consumer credit industry and concerns raised about the reforms. However, on balance, the committee believes that further industry regulation is required, and the proposed reforms strikes the right balance between enhancing consumer protection, while ensuring these financial products and services can continue to fulfil an important role in the economy.
2.78
The committee recommends the bills be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria