Bills Digest No. 20, 2022–23
PDF Version [598KB]
Ian Zhou
Economic Policy Section
28 September 2022
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Key points
- The Financial Sector Reform Bill 2022 deals with three separate policy measures:
- the Financial Accountability Regime
- the Compensation Scheme of Last Resort
- consumer credit law reforms.
- The Financial Accountability Regime (FAR) aims to increase transparency and accountability across the financial services industry.
- The Compensation Scheme of Last Resort (CSLR) will provide compensation to victims of financial misconduct who have not been paid, typically because the financial institution involved in the misconduct has become insolvent.
- The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 support the CSLR by forming the levy framework to fund the CSLR.
- Consumer credit law reforms aim to enhance consumer protections for people taking out small amount credit contracts (SACCs, also known as payday loans) and consumer leases.
- Opinions about the three policy measures are divided. While some stakeholders argue the measures will protect consumers, others say they impose unnecessary red tape on the financial services industry. In particular, attitudes toward consumer credit reforms vary widely.
- There have been several attempts by parliamentarians to reform consumer credit laws regarding SACCs and consumer leases.
- The Bills bear some resemblance to the Bills introduced by the previous Government in the 46th Parliament. The previous Bills lapsed at the dissolution of the 46th Parliament.
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Contents
Glossary
Purpose and structure of the Bills
History of the Bills
History of SACC and consumer lease
law reforms
Committee consideration
Policy position of non-government
parties/independents
Financial implications
Statement of Compatibility with Human
Rights
Schedules 1 and 2 of the FSR Bill
2022 – Financial Accountability Regime
Schedule 3 of the FSR Bill 2022 –
Compensation Scheme of Last Resort
Schedule 4 of the FSR Bill 2022 –
SACCs and consumer leases
Commencement date
Concluding comments
Annexure 1 – recommendations of the
2016 SACC Review
Annexure 2 – major differences
between the 2020 Bill and the FSR Bill 2022
Date introduced: 8 September 2022
House: House of Representatives
Portfolio: Treasury
Commencement: various dates as set out in the body of this Bills Digest.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the home
pages for the Financial
Sector Reform Bill 2022, the Financial
Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial
Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022, or
through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at September 2022.
Glossary
Purpose and
structure of the Bills
The Financial
Sector Reform Bill 2022 (the FSR Bill 2022) gives legislative effect to
three separate policy measures.
Schedules 1 and 2 of the FSR Bill 2022 provide
transitional arrangements for the Financial Accountability Regime (FAR).[1]
Schedule 3 of the FSR Bill 2022 establishes a financial
services Compensation Scheme of Last Resort (CSLR).[2]
The Financial
Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial
Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 support the CSLR by forming the levy framework to
fund the CSLR.[3]
Schedule 4 of the FSR Bill 2022 proposes to amend the National
Consumer Credit Protection Act 2009 (the NCCP Act) to implement the
Government’s response to the 2016
Review of Small Amount Credit Contract Laws (SACC Review). Put
simply, Schedule 4 imposes new obligations and requirements for providers of small
amount credit contracts and consumer leases.
As each of the three measures set out in the various
Schedules to the FSR Bill 2022 are independent of each other, the relevant
background on the measures and analysis of provisions are set out under each
Schedule number.
History of the Bills
Lapsed 2021
Bills
The Morrison Government introduced the following four
Bills into the House of Representatives on 28 October 2021:
The four 2021 Bills intended to establish the FAR and the
CSLR and they were packaged together because they represented the final tranche
of legislation to implement the recommendations made by the Banking Royal
Commission.[4]
The four 2021 Bills were not debated and they lapsed at the dissolution of the
46th Parliament on 11 April 2022.
The Albanese Government introduced the following four
Bills to the House of Representatives on 8 September 2022:
In addition to the FAR and the CSLR, consumer credit
reforms regarding SACCs and consumer leases have been packaged into the FSR
Bill 2022 (discussed further below).
A separate Bills
Digest has been prepared with respect to the Financial Accountability
Regime Bill 2022. The latter three Bills (the Bills) are the focus of this
Bills Digest.
What are
the similarities and differences between the lapsed 2021 Bills and the 2022
Bills?
The Financial Accountability Regime Bill 2022 is almost
identical in content to its lapsed 2021 counterpart.
Schedules 1 and 2 of the FSR Bill 2022 (FAR-related
provisions) are also drafted in almost identical terms to the lapsed, Financial
Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021, though the
FSR Bill has obviously been retitled.[5]
Schedule 3 of the FSR Bill 2022 (CSLR-related provisions),
the Levy Bill, and the Collection Bill also bear strong resemblance to the
lapsed 2021 Bills. Nevertheless, there are some minor differences between the
2022 Bills and the lapsed Bills with respect to the CSLR (discussed further
below).
Schedule 4 of the FSR Bill 2022 (SACC and consumer lease
law reforms) has no counterpart in the lapsed 2021 Bills. Put simply, the
lapsed 2021 Bills did not deal with SACC or consumer lease law reforms.
Although Schedule 4 has no counterpart in the 2021 Bills,
the Schedule bears strong resemblance to Bills introduced in 2019 and 2020
(discussed below).
Why are
three separate policy measures packaged together into the FSR Bill 2022?
The Government (for example, Treasury ministers)
determines the Bill packaging process and what policy measures that go into a
Bill. It is not uncommon for a Bill to deal with several different measures.
All three policy measures (FAR, CSLR, and consumer credit
law reforms) are financial sector reform measures.
History of
SACC and consumer lease law reforms
Unsuccessful
attempts to reform consumer credit protection laws
There have been several unsuccessful attempts by some parliamentarians
to reform the laws governing SACCs and consumer leases.
Consumer advocacy groups have long held the view that the laws
governing SACCs and consumer leases should be reformed to strengthen consumer
protections. In August 2015, the Coalition Government announced an independent Review
of the Small Amount Credit Contract Laws (the SACC Review). The final
report of the SACC Review was published in March 2016.
The final report made 24 recommendations relating to the
SACC and consumer lease laws.[6]
On 28 November 2016, the Government formally responded to the report
and accepted many of the recommendations. The recommendations and the
Government’s response are set out in Annexure 1 of this Bills Digest.
In October 2017, the Government released an exposure draft
of the National
Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer
Lease Reforms) Bill 2017 (exposure draft 2017 Bill) for stakeholder
consultation.[7]
The exposure draft was designed to implement the Government’s response to the SACC
Review.[8]
However, once the consultation process was completed, the Government did not
introduce an equivalent Bill into the Parliament.
Some non-government members (for example, Rebekha Sharkie
MP and Madeleine King MP) were vocal supporters of the exposure draft 2017 Bill.[9]
They criticised the Government for its ‘failure to reform payday lending’.[10]
On four occasions between February 2018 and September
2019, Bills that replicated the provisions of the exposure draft were introduced
to the House of Representatives by non-government members.[11]
Those Bills were not debated.[12]
In December 2019, Senator Stirling Griff (of Centre Alliance)
and Senator Jenny McAllister (of ALP) co-sponsored the National
Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer
Lease Reforms) Bill 2019 (No. 2) (the 2019 Bill) as a private Senators’ Bill.[13]
The 2019 Bill was in equivalent terms to the Government’s exposure draft that had
previously been the subject of consultation in October 2017.
The Senate referred the 2019 Bill to the Senate Economics
Legislation Committee for inquiry and report, and the Committee (chaired by
Senator Brockman) recommended the Senate not pass the Bill.[14]
ALP and Centre Alliance senators made a dissenting report and recommended the 2019
Bill be passed.[15]
The Bill lapsed at the dissolution of the 46th Parliament.
In November 2020, Andrew Wilkie MP introduced the National
Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer
Lease Reforms) Bill 2020 (the Wilkie Bill) as a private member’s Bill. The Wilkie
Bill was in similar terms to the 2019 Bill and its predecessors. The
Independent Member argued it was ‘Time to crack down on payday lending’.[16]
The Bill was not debated.[17]
In December 2020, the Coalition Government introduced the National
Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (the 2020
Bill).[18]
Measures to repeal responsible lending laws and measures to reform the SACC
regulations were packaged together into the 2020 Bill.
Consumer advocacy groups criticised the Coalition
Government for attempting to ‘water down’ the recommendations of the SACC
Review:
Key ‘protections’ in the [2020] Bill are merely watered-down
versions of recommendations of the SACC Review, with some of these changes
directly contradicting specific findings of the report. The protections in the Bill
are not sufficient, and will continue to see people pushed into financial
hardship through expensive, predatory payday loans and consumer leases.[19]
Although the 2020 Bill was debated in and passed by the
House of Representatives then subsequently introduced in the Senate, the 2020
Bill lapsed at the end of the 46th Parliament.[20]
Schedule 4 of the FSR Bill 2022 bears strong resemblances
to most of the lapsed Bills noted above. Nevertheless, there are some minor
differences between the FSR Bill 2022 and 2020 Bill and the differences are set
out Annexure 2 of this Bills Digest.
Why do
stakeholders disagree about consumer credit law reforms?
While there is consensus to protect consumers from falling
into unsustainable debt, stakeholders often disagree about consumer credit law
reforms because they disagree about how much credit/debt consumers should have
access to.
In economics, credit and debt are two sides of the same
coin. More credit in the economy goes hand in hand with more debt. The
efficient flow of credit is vital to the proper functioning of the Australian
economy as credit is necessary for many consumers to fund expenses.
The Government and the Reserve Bank seek to influence the
availability of credit in the economy through fiscal policy, monetary policy,
and regulations.
If consumer credit protection laws are too restrictive,
then consumers will not have accessible credit (for example, payday loans) to
fund emergency expenses; lenders will struggle to survive. If the laws are too
loose, then consumers get too much credit and may take on more debt than they
can sustain; lenders may target vulnerable Australians.
Because stakeholders often disagree about the
restrictiveness of Australian credit laws, they adopt different policy
positions.
Figure 1 below shows the impact of credit on the Australian economy
from a macroeconomic perspective.
Figure 1: credit accessibility and its impact on the economy
Source: Parliamentary Library
Committee
consideration
Senate
Selection of Bills Committee
On 8 September 2022, the Senate Selection of Bills
Committee deferred consideration of the Bills to its next meeting.[21]
Senate Standing Committee
for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
has yet to consider the Bills.[22]
The Committee raised scrutiny concerns regarding the
lapsed 2020 and 2021 Bills.[23]
Senate Economics
Legislation Committee
At this stage it is not clear whether the Bills will be
referred to the SELC for inquiry and report.
The SELC conducted inquiries into the lapsed 2019, 2020
and 2021 Bills.
Policy position of non-government parties/independents
Liberal Party of Australia
At the time of writing, the Liberal Party of Australia has
not commented publicly on the Bills.
Australian Greens
At the time of writing, the Australian Greens have not
commented publicly on the Bills.
Financial
implications
In relation to the FAR and consumer credit reforms, the
Explanatory Memorandum states there are no financial implications arising from
the Bills.[24]
In relation to the CSLR, the Explanatory Memorandum states
there will be some financial cost in setting up and maintaining the CSRL:[25]
| 2022-23 |
2023-24 |
2024-25 |
2025-26 |
| -$2.7m |
$0.5m |
-$0.1m |
-$1.6m |
Statement of Compatibility
with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bills’ compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bills are compatible.[26]
Parliamentary Joint Committee on Human Rights
At the time of writing, the Parliamentary Joint Committee
on Human Rights has yet to consider the Bills. The Committee had no comments
with respect to the lapsed 2021 Bills.[27]
Schedules 1
and 2 of the FSR Bill 2022 – Financial Accountability Regime
Background
– what is the FAR?
The FAR is an accountability framework that imposes four
fundamental sets of obligations on the financial services industry. Senate
committees’ consideration and stakeholders’ view of the FAR are discussed in a
separate Bills Digest for the Financial
Accountability Regime Bill 2022.
What the FSR
Bill 2022 does?
Schedules 1 and 2 of the FSR Bill makes
consequential amendments to the following legislation to support the FAR and
enable transitional arrangements from the existing Banking Executive
Accountability Regime to the FAR:
Schedule 3 of
the FSR Bill 2022 – Compensation Scheme of Last Resort
What is the
CSLR?
The CSLR is a proposed scheme that will provide
compensation to eligible victims of financial misconduct who have not been
paid, typically because the financial institution involved in the misconduct
has become insolvent.
The CSLR arose from the Government’s commitment to
implement Recommendation 7.1 of the final report of the Royal
Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry (known
as the Banking Royal Commission or Hayne Royal Commission).
Who will be
covered by the scheme?
As the name suggests,
the CSLR will provide compensation to consumers as a last resort in specific
circumstances—when the Australian Financial Complaints
Authority (AFCA) has
made a determination in favour of the consumer who experienced financial
misconduct, and the financial institution in dispute has not paid in accordance
with the AFCA determination (typically because of insolvency).[29]
The proposed
scheme is limited in its scope:
- the
CSLR will only apply to unpaid AFCA determinations. Unpaid victims of
financial misconduct as determined by court and tribunal rulings will not be
covered by the CSLR
- the
CSLR’s maximum compensation for each AFCA determination is capped at $150,000
- the
CSLR will consider claims for unpaid AFCA determinations when the financial
complaint is made to AFCA after 1 November 2018 (the date that AFCA commenced
operations)
- according
to a policy proposal paper released by the Treasury
in July 2021, the CSLR was intended to provide compensation to unpaid consumers
who experienced financial misconduct in relation to five types of financial
products and services
- however,
under the FSR Bill 2022, the CSLR applies to unpaid determinations about one or
more of the following (proposed section 1065 of the Corporations Act 2001, at item 3 of
Schedule 3
to the FSR Bill 2022):
- engaging
in credit activity as a credit provider or other than as a credit provider
- providing
financial product advice that is personal advice provided to a person as a retail
client about at least one financial product
- dealing
in securities for a person as a retail client other than issuing
securities.credit provision
Speaking in respect of the Bills, Assistant Treasurer
Stephen Jones said:
The scope of the CSLR reflects financial products that have a
history of unpaid determinations and have been subject to significant
regulatory reform which have reduced the risk of misconduct. This is an
important point. The government will continue to consider potential enhancements
to the regulatory framework of managed investment schemes.[30]
How will
the CSLR be funded?
Annual levy
The proposed CSLR will be industry-funded.[31]
In other words, when victims of financial misconduct are unpaid due to a
financial institution’s insolvency, it is up to the rest of the financial
services industry to meet the shortfall via an annual levy to fund the CSLR.
For the scheme’s first levy period, the Australian Government
will provide funding to the CSLR operator to meet the initial estimate of
claims, fees, and costs. From the second year onwards, the CSRL will be
industry-funded.[32]
The Collection Bill will establish the power for the
Australian Securities and Investments Commission (ASIC) to issue levy notices
and collect levies from relevant financial firms for the purpose of funding the
scheme (clauses 13 and 16 of the Collection Bill).
The annual levy will be payable by entities that provide
financial products and services which are within the scope of the CSLR (that
is, those products and services which are authorised to be provided by
Australian financial services licence and Australian credit licence holders who
are required by legislation to be AFCA members).
The annual levy that can be raised by the CSLR is subject
to a cap of $250 million (clause 17 of the Levy Bill).[33]
According to the Treasury’s CSLR proposal paper:
The amount is considered high enough to fund claims for
compensation in circumstances where there has been a large or ‘black swan’
event relating to a financial firm providing an in-scope financial product or
service. Additionally, the amount is also considered low enough to support the
sustainability of the scheme by limiting its potential yearly impact on
leviable financial firms throughout the life of the scheme.[34]
The amount of levy that may be imposed in any particular
subsector is capped at $20 million (clause 17 of the Levy Bill). This is one of the
major changes between the lapsed 2021 Bills and the 2022 Bills. The lapsed 2021
Bills proposed that the subsector cap should be at $10 million, this has been
raised to $20 million.
The sub-sector cap is intended to provide assurance to
sub-sectors about the maximum amount expected to be levied against each
sub-sector in a levy period, absent Ministerial involvement. Practically,
raising the sub-sector cap reduces the likelihood that a sub-sector cap would
be exceeded in any given levy period and therefore reduces the likelihood of
the need for Ministerial involvement.[35]
The CSLR levy framework will
align with the ASIC industry funding model/cost recovery framework to ease the
regulatory burden on the industry.[36]
One-off
levy and special levy
In addition to the annual levy, a one-off levy will be
imposed in the 2023–24 financial year. The one-off levy will be payable by the
ten largest financial firms, excluding private health insurers and
superannuation trustees (clause 10 of the Levy Bill).
The Bills also prescribe that the Minister (the Treasurer)
can impose a special levy to respond to unexpected events or cost outlays (proposed section 1069H
of the Corporations
Act 2001, at item 3 of Schedule 3 to
the FSR Bill 2022).
Delegated
legislation
The Bills provide power to make Regulations about the
CSLR. For example, details of the levy calculations will be prescribed in the
Regulations (clause
8 of the Levy Bill). On 8 September 2022, the
Government released an Exposure Draft of the
Regulations for consultation process.
Policy
position of major interest groups
In August 2021, eight financial
industry associations issued a joint media release
to oppose the proposed CSLR, claiming that the scheme will add unnecessary red
tape and increase costs to the financial advice sector. The eight financial
industry associations said:
The draft legislation establishes a CSLR operator as a
subsidiary of AFCA. This adds unnecessary red tape by requiring the
ASIC to administer invoices and payments and significantly increases the Governments [sic] administration costs
of the financial advice sector with little benefit to consumers.
ASIC fees for financial advisers have increased by more than 230 per cent over
the past three years. Most financial advisers are sole traders or small
businesses who cannot afford the rising costs associated with increased
regulation…
Responsibility for consumer
losses and complaints should be shared evenly across the sector. However, the
proposed scheme does not apply to some industry participants, such as product
manufacturers.[37]
[emphasis added]
The belief that the CSLR will
increase costs to the financial advice sector is based on the argument that the
scheme penalises good performers to fund the mistakes of bad performers (that
is, imposing a levy on the industry to fund the mistakes of insolvent firms).
Based on publicly available information, the financial
industry associations have not changed their policy position with the
introduction of the 2022 Bills.
Consumer
advocacy groups
Broadly speaking, consumer advocacy groups support the
establishment of the CSLR.[38]
However, they recommend the Government expand the scope of CSLR. Specifically,
they believe a CSLR should:
- cover
victims of financial misconduct as determined by court and tribunal rulings
- cover more financial products and services such as managed
investment schemes
- increase the proposed individual payment compensation cap
of $150,000 because ‘this cap is too low for some people who have suffered
losses from financial advice scandals’
- have more options available in the event of a funding
shortfall and
- the Minister should have the power, by Regulations, to
increase the annual scheme cap above $250 million.[39]
Schedule 4 of
the FSR Bill 2022 – SACCs and consumer leases
What are
SACCs?
Small amount credit contracts (SACCs) are unsecured loans
of up to $2,000, where the term of the contract is between 16 days and 12
months (in other words, borrowers have between 16 days and 12 months to repay
the loan).[40]
SACCs are also known as ‘payday loans’ because they are typically advertised as
a quick-fix solution for a person to fund unexpected purchases that could arise
a few days before a payday, when the person needs cash.
Compared with traditional personal loans that consider a
borrower’s entire credit history and financial situation, SACCs are more
accessible because their approval process is quicker as they mostly focus on
the borrower’s income.[41]
Under the current consumer credit laws, there is a cap on fees
for payday loans. Licensed lenders cannot charge interest on payday loans, however
lenders can and do typically charge high fees including:
- a
maximum of 20% establishment fee calculated on the amount being borrowed
- a maximum
of a 4% monthly fee
- default
fees and enforcement costs.[42]
According to the Government, SACCs are generally used by
consumers with lower incomes or those who are unable to access cheaper
mainstream sources of credit.[43]
Opinions regarding SACCs are divided: while consumer
advocacy groups believe SACCs are ‘debt traps’ that target vulnerable
Australians,[44]
SACC lenders argue the loans facilitate financial inclusion for customers that
would otherwise be excluded from the banking sector.[45]
Policy
position of major interest groups
Consumer
advocacy groups
Consumer advocacy groups have persistently argued that the
laws governing SACCs and consumer leases should be strengthened. In August
2019, they formed the Stop the Debt
Trap Alliance to campaign for consumer credit law reforms.
Consumer advocacy groups have welcomed the introduction of
the FSR Bill 2022. They argue the Bill will enhance ‘long overdue consumer
protections for high-cost payday loans and consumer leases’.
For example, the CEO of Financial Counselling Australia
said:
Financial counsellors are delighted that this long-awaited
legislation has finally been introduced to the Parliament. Every day we see
clients with high-cost payday loans and consumer leases that they struggle to
pay.
The most important part of this [FSR] Bill will be in the
accompanying regulations that will cap the amount a person can pay for each
product to 10% of income. This will make it less likely that people will end up
trapped in a never-ending cycle of debt.[46]
SACC
lenders
SACC lenders have not publicly commented on the FSR Bill
2022. Judging from their previous comments on the lapsed Bills, they tend to
adopt a more nuanced position regarding consumer credit law reforms.
While they supported most provisions in the 2019 Bill,
they criticised some specific provisions for being overly restrictive. Criticisms
of specific provisions are discussed below in the ‘Key issues and provisions’
section.
In its submission to the 2019 Bill, the National Credit
Providers Association (NCPA, a peak body representing SACC lenders) said:
The consumer activists ‘stop the debt trap’ campaign is
misleading and uses false statements to misrepresent legitimate and highly
regulated Australian businesses…
The NCPA has worked with governments since the introduction
of the NCCP Act 2009 to ensure responsible lending obligations are the
basis for consumer protections and have long called on the government to do
more in areas where some credit operators provide less regulated products.[47]
Cash Converters, one of Australia’s largest SACC lenders,
said:
Cash Converters will continue to support sensible legislation
that provides meaningful protection for its customers, but it will not support
legislation that has arbitrary cap (10% PEA) applied that… can create financial
exclusion and impinges on personal choices of employed Australians.[48]
Key issues
and provisions regarding SACC reforms
Schedule 4 of the FSR Bill 2022 implements the
Government’s response to the recommendations of the SACC review by:
- providing
a new regulation-making power that can be used to ensure that all consumers are
covered by a protected earnings amount, for example by reducing the existing loan
repayment cap from 20% of a person’s gross income to 10% of a person’s net
income (item 12 of Schedule 4)
- requiring
SACC providers to have equal repayments and equal repayment intervals over the
life of the loan to prevent providers from artificially extending the life of a
loan (item 14, proposed section 133CD of the NCCP Act)
- prohibiting
SACC providers from charging monthly fees in respect to any residual term of
the loan where a consumer repays the loan early (item 15, proposed section
31C of the National Credit Code)
- prohibiting
unsolicited offers to prompt certain consumers to apply for a SACC (item 14,
proposed section 133CF)
- introducing
a new prohibition on SACCs providers making referrals under certain
circumstances (items 57–59 in Part 3 of Schedule 4)
- requiring
SACC providers to give information to consumers about SACCs in accordance with
ASIC requirements (item 14, proposed section 133CE).
Key issue 1
– Extending ‘Protected Earnings Amount’ protection to all consumers and
reducing repayment cap from 20% to 10%
The FSR Bill 2022 introduces a new regulation-making power
that can be used to ensure that all consumers are covered by a protected
earnings amount.
PEA is the amount of a consumer’s income that can be used
for payday loan repayments. Currently, PEA protection only applies to a class
of consumers who receive at least 50% of their gross income from social security
payments.[49]
These consumers are perceived as more vulnerable and therefore the payday loan
repayment cap for these consumers is set at 20% of the consumer’s gross income.[50]
In other words, SACC licensed lenders are prohibited from entering into a SACC with
these vulnerable consumers that would require them to commit more than 20% of
their gross income into repaying the loan.
Part 1 of Schedule 4 of the FSR Bill 2022 amends the
NCCP Act to enable the Government (through the National Consumer
Credit Protection Regulations 2010) to set a PEA on SACC repayments for all
consumers, not just these vulnerable consumers who receive at least 50% of
their gross income from social security payments.
According to the Explanatory Memorandum:
It is expected that the regulations will provide a protected
earnings amount of 10 per cent of a person’s net income for all consumers,
meaning that a licensee cannot enter into a contract if the total repayments
would exceed 10 per cent of the consumer’s net income.[51]
Stakeholders’ commentary regarding reducing repayment cap from 20% to 10%
The National Credit Providers
Association (NCPA) made a submission in respect of the lapsed 2019 Bill and
criticised the potential reduction in repayment cap as regulatory
over-reach:
Ordinary Australians who are
unable to access credit from a mainstream lender such as a bank should be
free to choose the best credit option available, rather than be told they
can only access 10% of their net income for repayments. The latest CoreData research on small loans indicates
that 64.4% of customers are working Australians. Lowering the PEA to 10%
will have significant consequences for the 3 million Australians who are
unable to or choose not to access credit through main-stream financing.
The NCPA and Cash Converters are
not aware of another financial services sector that are subject to such
extreme over-reach where the government effectively controls how employed
consumers can spend their own money. The effects of lowering the PEA to 10%
of net income for all Australians also renders responsible lending
obligations null and void because they are not required under such a
prescriptive legislative model…
The NCPA proposes no change
to Section 133CC of the NCCP Act
2009 as the protected earnings amount
is working as intended following the reforms of 2013. [emphasis added][52]
|
Put simply, if passed the FSR
Bill 2022 and associated changes to regulations will extend PEA protection to
all consumers. Furthermore, the FSR Bill 2022 will enable regulations to reduce
the existing loan repayment cap from 20% of a consumer/borrower’s gross income
to 10% of the person’s net income (after tax and other deductions).[53]
Stakeholders’
commentary regarding reducing repayment cap from 20% to 10% (continued)
In contrast to the policy
position taken by the NCPA, the Consumer Action Law Centre (a consumer
advocacy group) suggested that the repayment cap should be lower than 10%:
… the 10% protected earnings
amount for consumer leases and payday loans are critical reforms that would
provide much needed protections for borrowers. We have strongly opposed more
lenient caps, which would fail to address the harm caused by these products…
Research by the Pew Trust in the
United States found that in order to fit the budgets of typical payday loan
borrowers, payments should not exceed 5% of monthly income, making the 10%
cap proposed by the SACC Review a very generous compromise.[54]
|
Key issue 2 – Requirements
for equal repayments over the life of a loan
The SACC Review identified that some SACC providers were
engaging in a practice of ‘front loading’ a consumer’s repayments. ‘Front
loading’ means extending the life of a loan to generate extra revenue for the
provider from monthly fees charged to the consumer.
To address this problem, item 14 in Schedule 4 of the FSR Bill 2022 inserts proposed section 133CD into Part 3-2C of the NCCP Act. The proposed section 133CD provides that a SACC must have equal repayments over the life of the loan.
Explainer: what is ‘front loading’ and why is it a problem for
borrowers?
From a borrower’s
perspective, paying off a loan as fast as possible is usually in his or her
best financial interest because the longer a loan is, the more fees it
accumulates.
On the other hand, SACC
lenders typically want their loans to last longer to maximise fees. However,
lenders must also consider that a longer loan potentially carries a higher
default risk because unforeseen circumstances can happen to the borrower.
To give a hypothetical
example, Peter has signed a 12-month loan with a SACC lender in January
2022. While the lender gets to charge 12 months’ worth of fees on Peter from
January to December 2022, the lender is also concerned that Peter may suffer
an accident in July and be unable to repay the remainder of his loan.
To get the best of both
worlds, the SACC lender can stipulate that Peter must repay the bulk of his
loan from January to June 2022, and then make smaller repayment amounts from
July to December. This way the lender still gets to charge 12 months’ worth
of fees, but if some accident does befall Peter in July, the lender would
still have recovered most of the loan amount.
The practice of making Peter
repay the bulk of a loan early on is called ‘front loading’. This practice
can be banned if legislation requires that payday loans must have equal
repayment amounts over equal intervals. In other words, the laws can require
SACC lenders to ensure Peter pays the same monthly repayment amount from
January to December 2022.
Note that most SACC lenders
supported the requirement for equal repayments and repayment intervals when
the lapsed 2019 Bill proposed this measure.
|
To address this problem, item 14 in Schedule 4 of
the FSR Bill 2022 inserts proposed section 133CD into Part 3-2C of the NCCP
Act. The proposed section 133CD provides that a SACC must have equal
repayments over the life of the loan.
Key issue 3 – Ban on unsolicited
SACC communications
Item 14 in Schedule 4 inserts proposed section
133CF to the NCCP Act 2009. The proposed section prohibits SACC providers
from making unsolicited invitations to people who:
- have
a current payday loan with the provider or another credit provider, or
- have
at any time applied (whether successfully or unsuccessfully) for a payday loan
with the provider or another credit provider, and the provider ought to be
aware of this.[55]
An unsolicited communication to a consumer occurs when:
- the
consumer has made no prior request to the SACC provider for that communication
- the
consumer has made a prior request to the SACC provider, but that prior request
was solicited by the provider
- circumstances
prescribed by the Regulations.[56]
The ban on unsolicited SACC communications would not apply
to the general advertising of SACCs that are directed towards consumers at
large.[57]
Stakeholders’
commentary regarding the proposed ban on unsolicited SACC communications
In its submission in relation
to the lapsed 2019 Bill, Cash Stop Financial Services (a SACC lender) said
the provisions regarding a ban on unsolicited SACC communications are overly
restrictive:
This is the most restrictive
type of legislation ever proposed in a democratic country were [sic] freedom
of expression and speech are seen as an icon of our Australian system of
democracy.
It appears the legislation was
penned with the prohibitions related to unsolicited Credit Card limit
increases and or a pre-approved Credit Cards in mind.
This is totally misguided, and
unnecessary, as every Small Amount Credit Contract loan must progress
through a vigorous assessment process to ensure it is not an unsuitable
loan, where as a Credit Card limit increase or a Line of Credit product are
not, these products allow for redraws without assessment unlike a Small Amount
Credit Contract loan.[58]
Note that the ban proposed by
the 2019 Bill is more restrictive than its counterpart in the FSR Bill 2022.
For example, the 2019 Bill proposed to ban SACC lenders from making
unsolicited invitations to people who have had a payday loan with lenders in
the past two years.[59]
This specific provision does not appear in the FSR Bill 2022.
SACC lenders have not made comment
publicly about the (less restrictive) ban proposed by the FSR Bill 2022.
|
Key issue 4 – Ban on monthly fees for repaid loans
Item 15 in Schedule 4 of the FSR Bill 2022 inserts
proposed section 31C into the National Credit Code to prohibit a licensee
from requiring or accepting payment of an unexpired monthly fee from a debtor
under a small amount credit contract.
Put simply, item 15 specifies that SACC providers
will be prohibited from charging monthly fees if a consumer/borrower pays off
the loan early. Currently, SACC providers are not restricted in structuring the
loan contracts in a way that consumers are required to pay monthly fees for the
full contract term, even if the loan is discharged early.
What are consumer leases?
A consumer lease is a contract where a person rents an
item (for example a fridge, TV, sofa or iPad) from a rental company for a set period
of time.[60]
Under a consumer lease, a person must make regular payments to have use of the
item. In most instances, a person must continue to make payments even when the
item has been broken or needs replacing.[61]
The Australian Government’s MoneySmart
webpage warns that although consumer leases generally have low weekly or
fortnightly payments, over time these costs add up. A consumer could end up
paying more than double what it would cost to buy the item outright in a store.[62]
Consumer leases are regulated under Part 11 of the
National Credit Code.
Key issues
and provisions regarding consumer lease reforms
Part 2 in Schedule 4 proposes key changes to
consumer lease laws and these changes include:
- capping
the costs of consumer leases
- establishing
a method to ensure consumers are only charged early termination fees that
reflects the appropriate and reasonable loss of the lessor in the event of an
early termination of a lease
- introducing
the concept of ‘consumer leases for household goods’.
Additionally, for both SACCs and consumer leases, the
reforms improve the information that must be obtained and used in affordability
checks, enhance disclosure and warnings requirements and strengthen
recordkeeping obligations.
Key issue 1
– capping the costs of consumer leases
Item 50 in Schedule 4 of the FSR Bill 2022 inserts proposed
sections 175AA–175AC into the National Credit Code. In particular, proposed
section 175AA imposes a cap on fees and charges for consumer leases.
The permitted cap for a consumer lease is the total
of the following amounts:
- the
base price of the goods hired under the consumer lease
- the
permitted delivery fee (if any) for the consumer lease
- the
permitted installation fees (if any) for the consumer lease
- the
amount worked out by multiplying the sum of those amounts by,
- in
the case of a consumer lease for a fixed term—0.04 for each whole month of the
consumer lease to a maximum of 48 months or
- in
the case of a consumer lease for an indefinite period—1.92.[63]
The Explanatory Memorandum to the FSR Bill 2022 provides several
examples of how to calculate the maximum amount that a consumer can be charged
on a consumer lease.[64]
Key issue 2
– definition of ‘consumer lease for household goods’
Item 20 in Schedule 4 inserts new definitions into
both the NCCP Act and the National Credit Code. Put simply, Part 2 of
Schedule 4 of the FSR Bill 2022 proposes to introduce the concept of ‘consumer
leases for household goods’ to which the following applies:
- limiting
the portion of a consumer’s net income that can be committed to payments on
consumer leases of household goods, broadly consistent with the approach being
adopted for SACCs
- requiring
lessors to disclose the base price of goods hired under the lease and the
difference in total amount payable under the lease and the base price of the
leased goods
- prohibiting
door-to-door selling of consumer leases for household goods and the unsolicited
selling of these leases outside their standard business premises
- requiring
lessors to document in writing their assessment that a consumer lease for
household goods is not unsuitable.[65]
Other provisions
For both SACCs and consumer leases, the reforms aim to
improve the information that must be obtained and used in affordability checks,
enhance disclosure and warning requirements and strengthen recordkeeping
obligations.
The Bill also introduces general anti-avoidance measures that
will prohibit schemes designed to avoid SACCs and consumer leases law restrictions,
and product intervention orders under the NCCP Act.[66]
Additionally, there are enhanced civil penalties for breaches of these reforms.
Indefinite term leases will also be brought within the scope of credit
regulation.[67]
Commencement
date
Part 1 of Schedule 1 and Schedule 2 to the FSR Bill 2022
commence at the same time as the Financial Accountability Regime Bill 2022.
Part 2 of Schedule 1 to the FSR Bill 2022 commences on the date the Regime
begins to apply to the banking industry, six months after the commencement of
the Financial Accountability Regime Bill 2022.[68]
The establishment of the CSLR and the supporting levy framework
commences on the day after Royal Assent.[69]
The Collection Bill 2022 commences at the same time as the Levy Bill to ensure
that all aspects of the levy framework start on the same day. If the Levy Bill
does not commence, the Collection Bill 2022 does not commence.[70]
Provisions relating to consumer credit reforms commence on
various dates outlined in the Explanatory Memorandum.[71]
Concluding comments
The Bills package together three separate policy measures
(the FAR, the CSLR, and consumer credit law reforms).
While all three measures have been broadly welcomed by
consumer advocacy groups, the measures have also attracted some criticisms from
industry stakeholders.
Consumer credit law reforms have been a particularly
divisive issue judging by previous attempts to introduce the changes. The
Government is seeking a balance between providing adequate consumer protection
and ensuring that consumer credit laws do not become too restrictive and strangle
the flow of credit.
Annexure 1 – recommendations of the 2016 SACC
Review
The recommendations from the Review
of Small Amount Credit Contract Laws and the relevant Government response
are set out below.[72]
| Recommendation |
Government response |
Recommendation 1—affordability
Extend the protected earning amount regulation to
cover SACCs provided to all consumers. Reduce the cap on the total amount of all SACC
repayments from 20 per cent of the consumer’s gross income to 10 percent of
the consumer’s net income. Subject to these changes being accepted, retain the
existing 20 per cent establishment fee and four per cent monthly fee
maximums.
Recommendation 2—suitability
Remove the rebuttable presumption that a loan is
presumed to be unsuitable if either the consumer is in default under another
SACC, or in the 90 day period before the assessment, the consumer has had two
or more other SACCS. This recommendation is made on the condition that it
is implemented together with Recommendation 1. |
The Government accepts these recommendations in
full.
The Government supports the panel’s direction to
promote financial inclusion by ensuring that consumers do not enter into
unaffordable SACCs whose repayment absorbs too large a proportion of their
net income. The Government notes that these recommendations
directly target the harm associated with repeat borrowing, rather than repeat
borrowing per se, by reducing the likelihood of a debt spiral occurring,
while still enabling consumers to access further SACCs if the repayments are
affordable. The Government notes that it is unusual to have such
prescriptive requirements regarding the amount that a consumer can devote to
a particular form of finance; however, the panel’s report highlighted the vulnerable
customer base of SACCs. The panel noted that the principles based responsible
lending obligations appear insufficient alone to prevent observed harm; a
more strict affordability test is warranted. The Government accepts this
proposal. To assist SACC providers in complying with this
obligation, the Government will provide a safe harbour allowing providers to
rely on a consumer’s bank statements when determining a consumer’s average
income for the purposes of the protected earnings amount, unless there is
evidence suggesting that it is inappropriate to do so. The Government supports removing the current
rebuttable presumption that a SACC is considered unsuitable if a consumer has
had two or more SACCs in 90 days.
|
Recommendation 3—short term credit contracts
Maintain the existing ban on credit contracts with
terms less than 15 days.
|
The Government accepts this recommendation in full.
Currently there is an outright ban on a provider
offering a credit contract which has a term of 15 days or less irrespective
of whether the credit contract is secured. The Government supports the
panel’s recommendation to maintain this ban. Loans of less than 15 days consume a disproportionate
amount of a consumer’s income due to large repayment amounts in a short period
of time. These loans are more likely to trap consumers in a debt spiral than
loans with longer durations. |
Recommendation 4—direct debit fees
Direct debit fees should be incorporated in the
existing SACC fee. |
The Government notes this recommendation.
This recommendation is the responsibility of ASIC, as
the independent regulator. In response to the recommendation, ASIC announced
on 4 November 2016 that it would remove ASIC Class Order [CO
13/818] Certain small amount credit contracts. The class order
allowed SACC providers to charge a separate fee for direct debit processing. The removal ensures that consumers are not charged
direct debit fees when taking out a SACC. The change will apply to any SACC
provided from 1 February 2017. Loans that commence before 1 February 2017
will continue to operate under the existing rules and third-party direct
debits will be able to be charged on those loans. |
Recommendation 5—equal repayments and sanction
In order to meet the definition of a SACC, the credit
contract must have equal repayments over the life of the loan. Where a contract does not meet this requirement the
credit provider cannot charge more than an annual percent rate (APR) of 48
per cent. |
The Government partially accepts this recommendation.
The Government supports the panel’s recommendation
that SACCs should have equal repayments over the life of the loan as it will
stop SACC providers artificially extending the term of the loan. ASIC will have the power to allow limited exceptions
where appropriate. However, the Government does not support the panel’s
recommendation that, where a contract does not meet the equal repayment
requirement, a credit provider cannot charge more than an annual percentage
rate (APR) of 48 per cent. This would effectively create a specific penalty
regime for this requirement, and the Government would prefer a consistent
approach to penalties across the SACC regime. |
Recommendation 6—SACC database
A national database of SACCs should not be
introduced. Rather, the major banks should be encouraged to participate in
the comprehensive credit reporting regime at the earliest date. |
The Government accepts this recommendation in full.
This does not preclude the industry from developing
its own database. |
Recommendation 7—early repayment
No four per cent monthly fee can be charged for a
month after the SACC is discharged by its early repayment. If a consumer
repays a SACC early, the credit provider cannot charge the monthly fee in
respect of any outstanding months of the original term of the SACC after the
consumer has repaid the outstanding balance and those amounts should be
deducted from the outstanding balance at the time it is paid. |
The Government accepts this recommendation in full.
This will allow consumers, if their loan is
discharged early, to only pay fees for the new shorter length of the loan. |
Recommendation 8—unsolicited offers
SACC providers should be prevented from making
unsolicited SACC offers to current or previous consumers. |
The Government accepts this recommendation in full.
The Government agrees with the principle that
consumers should only apply for a SACC when they pro-actively choose to do
so, rather than being prompted by a SACC provider. |
Recommendation 9—referrals to other SACC providers
SACC providers should not receive a payment or any
other benefit for a referral made to another SACC provider. |
The Government does not accept this recommendation.
The panel considered that it would be inappropriate
for SACC providers to refer a customer to another SACC provider after
determining that the customer is unsuitable to receive a SACC. During the
consultations undertaken following receipt of the final report, it became
apparent that there are legitimate instances where it may be appropriate for
a referral to occur. For example, some SACC providers only target specific
geographical locations. If such a SACC provider receives an application from
a consumer from another location, they may wish to refer that consumer to
another SACC provider. In addition, paying for referrals may be less
expensive than other means of attracting customers, who are in any case
subject to a cap on costs (a 20 per cent establishment fee and a 4 per cent
monthly fee). |
Recommendation 10—default fees
SACC providers should only be permitted to charge a
default fee that represents their actual costs arising from a consumer
defaulting on a SACC up to a maximum of $10 per week. The existing limitation of the amount recoverable in
the event of default to twice the adjusted credit amount should be retained. |
The Government does not accept this recommendation.
The Government will maintain the existing default cap
of twice the adjusted credit amount. Evidence provided by the SACC industry suggests that
the $10 per week default fee does not cover the costs of managing a
defaulting borrower. The Government considers the existing cap provides
sufficient restrictions to prevent SACC providers from over-charging a
consumer. |
Recommendation 11—cap on cost to consumers
A cap on the total amount of the payments to be made
under the consumer lease of household goods should be introduced. The cap
should be a multiple of the base price of the goods, determined by adding
four per cent of the base price for each whole month of the lease term to the
amount of the base price. For a lease with a term of greater than 48 months,
the term should be deemed to be 48 months for the purposes of the calculation
of the cap. |
The Government accepts this recommendation in full.
The Government supports this recommendation. The SACC
review identified the high cost of consumer leases, particularly to
vulnerable consumers. This will provide, for example, a cap of 1.48 times
of the Base Price of the goods for a 12 month lease and a multiple of 1.96
times the Base Price of the goods for a two year lease. Leases of four years
or more would be subject to a cap of 2.92 times the Base Price of the goods. For example, a two year lease for a TV valued at $500
would be limited to total payments of $980. This recommendation will make the regulation of
consumer leases more consistent with that of credit contracts, which are
subject to a 48 per cent APR cap. However, in recognition of the different
costs facing consumer lease providers, the Government supports a higher cap
on costs for consumer leases. |
Recommendation 12—base price of goods
The base price of new goods should be the recommended
retail price, or the price agreed in store, where this price is below the recommended
retail price. Further work should be done to define the Base Price
for second hand goods. |
The Government accepts this recommendation with an
amendment.
The Government supports this recommendation for new
goods. To provide a clear understandable process for
applying the cap to second hand goods, second hand goods will be subject to
the same cap as new goods, with a 10 per cent discount to the original Base
Price per annum, up to a maximum of 30 per cent. For example, a $500 TV re-leased after two years
would have a new base price of $400 for the purposes of calculating the cap. |
Recommendation 13—add-on services and features
The cost (if any) of add-on services and features,
apart from delivery, should be included in the cap. A separate one-off delivery
fee (limited to the reasonable costs of delivery of the leased goods) should
be permitted. That fee should be limited to the reasonable costs of delivery
of the leased good which appropriately account for any cost savings if there
is a bulk delivery of goods to an area. |
The Government accepts this recommendation with an
amendment.
The Government accepts that certain leased goods may
necessarily have significant installation costs, and is therefore allowing
installation of some items to be excluded from the cap. The Government will provide ASIC with the ability to
exempt the installation costs of certain leased goods from inclusion in the
cap on costs where ASIC considers it appropriate to do so. |
Recommendation 14—consumer leases to which the cap applies
The cap should apply to all leases of household goods
including electronic goods. Further consultations should take place on
whether the cap should apply to consumer leases of motor vehicles. |
The Government accepts this recommendation with an
amendment.
Following further consultation after the release of
the final report, the Government will apply the cap on costs to all consumer
leases. The Government notes that novated leases and small
business leases are not covered by the Consumer Credit Act, and will
not be affected by any changes. |
Recommendation 15—affordability
A protected earnings amount requirement be introduced
for leases of household goods, whereby lessors cannot require consumers to
pay more than 10 per cent of their net income in rental payments under
consumer leases of household goods, so that the total amount of all rental
payments (including under the proposed lease ) cannot exceed 10 per cent of
their net income in each payment period. |
The Government accepts this recommendation in full.
The Government notes that it is unusual to have such
prescriptive requirements regarding the amount that a consumer can devote to
a particular form of finance; however, the panel’s report highlighted the
vulnerable customer base of consumer leases. The panel noted that the principles based responsible
lending obligations appear insufficient alone to prevent observed harm; a
more strict affordability test is warranted. The Government accepts this
proposal. Capping the amount of income that can be devoted to
lease payments will ensure that consumers do not get locked into long term
lease contracts they cannot afford, while still enabling consumers to lease a
wide range of goods. To assist lessors in complying with this obligation,
the Government will provide a safe harbour allowing lessors to rely on a
consumer’s bank statements when determining a consumer’s average income for
the purposes of the protected earnings amount, unless there is evidence
suggesting that it is inappropriate to do so. |
Recommendation 16—Centrepay implementation
The Department of Human Services consider making the
caps in recommendations 11 and 15 mandatory as soon as practicable for
lessors who utilise or seek to utilise the Centrepay system. |
The Government supports this recommendation
in-principle.
The Government supports this recommendation
in-principle. Action in response to the recommendation will take account of
the outcome of litigation between The Aboriginal Community Benefit Fund Pty
Ltd and the Chief Executive Centrelink. |
Recommendation 17—early termination fees
The maximum amount that a lessor can charge on
termination of a consumer lease should be imposed by way of a formula or
principles that provide an appropriate and reasonable estimate of the
lessors’ losses from early repayment. |
The Government accepts this recommendation in full.
The Government supports this recommendation
in-principle and will undertake further consultation to finalise the formula
or principles. |
Recommendation 18—ban on the unsolicited marketing of
consumer leases
There should be a prohibition on the unsolicited
selling of consumer leases of household goods, addressing current unfair
practices used to market these goods. |
The Government partially accepts this recommendation.
The Government will prohibit door to door selling of
consumer leases. The final report highlights the concerns that sales
through unsolicited approaches are unfair and have the capacity to cause
financial harm irrespective of the target market. However, difficulties with
distinguishing between unsolicited selling and marketing mean that the
Government will only prohibit door to door sales. |
Recommendation 19—bank statements
Retain the obligation for SACC providers to obtain
and consider 90 days of bank statements before providing a SACC and introduce
an equivalent obligation for lessors of household goods. Introduce a prohibition on using information obtained
from bank statements for purposes other than compliance with responsible
lending obligations. ASIC should continue its discussions with software
providers, banking institutions and SACC providers with a view to ensuring
that ePayment Code protections are retained where consumers provide their
bank account log-in details in order for a SACC provider to comply with their
obligation to obtain 90 days of bank statements, for responsible lending
purposes. |
The Government accepts this recommendation in full.
The Government supports retaining the requirement for
SACC providers to collect 90 days of bank statements before providing a SACC
as well as introducing a requirement that lessors must also collect 90 days
of bank statements. Evidence from the final report shows that lessors are
not making sufficient inquiries when providing a lease and may be in a
position to make a more accurate assessment of consumers’ circumstances if
they collected at least 90 days of bank statements, in addition to their
responsible lending obligations. The Government also supports introducing a
prohibition on using information obtained from bank statements for purposes
other than compliance with responsible lending obligations. |
Recommendation 20—documenting suitability assessments
Introduce a requirement that SACC providers and
lessors under a consumer lease are required at the time the assessment is
made to document in writing their assessment that a proposed contract or
lease is suitable. |
The Government accepts this recommendation in full.
This recommendation strengthens the responsible
lending obligations |
Recommendation 21—warning statements
Introduce a requirement for lessors under consumer
leases of household goods to provide consumers with a warning statement,
designed to assist consumers to make better decisions as to whether to enter
into a consumer lease, including by informing consumers of the availability
of alternatives to these leases. In relation to both the proposed warning statement
for consumer leases of household goods and the current warning statement in
respect of SACCs, provide ASIC with the power to modify the requirements for
the statement (including the content and when the warning statement has to be
provided) to maximise the impact on consumers. |
The Government accepts this recommendation in full.
The Government supports lessors being required to
provide consumers with a warning statement to assist consumers in making more
informed decisions. The Government considers that giving ASIC the
flexibility to modify the requirements for the statement will likely result
in a more effective warning over time. |
Recommendation 22—disclosure
Introduce a requirement that SACC providers and
lessors under a consumer lease of household goods be required to disclose the
cost of their products as an APR. Introduce a requirement that lessors under
a consumer lease of household goods be required to disclose the Base Price of
the goods being leased, and the difference between the Base Price and the
total payments under the lease. |
The Government partially accepts this
recommendation.
The Government supports disclosing the base price of a
lease and the difference between the base price and the total cost of a
consumer lease. The Government does not consider it appropriate to
require disclosure of an APR for consumer leases as in order to calculate an
APR it is necessary to treat the lease as a sale by instalment and assume
that the consumer owns the good at the end of the lease. This is not the
case. In addition, the Government does not consider it
appropriate to require disclosure of an APR for SACCs. While the APR does
accurately reflect their high cost nature, this is partly a reflection of the
short term nature of SACCs. |
Recommendation 23—penalties
Encourage a rigorous approach to strict compliance by
extending the application of the existing civil penalty regime in Part 6 of
the National Credit Code to consumer leases of household goods and to SACCs,
and, in relation to contraventions of certain specific obligations by SACC
providers and lessors, provide for automatic loss of the right to their
charges under the contract. |
The Government accepts this recommendation in full.
The Government supports this recommendation as it
will encourage SACC providers and lessors to comply with the Consumer
Credit Act. |
Recommendation 24—avoidance
The Government should amend the Consumer Credit Act
to regulate indefinite term leases, address avoidance through entities using
business models that are not regulated by the Consumer Credit Act, and
address conduct by licensees adopting practices to avoid the restriction on
the maximum amount that can be changed under a consumer lease of household
goods or a SACC, or any of the conduct obligations that only apply to a
consumer lease of household goods or a SACC. |
The Government accepts this recommendation in full.
The Government supports regulating indefinite term
leases. As these products are currently exempted from the consumer
protections in the Consumer Credit Act, providers are not required to
hold an Australian Credit Licence or meet responsible lending obligations.
This has resulted in opportunities for regulatory arbitrage and has been
relied upon by fringe providers of short-term and indefinite leases to avoid
regulation, including where the consumer may be disadvantaged by the use of
an unregulated lease relative to a consumer lease. The introduction of an anti-avoidance provision will
assist in avoiding a drift to non-compliance where providers who are
complying with the Consumer Credit Act are losing business to those
who are not complying and are, therefore, under financial pressure to lower
their own standards. It will also minimise consumer detriment resulting from
businesses which are avoiding compliance with cost caps and additional
responsible lending and conduct requirements. |
Source: The Treasury, Review
of the Small Amount Credit Contract Laws, final report, Treasury,
Canberra, March 2016.
Kelly O’Dwyer (former Minister for Revenue and Financial
Services), ‘Government
response to the final report of the review of the small amount credit contract
laws’, media release, 28
November 2016.
Annexure 2
– major differences between the 2020 Bill and the FSR Bill 2022
With respect to consumer credit law reforms, the major differences
between the 2020 Bill
and the FSR Bill 2022 are set out below.[73]
| National
Consumer Credit Protection Amendment (Stronger Economic Recovery Bill) 2020
(the 2020 Bill) |
Financial
Sector Reform Bill 2022
(the 2022 Bill) |
| SACCs |
| The 2020 Bill (via
regulations) set higher thresholds than recommended by the 2016
SACC Review for protected earnings amounts (the amount of net income a
consumer can spend on a SACC or a consumer lease). It set different thresholds
for those mainly on social security (10 per cent) or not (20 per cent), and
provided consumer leases more generous thresholds than SACCs. The Review
recommended that there be a 10% threshold for each of SACCs and consumer
leases, with no differentiation between borrower on social security or not. |
The 2022 Bill introduces a new
regulation-making power that can be used to set a PEA cap of 10% (of net
income) for SACC borrowers and consumer lessees. Note that the 2022 Bill does
not contain provisions setting the 10% PEA cap. The Bill merely provides the
legislative authority (via regulations) to set the PEA cap. |
| SACCs providers would be
prohibited from making unsolicited communications with current or former
consumers. |
The 2022 Bill extends the
prohibition to include other consumers under specified circumstances (for
example, those who have unsuccessfully applied for a SACC and whose details
are still held by the SACC provider). |
| No prohibitions on referrals. |
The 2022 Bill provides that
referrals can only be made by regulated consumer credit providers to other
regulated credit providers. Referrals to unregulated credit providers are
prohibited. |
| Consumer Leases |
| The 2020 Bill allowed for the
charging of establishment fees and includes installation and delivery fees in
the base amount used to calculate the four per cent monthly fee cap on
consumer leases. Delivery and installation fees
would be allowed to be charged separately.
|
The 2022 Bill does not include
delivery or installation fees as part of the base amount for calculating the
permitted monthly fee cap for a consumer lease. Delivery and installation fees
are still allowed to be charged separately. The 2022 Bill does not allow
for the separate charging of establishment fees. |
| The 2020 Bill banned the
door-to-door selling of consumer leases. |
The 2022 Bill extends the ban
on door-to-door sales to include unsolicited contact situations where first
contact is made with a person in a non-standard business premises (for example, a
market stall, park, or other public space). |
| Combined |
| The 2020 Bill required lessors
to obtain 90 days of bank statements for use in their responsible lending assessments. |
The 2022 Bill allows the
regulations to extend the requirement to include Centrelink documents. The Bill also allows for
lenders to comply with the requirements to obtain these banking and other
documents in a technologically neutral manner. |
There was a requirement for a
court order or finding of guilt by a court, to determine if breaches of
certain of the laws would result in a credit provider losing their
entitlement to the fees and charges under the credit contract.
|
The 2022 Bill removes the
requirement for a court order or finding of guilt by a court for the loss of
charges provisions to apply. It also extends the loss of charges provisions
to unsolicited selling prohibitions specified in the Bill. |
| Anti-avoidance provisions
apply in situations where a scheme or contract was more complex or costly to
the consumer than the alternative for avoidance purposes. |
The 2022 Bill extends the
anti-avoidance provisions to include schemes created to avoid a product
intervention order made under Part 6-7A of the National Consumer Credit
Protection Act 2009. |
[1]. Stephen
Jones, Second
Reading Speech: Financial Sector Reform Bill 2022, House of
Representatives, Debates, (proof), 8 September 2022, 6.
Detailed information regarding the FAR is
provided in the Financial
Accountability Regime Bill 2022.
[2]. Stephen
Jones, Second
reading speech: Financial Sector Reform Bill 2022, 7.
[3]. Stephen
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[4]. J
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[5]. Kate Hilder and Siobhan Doherty, ‘Financial
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[6]. Review
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[7]. Treasury,
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[8]. Treasury, ‘Small Amount Credit
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[9]. Rebekha Sharkie, ‘Payday
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[10]. Madeleine
King, Matters
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[11]. Senate
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Lease Reforms) Bill 2019 (No. 2), (Canberra: The Senate, 2020), 2.
The National
Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer
Lease Reforms) Bill 2019 is one example of the Bills that were not debated.
[12]. Australian
Parliament, National
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Lease Reforms) Bill 2019, homepage.
[13]. Australian
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Lease Reforms) Bill 2019 (No. 2), homepage.
[14]. SELC,
National
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Lease Reforms) Bill 2019 (No. 2), 59.
[15]. SELC,
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Lease Reforms) Bill 2019 (No. 2), 65.
[16]. Andrew
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[17]. SELC,
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Lease Reforms) Bill 2019 (No. 2), 2.
Australian Parliament, National
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Lease Reforms) Bill 2019, homepage.
[18]. Australian
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[19]. Financial Rights Legal Centre, Joint submission to Senate Economics
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[20]. SELC,
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[21]. Senate
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[22]. Senate
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of Bills considered by the committee, 8 September 2022.
[23]. Senate
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Senate Standing Committee for the Scrutiny
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[24]. Explanatory
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[25]. Explanatory
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[26]. Explanatory
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[27]. Parliamentary
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Rights Scrutiny Report, 13, 2021, 10 November 2021: 32.
[28]. Explanatory
Memorandum, 38–40.
[29]. Stephen
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[30]. Stephen
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[31]. Explanatory
Memorandum, 79.
[32]. Explanatory
Memorandum, 81.
[33]. Adele
Ferguson, ‘Opinion:
Compo scheme gets the nod’, Australian Financial Review, 19 July
2021.
[34]. Treasury,
‘Compensation
Scheme of Last Resort: Proposal Paper’, (Canberra: Treasury, July 2021),
14.
[35]. Treasury,
email to the author, 22 September 2022. The author would like to thank Treasury official for providing substantial assistance in writing this Digest.
[36]. Treasury,
‘Compensation
Scheme of Last Resort: Proposal Paper’, 13.
[37]. CPA
Australia and et cetera, ‘Compensation
scheme of last resort may be last straw for financial advice industry’,
media release, 12 August 2021.
[38]. CHOICE,
‘CHOICE
responds to introduction of the Financial Sector Reform Bill 2022’, media
release, 8 September 2022.
[39]. CHOICE
and et cetera, ‘Submission
to Treasury: compensation scheme of last resort’, August 2021.
[40]. Explanatory
Memorandum, 112.
[41]. ‘Benefits
of Fast Payday Loans from CashnGo’, CashnGo website.
[42]. Explanatory
Memorandum, 112.
[43]. Explanatory
Memorandum, 112.
[44]. Saurav Dutta, Harjinder Singh and Nigar Sultana, ‘Four common debt traps: payday loans, consumer leases, blackmail
securities and credit ‘management’’, The
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[45]. Cash
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[46]. Financial
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advocates’, media release, 9 September 2022.
[47]. NCPA, submission
to the Senate Economics Legislation Committee, 14.
[48]. Cash Converters, submission
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[49]. Explanatory
Memorandum, 118.
[50]. National Consumer
Credit Protection Regulations 2010 (Consumer Credit Regulations),
subsections 28S(3)–(4).
Paula Pyburne, National
Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020,
Bills Digest, 52, 2020–21, (Canberra: Parliamentary Library, 2021),
27–28. The author would like to thank Paula Pyburne for providing assistance to this Digest.
[51]. Explanatory
Memorandum, 118.
[52]. NCPA, submission
to the Senate Economics Legislation Committee, 13.
[53]. Explanatory
Memorandum, 119.
[54]. Consumer Action Law Centre, submission
to the Senate Economics Legislation Committee, 16.
[55]. NCCP
Act, proposed subsection 133CF(2), Explanatory
Memorandum, 126.
[56]. NCCP Act, proposed subsection 133CF(2).
[57]. Explanatory
Memorandum, 127.
[58]. Cash Stop Financial Services, submission
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[59]. SELC, ‘National
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Lease Reforms) Bill 2019 (No. 2)’, 33.
[60]. ‘Consumer Leases’, Darwin Community Legal
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[61]. ‘Consumer Leases’, Darwin Community Legal
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[62]. ‘Consumer Leases’, MoneySmart.
[63]. National Credit Code, proposed
section 175AA, Explanatory
Memorandum, 139.
[64]. Explanatory
Memorandum, 142–145.
[65]. Part
2 of Schedule 4 of the FSR Bill. Explanatory
Memorandum, 115.
[66]. Part
4 of Schedule 4 of the FSR Bill.
[67]. Part
5 of Schedule 4 of the FSR Bill.
[68]. Explanatory
Memorandum, 58.
[69]. Explanatory
Memorandum, 2.
[70]. Explanatory
Memorandum, 108.
[71]. Explanatory
Memorandum, 108.
[72]. Paula
Pyburne, National
Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020,
Bills Digest, 52, 2020–21, (Canberra: Parliamentary Library, 2021),
47–54.
[73]. Treasury,
email to the author, 15 September 2022.
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