AustralianGovernment

TheTreasury

MrWaynePeelsExecutiveDirector

OfficeofBestPracticeRegulation

DepartmentofthePrimeMinisterandCabinetOneNationalCircuit

BARTONACT2600

Email:

DearMrPeels

CREDITCARDREFORMS-REGULATORYIMPACTSTATEMENT

17August2017

File:OBPRID20091

ThislettercertifiesthattheSenateEconomicsReferencesCommittee Inquiryintomattersrelatingtocreditcardinterestrates,InterestratesandinformedchoiceintheAustraliancreditcardmarket(SenateInquiry),hasinvolvedaprocessandlevelofanalysisequivalenttoafinalassessmentRegulatoryImpactStatement(RIS),assetoutintheAustralianGovernmentGuidetoRegulation2014.TheSenateinquirywillsupporttheintroductionofTreasury LawsAmendment (2017MeasuresNo.8)Bill2017:Creditcardreforms(theBill)inlate2017.

Overview

ThereisasubsetofAustralianconsumerswhoincurveryhighcreditcardinterestchargesonapersistentbasis.Thisraisestheconcernthat thecurrentregulatoryframeworkmaynotprovidetheseconsumerswithsufficientprotection.Variousbehaviouralbiasesandthecomplexityofcreditcardproductscanalsoconsumersrelativelyinattentivetotheimpactofacard'songoinginterestratewhichresultsinlittleinterestratecompetitionbetweencardissuers.

TheBillmakesamendmentstotheNationalConsumerCreditProtectionAct2009(theAct)totightenresponsiblelendingobligationsforcreditcardprovidersbyrequiringaffordabilityassessments tobebasedonaconsumer'sabilitytorepaythecreditlimitwithinareasonableperiodsetbyanASICinstrument,prohibitallunsolicitedcredit limitincrease invitationoffers,simplifythecalculationofcreditcardinterestandrequirecreditcardproviderstoallowconsumerstoinitiateacreditcardcontractcancellationonline.

IndependentReviews

TheSenateinquiryexaminedthecurrentregulatorysettingsinthecreditcardmarketandmaderecommendationsforimprovementstotheregulationofthismarkettoimprovecompetitionandconsumeroutcomes.Followingstakeholderconsultation,theSenateEconomicsReferenceCommittee releaseditsfinalreporton14December2015whichincluded11recommendationstoimproveconsumeroutcomesinthecreditcardmarket.

TreasuryconsidersthatthemattersthatmustbecoveredinafinalassessmentRIShavebeenaddressed throughtheSenateinquiryaswellasthroughsubstantive consultationwithkeystakeholders.TheSenateinquirycanbefoundat:

Business/Committees/Senate/Economics/Credit Card Interest/Report

L,AUSTRALIA

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AddressingtheRISquestions

Questions1and2-the problem andwhygovernmentactionisneeded

TheSenateinquiryidentifiedthatthecreditcardmarketischaracterisedbyinadequatecompetitiononongoinginterestrates,over-borrowingandunder-repaymentbysomeconsumers.Inparticular,asmallsubsetofconsumersuseunsuitablecreditcard productswhichcancontributeto cyclesanddebtand substantialhardship.

Thecreditcardmarketisalsoaffectedbyconsumerbehaviouralbiasesandtheincentivesofcreditcardissuersthatresultsinsignificantconsumerdetrimentandwhichtheoperationofmarketforcesis unlikelytoovercome.TheSenateinquiryrecommendedthatactionbetakentocorrectforspecificdeficienciesintheregulatory frameworktoprotectvulnerableconsumersfromincurringexcessivedebt,toincreasecompetitivepressureoncreditcardissuers andtoempowerconsumerstomakebetterdecisions.

Questions3and4- thepolicyoptionsandthecostsandbenefitsofeachoption

TheSenateinquiryconsideredarange ofpolicyoptions toincreasecompetitionandimproveconsumeroutcomesinthecreditcardmarket.Toimprovecompetitioninthecreditcardmarket,theSenateinquiryrecommendedthatcreditcardprovidersberequiredtoprovideonlineoptionstocloseacreditcardand recommendedthattheGovernmentexaminethefeasibilityofaccountnumberportabilityforcreditcardaccounts.Theserecommendationsareaimedatreducingbarrierstoswitchingcredit cardswhichcancontributetoreducedcompetitioninthemarket.

TheSenateinquiryalsomadeanumberofrecommendationstoreducetheincidenceofconsumersbuildingupunsustainabledebtincludingtighteningresponsiblelendingobligationsforcreditcardproviders,implementingahigherminimumcreditcardrepaymentandallowingconsumerstobettercomparethecostsof usingcreditcards.

Questions5 -whowillbeconsultedandhow?

TheSenateEconomicsReferencesCommitteereceived37submissionsfromarangeofrelevantstakeholders.Inaddition,publichearingswereheldonfive occasionsinvolvingregulators,consumerstakeholdersandcreditcard providers.TheGovernmentalso consultedwithanumberofkeystakeholdersthroughoutthepolicydevelopmentprocessincludingthroughthereleaseofaconsultationpaperin 2016.

Question6-whatisthebestoptionfrom thoseconsidered?

Inthe2017/18Budget,theGovernmentannounceditwouldintroducedraftlegislationonthefirstphaseofreformsintheGovernment'sresponsetotheSenateinquiry toreducetheincidenceofconsumersbuildingupexcessivecreditcarddebtandtoimprovecompetitioninthemarket.Thesereformsinclude:

•tighteningresponsiblelendingobligationsto ensurethataffordabilityassessmentsarebased onaconsumer'sabilitytorepaythefullcreditlimitwithinareasonableperiod;

•prohibitingunsolicitedcreditcardincreaseinvitations;

•simplifyingthecalculationofcreditcardinterestincludingbanningthebackdatingofinterest;and

•requiringcreditcardproviderstoprovideonlineoptionsforconsumerstoinitiateacreditcardcontractcancellationorloweracreditlimit.

Question7-howwillyouevaluateandimplementyourchosenoption?

Creditcardproviderswillberequiredtoimplementthereformstotightenresponsiblelendingobligations,simplifythecalculationofinterestandprovideonlineoptionstoloweracreditlimitorcancelacreditcardcontractby1January2019. Theprohibitionofunsolicitedcreditcardincreaseinvitationswillcomeintoforceon1January2018.

Theregulatorycostingforthesereformshasbeenprepared consistentwiththeGovernment'sRegulatoryBurdenMeasurementFramework.Thesecostshave beenagreed withyourofficeandaresummarisedinTable1.Aregulatoryoffsethasnotbeen identified.However,TreasuryisseekingtopursuenetreductionsincompliancecostsandwillworkwithaffectedstakeholdersandacrossGovernmenttoidentifyregulatoryburdenreductionswhereappropriate.

Table1:Regulatoryburdenestimatetable

Changeincosts($million) / Business / CommunityOrganisations / Individuals / Totalchangeincost
Total,bysector / 29.4 / n.a / 7.0 / 36.4

Accordingly,IamsatisfiedthattheattachedreportmeetsbestpracticeconsistentwiththeAustralianGovernmentGuidetoRegulation.

Yourssincerely

JohnLonsdaleDeputySecretary Markets Group