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
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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 / TotalchangeincostTotal,bysector / 29.4 / n.a / 7.0 / 36.4
Accordingly,IamsatisfiedthattheattachedreportmeetsbestpracticeconsistentwiththeAustralianGovernmentGuidetoRegulation.
Yourssincerely
JohnLonsdaleDeputySecretary Markets Group