Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 3 - Credit card contracts

Outline of chapter

3.1 The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 (Home Loans and Credit Cards Bill) introduces a series of reforms to the way in which credit cards are offered and used. The key elements of the reforms are that they:

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introduce a requirement for lenders to provide a Key Facts Sheet for credit card contracts;

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restrict the circumstances in which credit providers can send unsolicited written invitations to borrowers to increase the credit limit on their credit card;

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require credit providers to notify a consumer if a credit card is used in excess of its credit limit, and restricts the charging of fees or other amounts where a credit card is used to obtain credit in excess of the credit limit for the credit card contract; and

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provide for an order of application of payments made under credit card contracts.

3.2 The obligations only apply to credit providers who are licensees as defined in the National Consumer Credit Protection Act 2009 (NCCP Act). In this chapter of the explanatory memorandum, the term credit provider is a reference to a credit provider who is a licensee.

Context of amendments

3.3 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer credit regulation to the Commonwealth and introduce new Commonwealth regulation to enhance consumer protection.

3.4 The NCCP Act implemented phase one of the implementation plan by introducing a Commonwealth statutory framework for the regulation of lenders and brokers. The Home Loans and Credit Cards Bill supplements regulation in respect of two of the most common types of credit, credit cards and standard home loans. This is part of phase two of the COAG implementation plan.

3.5 Credit card contracts require targeted regulation because they differ from other credit contracts. Some of the main differences are that:

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consumers are commonly required to make repayments calculated at a low percentage of the outstanding balance, and credit card borrowers can therefore carry high balances for significant periods of time at relatively high interest rates;

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there is low visibility of the impact of differences in features between credit card products; and

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they are long term contracts in which the credit provider may, over time, change the terms of the contract and the obligations of the borrower resulting in significant changes to the original terms, and which can impact on the matters described above.

3.6 The Home Loans and Credit Cards Bill addresses these issues.

Summary of new law

3.7 The Credit Card and Home Loans Bill inserts Part 3-2B into the NCCP Act which:

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restricts approval of the use of credit cards above the credit limit;

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provides for an order of application of payments made under credit card contracts;

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restricts the making of unsolicited offers to increase the credit limit of a credit card; and

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introduces a requirement for lenders to provide a Key Facts Sheet for credit card contracts.

3.8 The obligations only apply to credit providers who are licensees. A licensee is a person who holds an Australian credit licence. [Chapter 1, part 1-2, division 2, section 5 of the NCCP Act]

Comparison of key features of new law and current law

Detailed explanation of new law

Part 3-2B: Rules relating to credit card contracts

Division 3 - Key Facts Sheet for credit card contracts

3.9 The Home Loans and Credit Cards Bill inserts Division 3 of Part 3-2B into the NCCP Act which imposes requirements aimed at ensuring a consumer is provided with, or can access, a Key Facts Sheet before entering into a credit card contract.

3.10 A Key Facts Sheet for credit cards is a document which contains the information and complies with the requirements required by the regulations. It is proposed that the form of the Key Facts Sheet will be prescribed by regulations. [Schedule 1, item 19, section 133BB]

3.11 The Key Facts Sheet is intended to provide a clear summary of the standard terms applicable to a credit card contract, containing information on matters such as the:

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minimum repayments required to be made under the contract;

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annual percentage rates (including different rates where these may apply to particular liabilities); and

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fees.

3.12 The purpose of the Key Facts Sheet is to provide the consumer with key information in an accessible form to assist them in deciding whether to enter into a particular credit card contract with the particular credit provider. The standardisation of the Key Facts Sheet will allow consumers to both compare different credit card products more easily, and to have a better understanding of how to use their credit cards more efficiently, so as to minimise the amount they have to pay, in fees and interest. It will be easier for consumers to either adapt their behaviour to minimise costs, or move to other credit card products more suited to their spending habits.

3.13 Credit providers must ensure that any application form for a credit card contract that they make available to consumers includes an up-to-date Key Facts Sheet. [Schedule 1, item 19, section 133BC]

3.14 Breach of the requirements in section 133BC attracts a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BC(1) and (2)]

3.15 The regulations may prescribe circumstances in which it is permissible for the credit provider to provide a Key Facts Sheet that is not up-to-date (for example, where the annual percentage rate has changed from the figure stated in the Key Facts Sheet). [Schedule 1, item 19, subsection 133BC(3)]

3.16 Credit providers must not enter into a credit card contract unless, in accordance with any requirements prescribed by the regulations:

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the application is made using an application form that includes an up-to-date Key Facts Sheet; or

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the application is made using an application form that includes an outdated Key Facts Sheet but the consumer has been provided with up-to-date information (to address the situation where a consumer applies on a form that contained superseded information); or

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the consumer has otherwise been provided with an up-to-date Key Facts Sheet; or

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the consumer has been given details of how to access an up-to-date Key Facts Sheet. [Schedule 1, item 19, section 133BD]

3.17 Under section 133BD, consumers who apply online or by phone must receive a copy of the Key Facts Sheet, or given details of how to access one.

3.18 Breach of the requirements in section 133BD attracts a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 100 penalty units. [Schedule 1, item 19, subsections 133BD(1) and (2)]

3.19 If a credit card contract is entered into in breach of section 133BC or section 133BD, it is still valid and enforceable, pursuant to section 333 of the NCCP Act.

Division 4 - Offers to increase the credit limit of the credit card contract

3.20 The Home Loans and Credit Cards Bill inserts Division 4 of Part 3-2B into the NCCP Act which imposes restrictions on a licensee from making unsolicited invitations to increase the credit limit of a credit card contract.

3.21 The credit limit is defined as the maximum amount of credit that may be provided under the credit contract, as specified in the contract pursuant to section 17(3) of the National Credit Code, so that the same definition applies in the National Credit Act as in the Code. [Schedule 1, item 19, section 28]

3.22 Credit providers must not make credit limit increase invitations, except where they have obtained the express consent of the consumer to do so, in accordance with the requirements of the Home Loans and Credit Cards Bill. [Schedule 1, item 19, sections 133BE and 133BF]

3.23 The purpose of this reform is to assist consumers to actively choose whether to increase their credit limit, rather than being prompted to do so by written letters from their credit provider. A consumer who accepts these types of offers can, over time, have a high credit limit and find they are unable to repay the debt in full within a relatively short period of time. For example, a consumer with a debt of $10,000 on a credit card contract with an annual percentage rate of 20 per cent, and who can only afford to make repayments of $200 a month, will have to make these repayments for over nine years to discharge the debt, and will pay over $11,000 in interest.

3.24 A credit limit increase invitation is made where a licensee gives a written communication to a consumer about their credit card contract which:

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offers to increase the credit limit of the credit card contract;

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invites the consumer to apply for an increase; or

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has a purpose of encouraging the consumer to consider applying for an increase. [Schedule 1, item 19, subsection 133BE(5)]

3.25 This definition is intended to cover written communications promoting easy access to a higher credit limit (for example, promotions offering increases described as 'pre-approved' or 'tick-a-box' offers) or other similar communications which result in consumers being encouraged to apply for an increase.

3.26 The regulations may make provisions that apply to determining whether a written communication has been given by a particular credit provider to a particular consumer and whether it relates to a particular credit card contract. The regulations may also be used to clarify permissible communications. [Schedule 1, item 19, subsection 133BE(6)]

3.27 Breach of the requirement in section 133BE attracts a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 100 penalty units. [Schedule 1, item 19, subsections 133BE(1) and (2)]

3.28 Strict liability also attaches to section 133BE with a penalty of 10 penalty units, meaning that this punishment applies regardless of fault. This is to encourage strict compliance with the prohibition on sending out credit limit increase invitations, given the potentially adverse consequences for consumers. [Schedule 1, item 19, subsections 133BE(3) and(4)]

3.29 Credit providers will be able to make a credit limit increase invitation where they have obtained the borrower's agreement to receiving these types of offers, and this consent has not been withdrawn. [Schedule 1, item 19, section 133BF]

3.30 Before obtaining the borrower's consent, the licensee must inform the consumer that:

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the consumer has a discretion whether to apply for any increase of the credit limit;

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the licensee has a discretion whether to grant any increase applied for; and

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the consumer may withdraw their consent at any time.

[Schedule 1, item 19, subsection 133BF(4)]

3.31 The credit provider may need to inform the consumer of any further matters prescribed by the regulations. Regulations may also prescribe requirements in relation to the giving or withdrawing of consent and informing the consumer of the above matters. [Schedule 1, item 19, subsection 133BF(7)]

3.32 Credit providers will need to obtain a customer's consent before providing a credit limit increase invitation. [Schedule 1, item 19, subsection 133BF(5)]

3.33 The credit provider must keep records of consents and withdrawals of consents, in accordance with the requirements prescribed by the regulations. [Schedule 1, item 19, section 133BG]

3.34 Breach of the requirement in section 133BG attracts a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 50 penalty units. [Schedule 1, item 19, section 133BG]

Transitional arrangements

3.35 A licensee has a defence to the prohibition in section 133BF on making unsolicited credit limit increase invitations where it informed the consent of the consumer before commencement of the Bill (and that consent has not been withdrawn). For the consent to be effective licensees must comply with the matters mentioned in 133BF(4)(a), (b) and (c) of the amended Act. [Schedule 2, item 1, section 3]

Division 5 - Use of credit card in excess of credit limit

3.36 Division 5 provides for consumers to be notified if a credit card is used in excess of its credit limit. It also restricts the charging of fees or other amounts where a credit card is used to obtain credit in excess of the credit limit for the credit card.

3.37 The Bill does not place any restriction on licensees who are credit providers under a credit card contract from approving transactions above a credit limit, and this can continue to occur in accordance with the licensee's internal procedures.

3.38 Responsible lending obligations under Part 3-2 of the NCCP Act require licensees to assess whether or not a consumer can meet their financial obligations under the credit contract. These obligations apply to any amount the licensee agrees to provide that is in excess of the credit limit of a credit card contract. For example, if the credit card contract requires the borrower to repay the amount of the excess in full within the next statement period, the licensee must have considered the borrower's capacity to repay this sum when undertaking its suitability assessment under section 131 of the Credit Act.

3.39 Section 133BH allows regulations to be made to require a credit provider to notify a consumer when their credit card is used to obtain cash, goods or services in excess of the credit limit of that card. The regulations may deal with how and when the credit provider must notify the consumer, and what must be included in the notification. [Schedule 1, item 19, subsections 133BH(1) and 133BH(2)]

3.40 Breach of the requirement to provide such notification will attract a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BH(3) and 133BH(4)]

3.41 This Division also prohibits credit providers from imposing any fees or charges, or a higher rate of interest on the credit card holder unless that consumer who is the debtor has previously provided their express consent to the credit provider doing so. [Schedule 1, item 19, subsections 133BI(1) and 133BI(2)]

3.42 Before obtaining the consumer's consent to impose fees or charges, or a higher rate of interest where a credit card is used in excess of its credit limit, the credit provider must inform the consumer of any matters which may be prescribed by the regulations. [Schedule 1, item 19, section 133BI(3)]

3.43 This consent may be obtained either before or after the credit card contract is entered into. The consent will not apply to any fees, charges or interest which were imposed as a result of transactions occurring before the consent was obtained. [Schedule 1, item 19, section 133BI(4)]

3.44 The consumer may withdraw their consent at any time. Regulations may prescribe further requirements to be complied with by either party in relation to giving or withdrawing consent. [Schedule 1, item 19, subsections 133BI(5) and 133BI(6)]

3.45 Subsection 133BI(7)), attaches criminal and civil consequences to a breach of section 133BI, through the operation of section 23 of the National Credit Code. The effect of section 23 is that amounts paid by the consumer in excess of what is permitted by section 133BI may be recovered by the debtor. Section 111 of the National Credit Code may apply additional penalties and consequences to a contravention of section 23 of the National Credit Code. [Schedule 1, item 19, section 133BI(7)]

3.46 Credit providers must keep records of consents and withdrawals, in accordance with the requirements prescribed by the regulations. [Schedule 1, item 19, section 133BJ]

3.47 Breach of the requirement in section 133BJ attracts a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BJ(1) and (2)]

Division 6 - Order of application of payments made under credit card contracts

3.48 Division 6 imposes requirements relating to the order of application of payments made under credit card contracts. Generally, a payment must be applied against that part of their outstanding balance on which they are charged the higher interest rate.

3.49 This measure addresses existing practices where some credit providers allocate repayments under their credit card contracts in a way that can maximise the amount and time required for the consumer to repay their credit. They will also assist consumers in comparing different credit card products, given that it is presently the case that the same repayments can produce different results according to the allocation hierarchy under the contract.

3.50 This Division regulates the order in which the credit provider must attribute payments as follows:

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in accordance with an agreement between the consumer and the licensee to apply certain payments made under the credit card contract against a particular amount; [Schedule 1, item 19, Section 133BP]

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against the amount owed contained in the most recent closing balance provided in a statement provided to the consumer before they made the relevant payment;

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against the part of the balance that has the highest annual percentage rate (the rate specified as such in the credit contract), then the part of the balance that has the next highest annual percentage rate, and so on; and

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remaining payments in accordance with the terms of the credit card contract. [Schedule 1, item 19, section 133BQ]

3.51 For the avoidance of doubt, it is specifically provided that the requirement does not apply to a payment to a credit card account which is made by the licensee as a result of a reversal of a previous transaction or a refund made in respect of such a transaction. [Schedule 1, item 19, subsection 133BO(2)]

3.52 Where there is an agreement between the consumer and the licensee to apply certain payments made under the credit card contract against a particular liability, the credit provider must act in accordance with the agreement. [Schedule 1, item 19, section 133BP]

3.53 An agreement can arise where the consumer requests for a certain payment to be made against a particular liability. If the credit provider has agreed to this request, they must then allocate repayments in accordance with it. The consumer may withdraw a request at any time, but the credit provider can only withdraw a request with the consent of the consumer. [Schedule 1, item 19, section 133BP]

3.54 Regulations may prescribe further requirements in relation to the operation of these requests and withdrawals. [Schedule 1, item 19, subsection 133BP(5)]

3.55 Such an agreement can only exist where the liability satisfies any other requirements which may apply under the regulations. [Schedule 1, item 19, subparagraph 133BP(1)(a)(ii)]

3.56 Consumers may seek such agreements so that they can direct payments to ensure a particular outcome; for example, they may want to ensure an 'interest free' purchase is paid off during the period in which interest is not charged, as the cost of not making repayments in this timeframe may exceed the cost of accruing higher interest on remaining credit card balances. In situations such as these, the consumer has discretion to assign repayments to pay off balances attracting the lowest charges first, leaving other balances unpaid and accruing higher interest.

3.57 If the consumer has not agreed otherwise, a payment must be first allocated to that part of the closing balance, from the previous statement provided to the consumer, which attracts the highest interest. If that part of the balance has been repaid in full, the remaining portion of the payment must be allocated to that part of the closing balance which attracts the next highest interest, and so on. [Schedule 1, item 19, section 133BQ]

3.58 If the closing balance has been discharged in full, any remaining part of the payment or further payment must be applied in accordance with the terms of the credit card contract. [Schedule 1, item 19, section 133BR]

3.59 Repayments to fees and interest charges are to be allocated in accordance with the above requirements. For example, if the closing balance on a consumer's last statement includes an amount in respect of interest charges (the interest balance), the application of repayments to the interest balance will be determined by the annual interest rate applicable charged in respect of the interest balance.

3.60 Interest that accrues after the last statement will be regulated by the provisions governing the application of any remaining part of the relevant payment.

3.61 In relation to the application of payments the order of application is to be determined by reference to the relative rates of interest. The size of any particular underlying debt being irrelevant. This includes components of the balance to which the same interest rate applies.

3.62 Breach of the requirement to apply payments in accordance with this Division attracts a civil penalty of 2,000 penalty units and is an offence, attracting a criminal penalty of 50 penalty units. [Schedule 1, item 19, subsections 133BO(1) and (3)]

3.63 Strict liability also attaches to this Division with a penalty of 10 penalty units, which applies regardless of fault. This reflects the importance of credit providers ensuring that they have systems in place to attribute payments in the required order and to give effect to agreements with the consumer. [Schedule 1, item 19, subsections 133BO(4) and (5)]

3.64 Where a credit provider contravenes one of the obligations in the Division, the consumer may end up paying more interest than would otherwise have been the case. The consumer would then have suffered a loss because of the contravention. A court which can exercise jurisdiction under the NCCP Act can make an order compensating the consumer for this loss under section 178 or 179 of the NCCP Act.

3.65 The obligations in the Division will be applied separately in relation to each credit card contract that a person has, so that a payment made in relation to one credit card contract cannot be applied against an amount owed under another credit card contract.

3.66 If a consumer has a credit card contract, and one or more other kinds of credit contracts with a particular credit provider, the obligations in this Division will only apply to payments made under the credit card contract.

3.67 Consequential amendments are also made to the note under subsection 23(1) of the National Credit Code, introducing a second note and renumbering the existing note. [Schedule 1, item 20 and 21, subsection 23(1)]

Amendments to the National Credit Code

3.68 The Home Loans and Credit Cards Bill introduces a number of amendments to the National Credit Code.

3.69 Section 30 of the National Credit Code specifies the maximum amount that can be charged under a credit contract, including a continuing credit contract. However, there is currently significant divergence in practices as to the circumstances in which credit providers may offer borrowers a benefit by reducing or reversing accrued interest charges; 'interest free periods' are the most common example of these arrangements.

3.70 Borrowers do not always appreciate or understand the nature or impact of these types of arrangements. These arrangements can mean that the amount of interest charged can vary between different credit products, even if the same annual percentage rate is charged.

3.71 It is intended to introduce reforms that will provide greater consistency in relation to annual percentage rates, and will therefore allow consumers to compare credit cards more effectively. The details of this reform are to be addressed through regulations.

3.72 Section 30B provides appropriate power for this by allowing regulations to be made in relation to any of the following matters relating to interest charges under credit card contracts:

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the day from which a daily percentage rate may be applied, and the balance (or part of the balance) to which it may be applied; and

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how matters relating to interest charges may be described in credit card contracts and other documents or advertisements published by or on behalf of credit providers. [Schedule 1, item 22, subsection 30B(1)]

3.73 Regulations made for this purpose may omit, modify or vary provisions of this Division in relation to a credit card contract. They may provide for offences not exceeding 50 penalty units for an individual or 250 penalty units for a body corporate. They may also provide for civil penalties against the regulations, not exceeding 500 penalty units for an individual or 2,500 penalty units for a body corporate. [Schedule 1, item 22, subsections 30B(2), (3) and (4)]

3.74 Specific provision is made for the imposition of penalties through the regulations as these reforms are intended to provide greater consistency between different credit card products. This will allow consumers to make more efficient choice in product selection and ensure that differences in the operation of competing products can no longer continue. It is therefore important that these objectives can be enforced through appropriate sanctions.

3.75 The Home Loans and Credit Cards Bill also makes a number of consequential amendments to definitions in the National Credit Code to ensure internal consistency with the NCCP Act:

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the phrase 'continuing credit contract under which credit is ordinarily obtained only by the use of a card' is replaced by the defined term 'credit card contract' in subsection 33(2)(a) and subsections 34(5) and 204(1) of the National Credit Code;

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the terms 'credit card', 'credit card contract' and 'credit limit' are included in the list of definitions in subsection 204(1) of the National Credit Code, and defined as having the same meaning as applicable to those terms in the NCCP Act.