House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Regulation Impact Statement

4.130 As part of the 2017-18 Budget, the Government announced it would implement a number of reforms to the credit card market. In taking this decision, the Government was informed of the regulatory impacts of various reform options by the findings of the Senate Economics References Committee inquiry into matters relating to credit card interest rates, 'Interest rates and informed choice in the Australian credit card market' (the Senate inquiry) and consultation with industry stakeholders.

4.131 Treasury has certified that the independent review and consultations are processes and analysis equivalent to a RIS.

4.132 The Australian Government Guide to Regulation identifies seven questions that a RIS should address. Following is a summary of the analysis of these questions that occurred as part of the independent review and stakeholder consultation process.

Problem

4.133 In 2015, the Senate Economics References Committee undertook to examine the economic effects of credit card interest rates and to identify opportunities to improve competition and consumer outcomes in the credit card market. The final report from this inquiry was published in December 2015.

4.134 The Senate inquiry found that the credit card market is characterised by inadequate competition on ongoing interest rates, over-borrowing and under-repayment by some consumers.

4.135 In particular, a small subset of credit cardholders pay interest that is well above what might be expected in a competitive credit card market. The Senate inquiry found that these cardholders are often those that can least afford to pay high credit card interest.

4.136 The Senate inquiry also identified that consumers can face substantial barriers to switching credit card products due to the time required to change any authorisations (e.g. direct debits) and the lack of online options to cancel a credit card. Moreover, the complexity of credit card products can make it difficult for consumers to compare cards and limits the ability of consumers to make informed choices about their credit cards.

4.137 The credit card market is also affected by substantial consumer behavioural biases which can result in significant consumer detriment which the operation of market forces is unlikely to overcome.

Need for government action

4.138 While the majority of Australians use their credit cards responsibly, there is a subset of consumers incurring very high credit card interest on a persistent basis. These consumers are not provided with sufficient protection by the current regulatory framework.

4.139 In addition, the Senate inquiry identified that consumer behavioural biases and the complexity of credit card products impede competition and contribute to consumers building up excessive credit card debt. These problems can be compounded by the incentives of credit card issuers and are not likely to be overcome by market forces.

4.140 Government action is required to correct for specific deficiencies in the current regulatory framework to protect vulnerable consumers from incurring excessive debt, to increase competitive pressure on credit card issuers and to empower consumers to make better decisions.

Policy options and likely net benefits of the options

4.141 The Senate inquiry considered a range of policy options to increase competition and improve consumer outcomes in the credit card market.

4.142 To improve competition in the credit card market, the Senate inquiry recommended that credit card providers be required to provide online options to close a credit card and recommended that the Government examine the feasibility of account number portability for credit card accounts. These recommendations were aimed at reducing barriers to switching credit cards which can contribute to reduced competition in the credit card market.

4.143 The Government considered the issue of account portability in its response to the Senate inquiry and determined that implementing portable credit card numbers would impose significant costs on industry. Given that the take up rate for switching services related to transaction accounts is low, the Government did not consider that the costs would be offset by substantial consumer benefits. A lack of consumer awareness and difficulties in comparing credit card products were considered greater barriers to consumers switching credit card products.

4.144 To reduce the incidence of consumers building up unsustainable credit card debt, the Senate inquiry recommended that responsible lending obligations be tightened to ensure that affordability assessments are based on a consumer's ability to repay the full credit limit within a reasonable period.

In addition, the Senate inquiry recommended that higher minimum credit card repayments should be implemented to reduce the very long amortisation periods that occur as a result of minimum repayments being set too low.

4.145 A number of stakeholders raised concerns about increasing the level of minimum credit card repayments due to the potential for higher repayments to exclude certain consumers from accessing credit cards or to push some consumers into financial hardship.

4.146 In contrast, the Government considered that requiring credit card providers to assess affordability based on a consumer's ability to repay a credit limit within a reasonable period would ensure that consumers are capable of repaying any debt over a medium term period while continuing to allow flexibility in how consumers can use their credit card.

Consultation

4.147 The Senate Economics References Committee received 37 submissions from a range of relevant stakeholders. In addition, public hearings were held on five occasions involving regulators, consumer stakeholders and credit card providers.

4.148 The Government consulted with a number of key stakeholders throughout the policy development process. The Government received 17 written submissions on the proposals outlined in its consultation paper, Credit cards: improving consumer outcomes and enhancing competition. Further consultation was undertaken with credit card providers and consumer groups throughout the development of the legislation.

Agreed option

4.149 In the 2017-18 Budget, the Government announced it would legislate to implement the first phase of reforms outlined in the Government's response to the Senate inquiry to reduce the incidence of consumers building up excessive credit card debt and to improve competition in the market. These reforms include:

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tightening responsible lending obligations to ensure that affordability assessments are based on a consumer's ability to repay the full credit limit within a reasonable period as determined by ASIC;

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prohibiting unsolicited credit limit increase invitations;

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simplifying the calculation of credit card interest including banning the backdating of interest; and

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requiring credit card providers to provide online options for consumers to initiate a credit card contract cancellation or lower a credit limit.

4.150 A regulatory costing for the reform package has been prepared, consistent with the Government's Regulatory Burden Measurement Framework. These costs are summarised in Table 1, noting that the 2017 offsets will be found from within the Treasury portfolio.

4.151 For credit card providers, there will be implementation and ongoing costs associated with updating IT systems to provide online options for consumers to cancel credit cards and to implement the changes to the calculation of interest.

4.152 Credit card providers will also incur costs associated with developing new procedures and policies for their staff, particularly in relation to the tightening of responsible lending obligations. All credit card providers will have additional costs associated with monitoring compliance with the new regulations.

4.153 It is estimated that the increase in annual compliance costs for the industry as a whole will amount to $36.4 million.

Note: Offsets will be found for 2017-18 from the Treasury portfolio.

Implementation and evaluation

4.154 Credit card providers will be required to implement the reforms to tighten responsible lending obligations, simplify the calculation of interest and provide online options to lower a credit limit or cancel a credit card contract by 1 January 2019.

4.155 Credit card providers will be required to comply with the prohibition of unsolicited credit limit increase invitations by 1 July 2018.

4.156 The Government will amend the Credit Act to give ASIC the power to create a legislative instrument to determine the reasonable period for the responsible lending obligations. Ultimately, the final form of ASIC's instrument will be a matter for ASIC, as the independent regulator.