House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Promoting financial stability

Schedules 1 and 2 to the Bill will promote financial stability through strengthening APRAs ability to respond to developments in non-ADI lending that pose a risk to financial stability.

Date of effect: Royal Assent.

Proposal announced: Budget 2017-18.

Financial impact: No financial impact.

Human rights implications: These Schedules do not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.133 to 1.137.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

Impact: Schedules 1 and 2 to the Bill are estimated to increase the regulatory burden on non-ADI lenders by around $1.2 million per annum.

Main points:

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Financial sector stability is critically important to economic performance.

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Consistent with its mandate to promote financial stability, APRA has taken actions to reinforce sound residential mortgage lending practices by ADIs.

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However, there currently exists a regulatory gap whereby APRA has no ability to manage material financial stability risks that might arise from the lending activities of entities that are not ADIs (non-ADI lenders).

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This gap will be closed by providing APRA a reserve power to make rules in respect of the lending activities of non-ADI lenders, should these activities be materially contributing to risks of instability in the Australian financial system.

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To enable APRA to monitor the non-ADI lending sector and determine when and if to use this new power, non-ADI lenders will need to register with, and provide data to, APRA.

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Non-ADI lenders will only incur regulatory costs in registering with APRA. These costs are expected to be minimal, as little is required to register.

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Regulatory impacts of the data reporting are to be assessed by APRA when, in future, it makes the Reporting Standard required to initiate the data collection.

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Similarly, regulatory impacts of a rule made by APRA will be assessed when APRA makes that rule.

Removing restrictions on the use of the term 'bank'

Schedule 3 to the Bill will promote a reduction of barriers to new entrants to the banking sector and provide a more level playing field amongst ADIs. Further, the changes will align community expectations in respect of the use of the term 'bank' with the fact that ADIs are prudentially supervised by APRA and deposits are covered by the FCS guarantee.

Date of effect: The day after the end of the period of two months beginning on the date of Royal Assent

Proposal announced: Budget 2017-18

Financial impact: None.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.20 to 2.24.

Compliance cost impact: None.

Objects of the Banking Act

Schedule 4 to the Bill modernises the Banking Act 1959 (Banking Act) by inserting an objects provision. Similar industry Acts, the Life Insurance Act 1995 and the Insurance Act 1973 contain objects provisions which guide the reader on the main purposes of the Act.

Date of effect: Royal Assent.

Proposal announced: Budget 2017-18

Financial impact: Nil.

Human rights implications: This Schedule does not any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.14 to 3.17.

Compliance cost impact: Not applicable.

Credit card reform

Schedule 5 to the Bill amends the Credit Act to introduce a number of reforms to improve consumer outcomes under credit card contracts.

Date of effect: The amendments made by this Schedule commence as follows:

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Part 1 - 1 January 2019;

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Part 2, Division 1 - 1 July 2018;

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Part 2, Division 2 - 1 January 2019;

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Parts 3 and 4 - 1 January 2019;

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Part 5, provisions relating to credit limit increase invitations - 1 July 2018

•

Part 5, all other provisions - 1 January 2019.

Proposal announced: The measure was announced on 9 May 2017 as part of the 2017-18 Budget.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - paragraphs 4.109 to 4.129.

Compliance cost impact: $36.4 million per annum.

Summary of regulation impact statement

Regulation impact on business

Impact: Total compliance costs of $364 million, or $36.4 million per annum, across credit card providers and affected individuals over a 10 year period.

Main points:

•

The Government has been informed of the regulatory impacts of various reform options by the Senate Economics References Committee's 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

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

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Deficiencies in the current regulatory framework can mean that many consumers are not provided with sufficient protections. In addition, behavioural biases and the complexity of credit card products impede competition and contribute to consumers building up excessive credit card debt.

Chapter 1 Promoting financial stability

Outline of chapter

1.1 Schedules 1 and 2 to the Bill will promote financial stability through strengthening the APRAs ability to respond to developments in non-ADI lending that pose a risk to financial stability.

Context of amendments

1.2 Under the Banking Act 1959 (Banking Act), a body corporate that wishes to carry on 'banking business' in Australia may only do so if APRA has granted an authority to the body corporate for the purpose of carrying on that business. Once authorised by APRA, the body corporate is an ADI and is subject to APRA's prudential requirements and ongoing supervision.

1.3 There are other entities who, like ADIs, provide finance for various purposes within Australia, but are not considered to be conducting 'banking business' as they do not take deposits. Given there are no depositors to protect, these entities are not required to be licensed as ADIs and prudentially regulated by APRA. These non-ADI lenders currently only have to report data to APRA in certain circumstances.

1.4 However, the protection of depositors is only one component of APRA's regulatory responsibilities. When APRA makes Prudential Standards under the Banking Act, APRA is also expected to have regard to the stability of the Australian financial system.

1.5 Under current law, APRA has significant powers with which to address the financial stability risks posed by the lending activities of ADIs. For example, concerns in recent years about residential mortgage lending have led APRA to take specific prudential actions to reinforce sound residential mortgage lending practices by ADIs.

1.6 APRA currently has no such ability with respect to non-ADI lenders. This gap potentially undermines APRA's ability to promote financial stability, as lending practices that APRA has curtailed or prohibited for ADIs may continue to be pursued by non-ADI lenders.

1.7 To address this gap, APRA will be given a new rule making power which applies to non-ADI lenders. This new power will allow APRA to make rules relating to the provision of finance by non-ADI lenders, where APRA has identified material risks of instability in the Australian financial system exist as a consequence of their lending activities.

1.8 These powers are narrow when compared to APRA's powers over ADIs. This is an appropriate outcome, given there are no depositors to protect in non-ADI lenders. When exercising these powers, APRA will have to consider efficiency, competition, contestability and competitive neutrality consistent with section 8 of the Australian Prudential Regulation Authority Act 1998.

1.9 APRA's new power will be limited by reference to material risk to the stability of the Australian financial system. As a result, it is not expected that the powers will result in any new rules being applied to non-ADI lenders in the immediate future. Rather, through collection and analysis of data, APRA will have a far better understanding of this part of the financial sector and will be able to make rules should the materiality threshold ever be in risk of breach.

1.10 Materiality threshold means that the current size of the non-ADI lending sector is such that there could be no material risk to the stability of the Australian financial sector posed by their activities. The intention behind these amendments is to provide appropriate tools for APRA to deploy should the size of the sector change, or lending practices within the sector become a cause for concern when viewed through the lens of risk to the stability of the Australian financial system.

1.11 As an example, at the time of the global financial crisis, the non-bank lending sector in the United States represented about 20 per cent of the relevant market. It is clear that the lending practices undertaken by non-bank lenders were able to materially affect the financial stability of the United States lending market. The non-ADI lending market in Australia currently represents only around four to five per cent of the market. The size and lending practices of the non-ADI sector mean that it is unlikely their practices could result in a material risk to the stability of the Australian financial system currently.

1.12 A separate but related issue is APRA's ability to collect data from registrable corporations under FSCODA. The current definition of registrable corporation in section 7 of the FSCODA has limited APRA's ability to collect data, as corporations which engage in material lending activity are occasionally technically not required to register. This has inhibited the ability of APRA, ASIC, Treasury and the RBA to properly monitor the financial stability implications of the non-ADI lender sector.

1.13 APRA's ability to collect data from non-ADI lenders will be improved by an alteration of the definition of registrable corporations in FSCODA. The new definition will seek to capture entities who engage in material lending activity, irrespective of whether it is their primary business.

Summary of new law

1.14 A new reserve power will be provided to APRA to make rules with respect to provision of finance by non-ADI lenders, for the purpose of addressing financial stability risks. APRA will also be provided a power to issue directions to a non-ADI lender, in the case that it has contravened, or is likely to contravene, a rule. Appropriate directions powers and penalties will also be introduced for a non-ADI lender that does, or fails to do, an act that results in the contravention of a direction from APRA.

1.15 It is important to note that these powers do not equate to ongoing regulation by APRA of non-ADI lenders. APRA will not prudentially regulate and supervise non-ADI lenders as it does ADIs. APRA's power over non-ADI lenders will lie dormant until such time as the provision of finance by non-ADI lenders materially contributes to risks of financial instability.

Comparison of key features of new law and current law

Detailed explanation of new law

1.16 Schedule 1 creates new definitions in the Banking Act to clarify the application of the provisions relating to non-ADI lenders.

1.17 Non-ADI lenders are defined as a registrable corporation, for the purposes of section 7 of the FSCODA, engaged in the provision of Part IIB finance. Part IIB provision of finance (provision of finance) is a new definition which draws from the FSCODA definition of provision of finance but appropriately narrows the scope for this context. The provision of finance in this context includes the origination of loans or credit. [Schedule 1, item 2, subsections 38B(1) and (2) of the Banking Act]

1.18 This ensures that corporations which are engaged in the lending of money and origination of loans or other financing are captured by the new regime. While APRA does not have regulatory responsibility for non-ADI lenders, these changes will ensure that APRA is able to make rules relating to the lending activities of non-ADI lenders in appropriate circumstances. The role of non-ADI lenders in the mortgage and personal finance markets may in future present a risk to financial stability in these markets and enabling APRA to monitor non-ADI lending practices will enhance the overall stability of the financial system. [Schedule 1, item 1, subsection 5(1) and item 2, Part IIB, Division 1, section 38B of the Banking Act]

1.19 The Banking Act will be amended to provide APRA with powers to make rules for non-ADI lenders. The new rule making powers will extend and enhance APRA's ability to promote the stability of the financial system. These rules close a gap which may occur when APRA restricts the lending activities of ADIs, but is unable to affect the activities of non-ADI lenders. [Schedule 1, item 2, Part IIB, Division 2 of the Banking Act]

1.20 The rule making powers for non-ADI lenders include the ability to impose different requirements to be complied with by all non-ADI lenders or by a specified class of non-ADI lenders or by one or more specified non-ADI lenders. This will provide APRA with the flexibility to make rules that focus on the particular area of the non-ADI lender industry that is engaging in practices which threaten the stability of the financial system. [Schedule 1, item 2, subsections 38C(1) (2) (4) and (5) of the Banking Act]

1.21 APRA will have the ability to exercise powers and discretions under rules made by it, including but not limited to discretions to approve, impose, adjust or exclude specific requirements in relation to one or more specified non-ADI lenders. Rules made by APRA under this provision may be varied or revoked from time to time, as determined by APRA and must be made in writing. [Schedule 1, item 2, subsection 38C(6) and section 38E of the Banking Act]

1.22 Where rules apply to a class or classes of non-ADI lenders, the rules will be legislative instruments. [Schedule 1, item 2, section 38G of the Banking Act]

1.23 If APRA issues a non-ADI lender rule which covers a class or classes of non-ADI lenders, only those lenders who fall into the relevant class will be covered by the rule. Similarly, if APRA were to subsequently issue directions under section 38K of the Banking Act, those directions would only apply to the relevant individual, class or classes of non-ADI lenders covered by the original rule. If a non-ADI lender is complying with the original rule, the direction will have no application to it.

1.24 APRA must notify a non-ADI lender, as soon as practicable, regarding a non-ADI lender rule that applies to the non-ADI lender. A copy of the rule must be provided to the non-ADI lender, or to each non-ADI lender, to which the rule applies in order to ensure that the non-ADI lender is aware that it is subject to a non-ADI lender rule. [Schedule 1, item 2, section 38F of the Banking Act]

1.25 However, APRA's new rule making powers for non-ADI lenders are not intended to relate to lending matters which are properly the responsibility of ASIC, such as responsible lending obligations. APRA is required to consult with ASIC before making any non-ADI lender rules, to ensure that any such rules are targeted appropriately, cognisant of any interaction with the various regulatory regimes for which ASIC is responsible. This acknowledges the role ASIC has in regulating non-ADI lenders that hold either an Australian financial services license or a credit license as granted by ASIC. It will ensure that the work of APRA and ASIC in this area is consistent. [Schedule 1, item 2, subsection 38F(3) of the Banking Act]

1.26 A non-ADI lender rule will not be able to cover the manner in which a non-ADI lender conducts its business and activities unless there is a connection between that conduct and the provision of finance. This link will ensure that non-ADI lender rules are targeted to the provision of finance by non-ADI lenders but are not able to require a non-ADI lender to restructure or amend its business in any way unconnected to the provision of finance. This can be contrasted with the broad powers the Banking Act provides APRA with respect to ADIs. [Schedule 1, item 2, subsection 38C(3) of the Banking Act]

1.27 It is important to note the role of paragraph 7(2)(c) of the Acts Interpretation Act 1901 in the context of the new rule making powers. This paragraph provides that an amendment to an Act does not "affect any right, privilege, obligation or liability acquired, accrued or incurred under the affected Act or part". In relation to these amendments, non-ADI lender rules should not affect existing rights, for example contractual rights. However, a non-ADI lender rule will be able to require an amendment to future rights under an existing contract, if the rules are triggered by the materiality threshold. That is, if the actions of non-ADI lenders are materially contributing to risks of instability in the Australia financial system then it makes sense that APRA should have the ability to affect future actions.

1.28 Further, it is important to note that APRA will typically undertake consultation with the non-ADI industry as a normal part of its approach to rule making. This is consistent with APRA's long standing approach to regulation of ADIs. Consultation ensures that the relevant rules are appropriate and adapted to address concerns APRA may have. Consultation with industry also mitigates the risk of unintended consequences flowing from a rule.

1.29 APRA may vary or revoke a non-ADI lender rule but this must be done in writing. If a non-ADI lender rule is varied or revoked, the variation or revocation takes effect from the day the instrument is made or one a date specified in the instrument. [Schedule , item 2, section 38E of the Banking Act]

1.30 A non-ADI lender rule will be automatically revoked after two years from the date the rule is made or the day the rule is registered under the Legislation Act 2003. [Schedule 1, item 2, section 38D of the Banking Act]

1.31 Following receipt of data under the new FSCODA rules, APRA intends to analyse the sector to gain a better understanding of its practices, prior to engaging in any analysis of whether particular rules may be required in the future. This is a measured approach to these new rule making powers over a sector of the financial system APRA has previously had limited contact with.

1.32 In addition to the power to make rules with respect to non-ADI lenders, APRA may give a body corporate that is a non-ADI lender a direction if APRA has reason to believe that the non-ADI lender has contravened, or is likely to contravene, a rule made under Part IIB of the Banking Act. This directions power provides APRA with the ability to seek compliance with the whole or part of a relevant rule. [Schedule 1, item 2, section 38K of the Banking Act]

1.33 Part VI of the Banking Act will apply to decisions made by APRA in relation to individual non-ADI lenders under this new Part IIB of the Banking Act. This will provide non-ADI lenders with the ability to seek reconsideration or review of APRA decisions in the same manner ADIs can seek review or reconsideration of certain actions taken by APRA under the Banking Act. [Schedule 1, item 2, section 38H of the Banking Act ]

1.34 An offence provision will be inserted into Part IIB of the Banking Act to apply where a non-ADI lender, or an officer of a non-ADI lender does, or fails to do, an act which results in contravention of the direction given under section 38K. In the case of contravention of section 38K, penalties will apply for non-compliance. [Schedule 1, item 2, section 38L of the Banking Act]

1.35 Further consequential amendments are made to the Banking Act to ensure internal consistency upon the introduction of these new provisions. [Schedule 1, items 3 and 4, subparagraph 65A(1)(a)(i) and paragraph 65A(4)(a) of the Banking Act]

Consequential amendments

1.36 Schedule 2 provides consequential amendments to the FSCODA to ensure that it applies to non-ADI lenders, as regulated in new Part IIB of the Banking Act. These amendments include updates to the definition of registrable corporations which widens the class of corporations which must be registered under the FSCODA. By widening the class of corporations FSCODA applies to, these amendments will ensure that non-ADI lenders are included for the purposes of registering under the FSCODA, which will enable collection of information relevant to the exercise of APRA's new powers under Part IIB of the Banking Act. [Schedule 2, items 1 and 2, subsection 7(1) and paragraphs 7(1)(a), (b) and (c) of the Financial Sector (Collection of Data) Act 2001]

1.37 The intention behind widening the class of entities to which the FSCODA applies is to provide APRA with information on which it can make decisions about non-ADI lenders. However, in so far as the relevant information is provided to other government regulators or agencies, it is not intended that the form of information be substantially altered for that information to be provided to APRA under FSCODA.

1.38 This acknowledges that the intention is transparency and visibility of the information, and not to increase the compliance burden on the non-ADI sector. Further, the class of registrable corporations continues to be limited to those who carry on business activities in Australia. [Schedule 2, item 2, paragraph 7(1)(a) of the Financial Sector (Collection of Data) Act 2001]

1.39 In addition, APRA will have a power to make a determination in writing to specify a corporation, or a class of corporations, for the purposes of the FSCODA. Such a determination will enable any corporations which are not captured by the widening of the class of registrable corporations in section 7 of the FSCODA to be specified by APRA. Full coverage of the non-ADI lender market is the intended consequence of these amendments. [Schedule 2, item 3, subsection 7(1A) of the Financial Sector (Collection of Data) Act 2001]

1.40 Where such determinations apply to a class or classes of corporations, the determinations will be legislative instruments. [Schedule 2, item 3, subsection 7(1C) of the Financial Sector (Collection of Data) Act 2001]

1.41 However, where the determination applies only to a particular corporation rather than a class of corporations (or classes thereof), the determination is not a legislative instrument for the purposes of the Legislation Act 2003. Subsection 7(1B) is included to provide clarity as to which type of determination will be a legislative instrument. [Schedule 2, item 3, subsection 7(1B) of the Financial Sector (Collection of Data) Act 2001]

1.42 Certain classes of corporation are excluded from the definition of registrable corporations under the FSCODA. As a result of these changes to the Banking Act and FSCODA, a further class of entities will be specifically excluded from being characterised as registrable corporations.

1.43 In particular, new subsection 7(2A) will clarify that where a corporation has assets, consisting of debts due as a result of the provision of finance, and principal amounts outstanding on loans or other financing, which do not exceed $50,000,000 or any greater or lesser amount as prescribed by regulations, such a corporation is not a registrable corporation for the purposes of the FSCODA. This provision is designed to ensure that corporations with a stock of debt on their books, and a flow of debt through their books, which does not exceed $50,000,000, will not be registrable corporations for the purposes of the FSCODA. [Schedule 2, item 6, subsection 7(2A) of the Financial Sector (Collection of Data) Act 2001]

1.44 The calculation of the value of loans or other financing is to be done on a financial year basis. So in determining whether a corporation is a registrable corporation, if that corporation had less than $50,000,000 in loans outstanding on 30 June in the relevant year and less than $50,000,000 in assets consisting of debts due to the corporation as a result of transactions entered into in the course of provision of finance, that corporation is not a registrable corporation for the purposes of the FSCODA. [Schedule 2, item 6, subsection 7(2C) of the Financial Sector (Collection of Data) Act 2001]

1.45 In addition to the specified classes of corporations which are not included as registrable corporations by operation of subsection 7(2A) of the FSCODA, APRA is provided with a power to make determinations specifying a class or classes of corporations. Such determinations are legislative instruments for the purposes of the Legislation Act 2003. However, subsection 7(2G) clarifies that a determination applying to a specific corporation or corporations will not be a legislative instrument. [Schedule 2, item 6, subsections 7(2F), (2G) and (2H) of the Financial Sector (Collection of Data) Act 2001]

1.46 As soon as practicable after making the determination with respect to class or classes of corporations, APRA must give a copy of the determination to each corporation nominated in the determination. [Schedule 2, item 6, subsection 7(2J) of the Financial Sector (Collection of Data) Act 2001]

1.47 Section 31 of the FSCODA will be amended to provide that a determination by APRA not to include an organisation taken under paragraphs 7(1A)(a) and 7(2F)(a) (which are not legislative instruments) are reviewable decisions. [Schedule 2, item 8, section 31 of the Financial Sector (Collection of Data) Act 2001]

1.48 Section 32 of the FSCODA will be updated to reflect the definition of provision of finance to clarify that it includes the carrying out of activities, whether directly or indirectly, that result in the funding or originating of loans or other financing. This addition ensures internal consistency within the FSCODA and carries through the concept of provision of finance which is central to the definition of non-ADI lender. Additionally, it is intended to capture corporations that provide finance indirectly, such as through interposed corporations or trusts. [Schedule 2, item 9, paragraph 32(1)(aa) of the Financial Sector (Collection of Data) Act 2001]

1.49 The provision of finance for the sole purpose of intra-group activities between related corporations has been specifically excluded from the definition of provision of finance. The intention is to specifically exclude corporations that provide finance via intra-group activities in amounts which otherwise render the corporation as a registrable corporation under the FSCODA. [Schedule 2, item 10, paragraph 32(1A) (b) of the Financial Sector (Collection of Data) Act 2001]

1.50 Similarly, the provision of financial advice is specifically excluded from the operation of the new provisions. It is not intended that entities whose activities are limited to the provision of financial advice would be covered by the non-ADI lender regime. [Schedule 2, item 10, paragraph 32(1A) (a) of the Financial Sector (Collection of Data) Act 2001]

1.51 Other consequential amendments have been made to the FSCODA to ensure consistency with these amendments. [Schedule 2, items 4, 5, and 7 paragraphs 7(2)(h), 7(2)(i) and subsection 7(3) of the Financial Sector (Collection of Data) Act 2001]

Application and transitional provisions

1.52 The provisions of these Schedules apply from the date of Royal Assent.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Promoting financial stability

1.53 These Schedules are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.54 Schedules 1 and 2 to the Bill amend the Banking Act to provide the APRA with the ability to issue rules and directions to lenders that are non-ADI lenders where those institutions provide finance (as defined in Part IIB of the Banking Act) and that activity or those activities materially contributes to risks of instability in the Australian financial system.

1.55 The rules and directions do not impact on individuals but corporations.

Human rights implications

1.56 These Schedules does not engage any of the applicable rights or freedoms.

Conclusion

1.57 These Schedules are compatible with human rights as it does not raise any human rights issues.

Regulation Impact Statement

Background

Authorised deposit-taking institutions

1.58 Under section 9 of the Banking Act, a body corporate that wishes to carry on 'banking business' in Australia may only do so if APRA has granted an authority to the body corporate for the purpose of carrying on that business. Banking business is ordinarily understood to mean the mixture of deposit taking and lending. Once authorised by APRA to undertake banking business, the body corporate is an ADI and is subject to APRA's prudential requirements and ongoing supervision.

Non-ADI lenders

1.59 There are other entities that engage in lending activities, but remain outside the APRA regulated population of ADIs. These entities include RFCs, securitisers and managed investment funds. Typically, these entities do not take deposits, and hence are excluded or exempted from the definition of banking business^[1]. Collectively, these entities, when they engage in lending or the provision of finance, can be termed non-ADI lenders.

1.60 RFCs include certain finance companies and MMCs. Finance companies typically provided finance for household purchases, while MMCs act like investment banks, primarily providing commercial loans and trading securities.

1.61 Securitisers (or wholesale funders) often originate loans, but unlike ADIs, do not fund these loans by taking deposits. Rather, their funding comes by pooling these loans into securities, which are then sold to capital market investors.

1.62 Managed investment funds refer to a wide range of investment funds where investors contribute money which is then pooled and invested. Investors are compensated with a share of the return on the investment. In some cases, this investment may be used to make some form of lending.

Regulation of non-ADI lenders

1.63 Non-ADI lenders are primarily regulated by ASIC, in respect of conduct, disclosure and accountability. The aim of this regulation is to ensure that financial markets are sound, orderly and transparent, users are treated fairly and markets are free from misleading, manipulative or abusive conduct.

1.64 Non-ADI lenders, as issuers of financial products and services, are required to have an AFS Licence granted by ASIC under the Corporations Act 2001. AFS Licenses primarily impose obligations relating to conduct and disclosure. Non-ADI lenders engaged in the provision of consumer (that is, not business) credit need to obtain a Credit Licence granted by ASIC under the Credit Act. Credit Licences oblige non-ADI lenders to ensure that a credit contract is 'not unsuitable' for the customer.

1.65 Only certain RFCs have a regulatory relationship with APRA. Currently, these RFCs are required to register with APRA under FSCODA and report data to APRA in certain circumstances. RFCs which are directly exempted from the from the operation of the Banking Act under the Banking Exemption No. 1 of 2015 are required to meet a number of conditions to qualify for the exemption. APRA has no supervisory role in respect of non-ADI lenders.

1.66 APRA may also have an indirect influence on non-ADI lenders via its regulation of ADIs. Many non-ADI lenders fund their businesses through commercial relationships with ADIs. This indirect influence is most notable when APRA imposes rules on the role of ADIs in securitisation structures, which are key to the business models of many non-ADI lenders (see for instance, APRA prudential standard APS 120 Securitisation).

Size of the non-ADI lending sector

1.67 As of late 2016, the total assets of non-ADI lenders were around $450 billion or 6 per cent of total financial system assets^[2]. While non-ADI lenders are currently small as a share of financial system assets, there are estimated to be a large number of non-ADI lenders operating in Australia. Based on data on managed investments schemes, Credit and AFS Licence holders and RFCs, there may be up to 1,500 entities that could be considered to be non-ADI lenders^[3].

Policy problem

1.68 Financial stability is very important to economic performance and the wellbeing of Australian households and businesses.

1.69 Consistent with its mandate to promote stability in the Australian financial system, APRA has put in place prudential measures to reinforce sound residential mortgage lending practices by ADIs. In December 2014 and March 2017, APRA wrote to ADIs outlining a range of measures to improve lending standards. These measures included, for example, a requirement that ADIs keep investor lending growth under 10 per cent per annum. APRA, to date, has enforced these measures through its supervisory practices.

1.70 The primary purpose of these measures is to address the risks that are posed to financial stability by the build-up of household debt, the serviceability (that is the borrower's capacity to repay the loan) of which is exposed to changes in conditions. For example, if the economic environment changed to one of rising interest rates or unemployment, this would materially impact the serviceability of household debt.

1.71 The community is better placed to absorb adverse changes to the economic environment if credit is prudently originated in 'good times' (environments of increasing asset prices, near full employment and low interest rates). Prudent credit origination practices mean the community benefits from a 'buffer', the ability for households to absorb the impact of a more adverse environment without going into default. This buffer lessens the risk of credit and asset 'bubbles' bursting, leading to significant adverse economic outcomes.

1.72 Whilst credit origination practices - whether from ADIs or non-ADI lenders - can contribute to risks to financial stability, there are important differences between the source of funds between an ADI and a non-ADI lender. ADIs fund much of their lending activities via retail deposits, a source of funds which is appropriately highly protected. Non-ADI lenders, on the other hand, fund much of their activity through wholesale or international investors^[4]. As a result, the diversity and sophistication of the sources of funds upon which non-ADI lenders rely contributes to financial sector stability.

1.73 However, international experience has demonstrated that, in certain circumstances, non-ADI lenders can materially contribute to financial stability risks. For instance, the RBA has pointed to the role of the shadow banking sector in the global financial crisis, stating that:

"(Shadow banking) intermediation can support economic activity by providing additional funding sources for the economy, including for riskier market segments that may find it relatively difficult to access bank funding.

However, these activities can pose risks to financial stability, which became clear during the global financial crisis. In a number of countries, a range of incentive problems in securitisation and structured finance markets undermined lending standards and asset quality. A general lack of transparency concealed an associated build-up in leverage and maturity mismatch, and the extent of linkages back to the banking system. When asset quality problems materialised, investors withdrew or tightened the conditions on short-term funding. This prompted financial difficulties in investment vehicles such as money market funds (MMFs) and led to some destabilising asset 'fire sales'. In the aftermath, credit intermediation in many countries was significantly curtailed, both through the shadow banking system and the banking system given various interlinkages."^[5]

1.74 Given the macroprudential measures that apply to ADIs, non-ADI lenders could be currently benefitting from a 'spill over effect', whereby lending that can no longer be done by ADIs is possibly being done by (that is, spilling over to) non-ADI lenders. While the Government is of the view that the activities of non-ADI lenders are not currently contributing to risks to financial stability in any material way given their small share of the sector, this possible spill over does increase the potential for the non-ADI sector to contribute to these risks in the future.

1.75 Moreover, this highlights that a regulatory gap exists - APRA and ASIC currently have limited ability to address any potential risk posed to financial stability which may emerge as a consequence of the credit origination practices of the non-ADI lending sector. ASIC is the primary regulator of non-ADI lenders, but it does not have a financial stability mandate. While APRA has the appropriate mandate (financial stability), it has little direct influence over non-ADI lenders (that are RFCs) and only a limited indirect influence in respect of other non-ADI lenders.

The need for government action

1.76 While the Government could make non-ADI lenders aware that they were contributing to risks (if that were the case) and request that they self-regulate to remove these risks in the absence of the enforcement mechanism non-ADI lenders would have limited incentive to do so. Moreover, given the number of non-ADI lenders and the fragmented nature of the sector, there is currently no single industry body that could coordinate voluntary compliance across all non-ADI lenders.

1.77 As self-regulation is unlikely to be a viable option, and given the potential implications of allowing risks to financial stability to go unmitigated, government intervention is necessary to close the regulatory gap. In Australia, responsibility for financial regulation is shared between three independent regulators - ASIC, APRA and the RBA. Any government intervention in respect of financial regulation should therefore be achieved by empowering the appropriate regulator to take action.

1.78 As outlined above, APRA's mandate explicitly includes the promotion of stability in the Australian financial system and it has the necessary supervisory capability to monitor the non-ADI sector. Accordingly, empowering APRA to address these risks (when needed) is likely to ensure the desired outcomes. APRA will be able to influence credit origination practices consistently across the industry (recognising the legitimate differences between ADIs and non-ADI lenders) and will be appropriately accountable for achieving these outcomes. This will be ensured through a range of mechanisms, including Parliament and via the Government's Statement of Expectations for APRA. Before APRA can exercise any of its powers, it is required to weigh up the effects of competition and competitive neutrality.

Policy options

1.79 The Government announced in the 2017-18 Budget that it would act to ensure APRA is able to respond flexibly to financial and housing market developments that pose a risk to financial stability, by providing APRA with new powers in respect of the provision of credit by non-ADI lenders, to complement APRA's existing powers to address financial stability risks posed by the activities of ADIs. The Government also announced that it would enable APRA to collect data from these entities for the purposes of monitoring risks in the non-ADI lending sector so as to determine when to use its new powers.

1.80 Consistent with the Budget announcement, the Government's preferred option is to provide APRA with a new rulemaking power in respect of the provision of finance activities of non-ADI lenders and allow APRA to collect data from these entities (Option 1). Under this option, when APRA identifies material risks to financial stability emerging from the sector, APRA would be able to make rules that would apply to non-ADI lenders to address those risks. Compliance with a rule would be ensured through an enforcement regime. This would involve providing a directions power to APRA and instituting appropriate penalties for continued non-compliance.

1.81 An option also considered by the Government was to maintain the status quo, and require APRA to manage the financial stability risks stemming from the activities of non-ADI lenders using its current powers and functions (Option 2). This option would likely involve APRA writing to non-ADI lenders requesting a change in their lending activities, in order to mitigate financial stability risks. The Government rejected this option on the grounds that it would not address the policy problem identified, as non-ADI lenders would have no incentive to comply with any request from APRA, leaving a gap in APRA's powers should non-ADI lending practices pose a material risk to Australia's financial stability.

1.82 An alternative approach identified is to expand APRA's regulatory remit by requiring non-ADI lenders to be authorised by APRA, thereby subjecting them to the full range of APRA's prudential and other requirements (Option 3). This approach would result in an increase in regulation that would be disproportionate to the policy problem that it would solve. It would impose significant costs on non-ADI lenders (potentially putting many of them out of business) and would materially alter that nature of APRA's regulated population, blurring the lines between ASIC and APRA.

1.83 These options are further described, and their costs and benefits (including regulatory costs) analysed, below.

Costs and benefits

Option 1 - Provide APRA with monitoring and rulemaking powers

Description

1.84 This option involves amending the Banking Act to provide APRA with a power to make rules that would apply to the provision of finance by non-ADI lenders, should it become apparent that these activities are materially contributing to risks of financial instability. The determination of what constitutes 'materially contributing' in this context is to be an independent judgement of APRA. However, APRA would likely take the following indicative factors into account when making this judgement:

1.85 The size of the non-ADI lending sector. The sector's share of the financial system is a relevant consideration, noting that the more significant the share, the greater the likelihood that the activities of non-ADI lenders may have material impacts on the financial system.

1.86 The nature of activities undertaken by non-ADI lenders. This includes the types of lending undertaken by non-ADI lenders and in particular, whether the specific activities of non-ADI lenders are contributing to risks in a way that is disproportionate to their size.

1.87 The impact of non-ADI lending practices on the ADI sector. APRA will likely consider whether the lending activities of non-ADI lenders are influencing the lending behaviour of ADIs, where such influence is both material to financial sector stability and is not able to be addressed by APRA via its supervisory tools that apply to ADIs.

1.88 The rules would be made enforceable by providing APRA a directions power and instituting appropriate penalties for non-compliance. In the first instance, APRA would able to direct entities to comply with a rule. Any subsequent non-compliance may then be met by further APRA directions or appropriate monetary penalties, as determined necessary by APRA.

1.89 The rules would also be scalable. APRA would be able to target a non-ADI lender rule to all non-ADI lenders or a subclass of the broader population of non-ADI lenders, as needed, to be determined based type of lending activities that were contributing to risks and the size of the contribution of these risks by an individual non-ADI lender. Furthermore, the rules would be only issued for a set period, reflecting the fact that the rules would only be temporary measures introduced by APRA to address a specific source of risks (a specific lending activity) when such risks arise.

1.90 In support of the regime, FSCODA would be amended to define a class of entities that would determine the non-ADI lender population^[6] and enable APRA to collect data from non-ADI lenders for the purposes of monitoring these entities and determining when to issue a non-ADI lender rule.

1.91 It is important to note that this option provides a framework for APRA to make rules should it choose to do so, but it does not necessitate a rule being made. The only immediate implication of the option, if implemented, is registration. That is, non-ADI lenders that meet the appropriate criteria will need to register with APRA, which will carry with it a minor compliance cost (see Regulatory Costs below).

Cost-benefit analysis

1.92 This option would close the regulatory gap by providing APRA a highly targeted tool with which to monitor and manage financial stability risks across the sector, should they emerge. The primary benefit of this is the lower potential risk of a systemic financial crisis in Australia, and hence the losses caused by such an event. An additional benefit of this option is that it does not materially alter the current regulatory architecture; that is, it does not alter APRA's mandate and breach ASIC's area of responsibility. Rather, it would merely complement APRA's existing powers in respect of ADIs.

1.93 Further, this approach suits the nature of the policy problem - which is more likely to be temporary, rather than permanent. This suggests that regulation that can be deployed only when needed and for as long as necessary is more appropriate than ongoing regulation. This appropriately reflects the Government's view that non-ADI lenders are not currently materially contributing to risks of instability in Australia's financial system.

1.94 The main cost of this option is that which is incurred to a non-ADI lender's business as a result of complying with a non-ADI lender rule ('business costs'). Business costs are an opportunity cost - that is, profit forgone by a non-ADI lender as the result of compliance with a rule. Part of this profit may be conferred on non-ADI lenders as a result of the 'spill over effect' outlined above. This profit is therefore the result of inconsistent regulation across entities (both ADIs and non-ADI lenders) engaging in the same activities. Accordingly, should the situation arise where a rule is made for non-ADI lenders in respect of these activities, it would simply correct this market distortion.

1.95 A minor cost involved in this option is a result of increased resourcing for APRA. As announced in the Budget, APRA will be provided with $2.6 million over four years to conduct the regime, commencing in 2017-18. Consistent with the principle that entities that create the need for regulation pay for that regulation, $1.9 million of this is to be cost-recovered via an increase the Financial Institutions Supervisory Levies, beginning in 2018-19.

Regulatory costs

1.96 Under this option, non-ADI lenders will incur regulatory costs in the case that they comply with a non-ADI lender rule issued by APRA. However, as this option merely provides APRA the framework to make rules, and does not require APRA to issue a rule at any point in time, regulatory costs of this type will not be incurred upon provision of this power to APRA. Should APRA decide to make a rule in future, it is expected that APRA will follow standard RIS practices and consult with industry, prior to making any rule.

1.97 Similarly, while this option enables APRA to collect data from all non-ADI lenders, it does not impose any immediate requirements to provide data and therefore does not impose any related regulatory costs. APRA will need to issue a Reporting Standard (outlining the data required and how and when it is to be provided) before non-ADI lenders are required to provide such data. In making a Reporting Standard, APRA will need to go through its regular processes, including a consultation with industry and an assessment of regulatory costs through a RIS-like process.

1.98 This said, non-ADI lenders will incur some small immediate regulatory costs. To enable data collection and to define non-ADI lenders as a class of entities, the definition of 'registerable corporations' in section 7 of FSCODA is to be broadened to capture all relevant non-ADI lenders (possibly up to 1,500 entities in total). For these entities, there will be a one-off administrative cost incurred in registering with APRA. However, this will be minimal. Little is required to register; a non-ADI lender must provide the registration form and its latest financial statements to APRA (and potentially, further liaise with APRA as needed).

1.99 Aside from the above, this option will not impose any other regulatory costs on individuals, community organisations or any other businesses. Total average annual regulatory costs for this option are outlined in the table below.

Option 2 - Maintain the status quo

Description

1.100 Under this option, there would be no change to nature and extent of regulation currently imposed on non-ADI lenders. In this context, should APRA wish to attempt to mitigate financial stability risks posed by the lending activities of non-ADI lenders, APRA could write to such entities requesting the change in the behaviour that APRA deems necessary to meet this goal. However, this would not be backed by any enforcement mechanism and accordingly, non-ADI lenders would have little incentive to comply with any request made by APRA.

Cost-benefit analysis

1.101 This option would not require any increase in regulation, and therefore the benefit of this option is that the costs involved would be negligible. No increase in APRA resourcing would be required - and therefore no costs would be incurred by the Government or industry. Further, non-ADI lenders would not incur any data provision costs, and would be unlikely to incur any business costs unless they chose to comply with a request from APRA (in which case, such costs would be incurred voluntarily).

1.102 However, this option is unlikely to address the core policy problem, and accordingly the potential costs of this option are significant. As non-ADI lenders would be unlikely to comply with a request made by APRA, there is little chance that the extreme negative affects posed by allowing risk to financial instability (a financial crisis) could be avoided, should these risks arise.

Regulatory costs

1.103 Another key benefit of this option is that non-ADIs would not be subject to any further statutory regulation and therefore would likely avoid any additional regulatory (compliance, administrative or other) costs. As with business costs under this option, any such regulatory costs would only be incurred voluntarily under this option - that is, should a non-ADI lender receive a written request from APRA and then choose to comply with this request.

1.104 This option will therefore not impose any regulatory costs on individuals, community organisations or any other businesses. Total average annual regulatory costs for this option are outlined in the table below.

Option 3 - Require non-ADI lenders to be authorised by APRA

Description

1.105 A third option would be to require non-ADI lenders to become authorised as ADIs under the Banking Act. Once authorised, these non-ADI lenders would be subject to rigorous and close supervision by APRA. They would be required to comply with a range of requirements contained in Prudential Standards and provide comprehensive data to APRA under Reporting Standards. This option would require significant changes to relevant legislation (primarily the Banking Act), alter APRA's processes and increase APRA's resourcing needs.

1.106 It is assumed that under this option, APRA would only authorise the largest non-ADI lenders (of which it is currently estimated that there would be fifteen), reflecting an assumption that these non-ADI lenders would be the most likely to be able to materially contribute to risks of financial instability. This would avoid the need for APRA to have to regulate a large number of small non-ADI lenders who would be unlikely to pose a risk to financial stability. These smaller non-ADI lenders would however still need to register with APRA, so that APRA could monitor the sector and determine if and when to authorise other non-ADI lenders.

Costs-benefit analysis

1.107 This option would close the regulatory gap by allowing APRA to institute measures to address risks to financial stability posed by the activities of larger non-ADI lenders, in the same way that APRA has done for ADIs - that is, via a written request backed by enforcement through its supervisory functions - where needed. Accordingly, this option would address the core policy problem as APRA would be able to act to stop risks developing, thereby avoiding the potential negative impacts of these risks. This could also lead to greater transparency in the activities of non-ADI lenders and would likely increase the relative stability of the whole of the sector.

1.108 However, this option goes beyond simply addressing the policy problem. It would materially alter the current regulatory architecture, where there has not been demonstrated a need to do so. This is, it would bring non-ADI lenders under the full degree of APRA regulation and supervision, despite non-ADI lenders being otherwise mostly distinct from ADIs. Accordingly, this option would broaden APRA's role as a prudential regulator, and may blur the lines between ASIC and APRA.

1.109 This form of regulation would also be ongoing. This would impose broader regulatory costs than needed to achieve the benefits sought, given that the Government's view is that the activities of non-ADI lenders are not currently posing material risks to financial stability, albeit such risks could arise in the future.

1.110 This option would also have significant costs. Most significantly, a requirement to be authorised as an ADI would impose large business costs on any authorised non-ADI lender. For example, these entities may have to raise or set aside capital to meet capital requirements, or may find their activities constrained and accordingly incur the resulting loss of revenue or profit.

1.111 Further, non-ADI lenders do not take deposits and therefore prudential supervision of their activities does not result in the same benefits for the community. This could lead to higher prices for consumers (for example, if these non-ADI lenders increased loan rates in response to higher capital and compliance costs). It would most likely reduce the size of the sector which provides a competitive balance to the large ADIs.

1.112 Lastly, APRA would also require greater resourcing in order to undertake these functions in respect of these non-ADI lenders. This would impose significant costs on Government, or should these costs be cost-recovered, on industry.

Regulatory costs

1.113 Under this option, the regulatory burden on authorised non-ADI lenders that would be authorised by APRA would significantly increase, leading to large regulatory costs. These non-ADI lenders would incur significant one-off compliance costs (for example, updating their processes, computer systems and internal and external documentation) and large ongoing administrative costs (for example, making, keeping and providing records and notifying APRA of their activities).

1.114 These non-ADI lenders would incur these costs from the first day of implementation of this option and, while they may vary by size of the entity, feedback has indicated that there is a baseline level of cost incurred by all ADIs as a result of being authorised^[7], which implies the same would be true for non-ADI lenders. The remaining non-ADI lenders would need to register with APRA, to allow APRA to monitor these entities. This would impose regulatory costs on these entities - of the nature and magnitude described in Option 1.

1.115 Apart from the above, this option is unlikely to impose additional regulatory costs for individuals, community organisations or any other businesses. Total average annual regulatory costs for this option are outlined in the table below.

Consultation

1.116 Draft legislation to implement the Government's preferred option that was announced in the 2017-18 Budget (Option 1) was exposed for a four week period of public consultation that commenced 17 July 2017 and concluded 14 August 2017 (a one week extension was also granted to a number of submitters at their request). During the consultation period and immediately after it, Treasury and APRA met with a number of non-ADI lenders, industry representatives and their advisers, to hear their feedback and discuss ways to improve the draft legislation.

1.117 In addition to seeking general feedback, Treasury and APRA, in their meetings with stakeholders, sought to determine whether the legislation achieved its purpose while minimising the associated regulatory burden. Further, specific feedback was also sought as to whether the definitions used to determine the class of entities that would be required to register and report data to APRA, and with respect to whom a rule could be made, were calibrated correctly.

1.118 Twenty-two submissions were received to the consultation, twenty of which were public and two confidential. Submitters included a number of non-ADI lenders and industry bodies, law firms, ADIs and consulting companies, among others. The majority of public submissions generally supported the data collection component of the measure, but raised concerns with the nature of the rulemaking and directions powers to be given by APRA. This was generally the same stance taken by industry in their meetings with Treasury and APRA. Three submissions supported the measure in its entirety.

•

The primary concerns raised by submitters included:

•

The draft legislation did not reflect the 'reserve power' intent of Government, as there was insufficient limitation on how and when APRA may use the power. Stakeholders advised this was causing concern for their investors and could put their funding at risk.

•

The class of entities which may be subject to rules was too broad. Stakeholders requested that only the entity engaged in the ultimate act of lending (the origination of the loan or financing) should potentially be subject to a rule, and that other entities that handle the same dollar of financing should not be caught.

•

The directions power was not appropriately limited in scope to the breach of the rule itself. Stakeholders were concerned that APRA could issue a direction totally unrelated to the specific lending activity contributing to the risks and that such a direction could take the form of an instruction to cease lending (effectively putting a non-ADI lender out of business).

•

The class of entities which may be required to register and report data was too broad.

1.119 Significant support was, in effect, expressed for Option 2, as many submitters and most stakeholders that met with Treasury and APRA felt that there was no need for the Government to act. Option 3 was not explicitly consulted on given significant consultation undertaken as part of previous Financial System Inquiries in 1997 and 2014), both of which determined that there was no need to prudentially regulate non-ADI lenders (that is, authorise non-ADI lenders in the same way as ADIs)^[8].

1.120 While not explicitly consulted on, Option 3 did however form part of Treasury and APRA's consultation discussions with industry. Industry expressed a strong view that APRA should not be given any power or ability to prudentially regulate non-ADI lenders. Industry requested that any implication that APRA would be able to do so be removed from the draft legislation and that it be made clear in the associated explanatory material, that the powers given to APRA over non-ADI lenders would be in no way prudential.

Preferred option

1.121 Consistent with the Budget announcement, the Government's preferred option remains to provide APRA with a rulemaking power over non-ADI lenders (Option 1). This option would close the regulatory gap and allow APRA to manage material financial stability risks in a consistent way across the entire sector (if and when such risks arise). Further, this option would not impose ongoing regulation - reflecting the Government's view that non-ADI lenders are not currently materially contributing to risks, and that regulatory intervention would only be required when such risks emerge. Lastly, this option would impose small regulatory (and other) costs on non-ADI lenders, government and APRA.

1.122 Maintaining the status quo (Option 2), which would see APRA attempt to address the policy problem through its current powers, would have advantages in that it would not require legislative or regulatory change and would so impose no additional regulatory costs. However, in the absence of a method of enforcement, any action taken by APRA to mitigate financial stability risks posed by the activities of non-ADI lenders would likely fail, as non-ADI lenders would have no incentive to comply with such an action if taken by APRA.

1.123 Requiring non-ADI lenders to be authorised as ADIs (Option 3) would address the policy problem by subjecting non-ADI lenders to the full scope of APRA's prudential and other regulation, giving APRA a significant toolkit with which to act on risks, should it see a need to do so. However, this option would fundamentally alter the current regulatory architecture, and moreover, there has not been demonstrated a need to subject non-ADI lenders to this degree of regulation. This option would also result in non-ADI lenders incurring significant costs, both in terms of business and regulatory costs, which may put some non-ADI lenders out of business and raise prices for consumers.

1.124 While the Government's preferred option remains Option 1, a number of changes were made to the legislation to implement this option to address the concerns of stakeholders raised during the consultation, while still achieving the Government's policy objective.

1.125 This included clarifying:

•

the 'reserve power' nature of the proposal by narrowing the circumstances in which APRA may use the rulemaking power (for example, by restricting APRA such that it can only make rules in respect of the specific lending or financing activity that is contributing to the risks identified);

•

the class of entities that may be subject to the rule - so that only the originator of the loan or financing, and not any other entity which may handle the same dollar of lending or financing, is potentially the subject to a rule;

•

the directions power to ensure directions can only be issued in respect of the particular activity that is the subject of a rule and remove APRA's ability to direct a non-ADI lender to cease lending; and

•

the Explanatory Memorandum's description of the 'reserve power' purpose of the rulemaking power - this included making clear that the power is only to be use in exceptional circumstances - that is, when the activities of non-ADI lenders are materially contributing to risks of instability in the Australian financial system.

1.126 No significant changes were made to the data collection component of the draft legislation as stakeholders had indicated they were broadly comfortable with this element during consultation meetings. Further, the legislation will provide APRA the flexibility to make adjustments to the class of entities that must report data, and APRA will be able to adjust the way that data is reported through its Reporting Standards. Concerns about the breadth and nature of reporting will therefore be dealt with by APRA following practical experience with the new definitions.

1.127 The changes made explicitly addressed the main concerns raised during the consultation and were developed with significant input from key stakeholders. In Treasury and APRA's meetings with industry, stakeholders expressed a reasonable degree of satisfaction that the proposed changes adequately address their concerns and appropriately balance the regulatory burden with the Government's desired outcomes.

1.128 In relation to the minor regulatory costs involved in this option, a regulatory offset has not been identified. However, Treasury is seeking to pursue net reductions in compliance costs and will work with affected stakeholders and across Government to identify regulatory burden reductions where appropriate.

Implementation and evaluation

Implementation

1.129 As outlined above, legislation is required to give effect to the Government's preferred option (Option 1). The option commences upon passage of the legislation and Royal Assent. However, while APRA would be able to make rules immediately, it is not envisaged it will do so. Non-ADI lenders will need to register with APRA first and APRA will then need to begin collecting data.

1.130 Only once APRA has this data could it make the assessment as to whether or not non-ADI lenders were materially contributing to risks of financial instability and therefore whether it was necessary to make a rule (see Costs and benefits - Option 1 above, for a description of what is meant by 'materially contribute'). While this information is yet unavailable, the view of the Government is that APRA would be unlikely to need to make a rule given the current size and nature of activities in the sector.

1.131 Accordingly, the only immediate impact for non-ADI lenders is the need to register. From Royal Assent, non-ADI lenders that are not currently registered as RFCs will need to begin to register with APRA. Some RFCs that are already registered may no longer be required to register (given increased monetary thresholds for determining the need to register) and may consequently be required to de-register. Importantly, APRA will provide a transitional period for entities to register, before commencing the Reporting Standards process that will enable the data to be collected.

1.132 Once non-ADI lenders are registered, APRA will begin the process of making the necessary Reporting Standard. As part of this process, APRA will consult with industry to ensure that data provision requirements for non-ADI lenders are consistent with those already imposed by the Australian Bureau of Statistics and RBA, thereby minimising any associated regulatory costs. This is usually a two-phase process where industry is consulted twice as part of APRA making the Reporting Standard and associated reporting forms.

1.133 Once the Reporting Standard is made, non-ADI lenders will begin provision of data to APRA. To make a rule, APRA will need to form the view that a specific lending activity (or activities) of non-ADI lenders are materially contributing to risks of instability in the Australian financial system. This is a relatively high bar and should be consistent with the Government's expectations as set out in the explanatory materials. In making a rule, APRA will, in all but extreme time-critical circumstances, consult with industry on the content of the rule and its impacts (including regulatory costs).

Evaluation

1.134 Evaluation of the policy will occur through three primary channels: assessment by APRA and the Council of Financial Regulators (a coordination body for financial sector regulatory policy, consisting of Treasury, RBA, ASIC and APRA, and chaired by the Governor of the RBA), feedback from non-ADI lenders (in general and to various consultations), and through Parliamentary processes.

1.135 Success of the registration process will be determined by APRA based on ASIC's data on AFS and Credit Licence holders. Given this information, APRA will be able to determine whether any entities that should be registered aren't. An assessment will also be made by APRA as to whether the implementation of the policy corrects current defects with FSCODA which means some entities that should be RFCs are currently unregistered. Industry feedback during the registration process will also be valuable in determining its success. As noted earlier, APRA will have the ability to correct issues with registration, through a discretionary power to expand or narrow the class of entities, as it deems appropriate.

1.136 The success of the data collection will be evaluated based on the usefulness of the data, whether it meets expectations and reflects current proxies. It will also be evaluated on whether the data collection process adequately minimises regulatory costs for stakeholders. The primary methods for determining this will be consultation that will occur with industry as part of making the necessary Reporting Standard prior to data being collected, and industry feedback to APRA and to the Government during, and post, the initial data collection processes.

In making a rule, APRA will endeavour to consult with industry (in all but extreme circumstances). Should one be implemented, the adequacy of the rule may be determined by Parliament, as certain rules may be legislative instruments. The success of a rule should be measured on whether it the rule reduces risks to financial stability, and this will be gauged from the data collected by APRA (hence why this is an important component on the measure). Oversight of the need for a rule will be provided by the Council of Financial Regulators.

Chapter 2 Removing restrictions on the use of the term 'bank'

Outline of chapter

2.1 Schedule 3 to the Bill will result in a reduction of barriers to new entrants to the banking sector and provide a more level playing field amongst ADIs. Further, the changes will align community expectations in respect of the use of the term 'bank' with the fact that ADIs are prudentially supervised by APRA and deposits are covered by the FCS guarantee.

Context of amendments

2.2 These amendments are being made in the context of several initiatives to improve the banking sector in Australia. The restriction on the use of the term 'bank' was noted in the 2016 House of Representatives Standing Committee on Economics Review of the Four Major Banks (the Coleman Review) as being 'prohibitive to new entrants to the sector', although no specific recommendations were made with respect to this finding.

2.3 Enabling the use of the term 'bank' by ADIs will also assist new entrants to the market for whom that the use of the term 'bank' may be an essential component in new entrants' business model, particularly in the early phase of development.

Summary of new law

2.4 The amendments in this Schedule remove an existing practical impediment to the use of the term bank by ADIs. Provided that a financial entity has been granted an ADI authorisation by APRA, that entity will be entitled to use the term 'bank' should they so choose.

2.5 APRA will retain its ability to restrict the use of the term 'bank' in certain circumstances, for example, where a purchase payment facility is an ADI but does not conduct traditional 'banking' business.

Comparison of key features of new law and current law

Detailed explanation of new law

2.6 The current restriction on the use of the words 'bank', 'banker' and 'banking' under section 66 of the Banking Act will be removed to the effect that where an entity is an ADI that entity will be able to use those terms in its business. This will allow a range of ADIs to use the term 'bank'.

2.7 Subsection 66(1) of the Banking Act created an offence if a person carries out a financial business and uses or assumes a restricted word or expression in relation to that business.

2.8 APRA currently only permit ADIs with tier 1 capital exceeding $50 million to use the terms 'bank', 'banker' and 'banking'. However, there are a number of smaller ADIs which are prudentially regulated by APRA who would benefit from the use of these terms. Amending section 66 to allow all ADIs to use the terms will create a more level playing field in the banking sector. [Schedule 3, item 3, subsection 66(1AC)]

2.9 It is important that APRA retain the ability to determine that some ADIs may not use the restricted terms. Therefore, APRA will continue to be able to restrict the use of the terms 'bank', 'banker' and 'banking' through providing an affected ADI with a written determination restricting that ADI from use of the terms. [Schedule 3, item 5, subsection 66AA(3]

2.10 Determinations made by APRA to restrict the use of these terms may apply to a single ADI or to a class or classes of ADI. It is expected that APRA would use the power to prohibit certain ADIs which do not have the ordinary characteristics of banks from utilising the term 'bank' (for example, purchase payment facilities). This power may also be used to deny the use of the term where serious or unusual circumstances warrant APRA making this determination. [Schedule 3, item 5, subsection 66AA(4]

2.11 The ability of an ADI to seek a review under Part VI of the Banking Act will be retained. [Schedule 3, item 5, subsection 66AA(9)]

2.12 However, the current review mechanism provided by subsection 66(2C) of the Banking Act, which makes decisions taken under section 66 reviewable under Part VI of the Banking Act, will be removed. [Schedule 3, item 4, subsection 66(2C)]

2.13 This change is not expected to disadvantage applicants under section 66 of the Banking Act because, as a result of the changes in this Schedule, the main applicants to use a restricted term will be able to use those terms. The majority of applicants to APRA are ADIs who are seeking to use the term 'bank' in their business name. Given that ADIs will now be provided with the ability to use that term, it is expected that APRA will make very few reviewable decisions under section 66 of the Banking Act.

2.14 APRA may still receive applications from non-ADI financial businesses for permission to use the term 'bank', or from ADIs who wish to apply for the use of other restricted terms, such as 'credit union' (non-mutual ADIs are separately prohibited from inaccurately describing themselves as 'credit unions' or like terms). The latter approval is not automatically granted in the same way as 'bank' given that these terms convey the concept of mutuality, which is not relevant to all ADIs.

2.15 However, given APRA will no longer receive applications from many ADIs, it is no longer desirable that the remainder of the decisions to be made under section 66 be reviewable. This more appropriately reflects the Government's intent to limit the use of the term 'bank' by financial businesses other than ADIs to very rare and unusual circumstances. This approach is consistent with Recommendation 35 of the Financial System Inquiry to clearly differentiate the investment products financial companies and similar entities offer retail consumers from authorised deposit-taking institution deposits.

2.16 The usual review processes for administrative decisions, including review under the Administrative Decisions (Judicial Review) Act 1977 will continue to apply to decisions of APRA.

2.17 Further amendments have been made to the Banking Act to ensure internal consistency of the Act as a result of these changes. [Schedule 3, items 1 and 2, Subsections 9(3)(note 1) and 9(3)(note 2)]

Application and transitional provisions

2.18 The amendments made by this Schedule apply from the day after the end of the period of two months beginning on the day of Royal Assent.

2.19 APRA will be permitted to make determinations under subsection 66AA(3) following Royal Assent, in accordance with subsection 4(2) of the Acts Interpretation Act 1901.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Removing restrictions on the use of the term 'bank'

2.20 Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.21 This Schedule amends the Banking Act to enable an Authorised Deposit-taking Institution (ADI) to assume or use the word 'bank' in its business name, unless APRA has issued a determination which prevents that.

2.22 As the Schedule applies to ADIs and non-ADIs, who are generally corporations, no individual rights or obligations are affected.

Human rights implications

2.23 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.24 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 3 Objects of the Banking Act

Outline of Chapter

3.1 Schedule 4 to the Bill modernises the Banking Act by inserting an objects provision. Similar industry Acts, the Life Insurance Act 1995 and the Insurance Act 1973 contain objects provisions which guide the reader on the main purposes of the Act.

Context of amendments

3.2 These amendments are being made in order to modernise the Banking Act and ensure consistency with similar industry Acts. While the amendments do not have any operative effect, they provide a clear signal to the reader of the objects and purposes of the Banking Act.

Summary of new law

3.3 An objects provision is being inserted to the Banking Act to signal that Act's primary purposes including the protection of depositors in ADIs consistent with the continued development of a viable, innovative and competitive banking industry.

Comparison of key features of new law and current law

Detailed explanation of new law

3.4 The current Banking Act was first enacted to law in 1959. In the intervening years, many significant events have occurred in the industry, including the establishment of APRA in 1998. While there has been significant amendment made to the original Banking Act, an objects clause had not been included.

3.5 The Banking Act is currently subject to several significant amendments reflecting the importance of a strong banking sector to the Australian economy. As a result of the Crisis Resolution amendments, the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017 which will establish the BEAR and the measures contained in this Bill, a comprehensive update of the Banking Act is underway.

3.6 Updating the Banking Act with an objects provision assists the reader to understand the multiple objectives of the Act.

3.7 The main objects continue to be the protection of depositors in ADIs consistently with the continued development of a viable, competitive and innovative banking industry and the promotion of financial system stability in Australia. [Schedule 4, item 1, paragraphs 2A(1)(a) and (b)]

3.8 The objects provision notes that the Banking Act, together with prudential standards as determined by APRA, promote the main objects by restricting who can carry on banking business in Australia and establishing prudential standards for the prudent management of ADIs in Australia. [Schedule 4, item 1, paragraphs 2A(2)(a) and (b)]

3.9 Further, the objects provision notes that non-Authorised Deposit-taking Institutions lender rules will enable APRA to ensure that this sector of the financial services industry is not engaged provision of finance which could result in material risks to the stability of the Australian financial system. [Schedule 4, item 1, paragraph 2A(2)(g)]

3.10 Incorporating changes made by the Crisis Resolution amendments, the Banking Act will provide for APRA to manage or respond to circumstances in which the ability of an ADI to meet its obligations may be threatened. The objects provisions also illustrates APRA's role as the administrator of the FCS.

3.11 The objects provision will also reference the new BEAR powers which are being provided to APRA. The BEAR will impose heightened obligations on bank executives in line with their position of trust and influence in these important financial institutions. [Schedule 4, item 1, paragraph 2A(2)(e)]

3.12 The ability of APRA to take into account a range of factors in addressing any systemic risks to the Australian financial system stability is also captured in the objects clause. These factors can include, but are not limited to, geographic, sectoral or other issues and APRA's analysis of potential risk will continue to reflect on these factors. [Schedule 4, item 1, subsection 2A(3A)]

3.13 The objects provision does not apply to those parts of the Banking Act which deal with foreign exchange, foreign investment, gold or interest rates. Nor does it apply to any provisions within the Banking Act which deal with these subject matters as captured by Parts III, IV and V of the Banking Act. [Schedule 4, item 1, subsection 2A(4)]

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Objects of the Banking Act

3.14 Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.15 This Schedule amends the Banking Act to modernise it through the incorporation of an objects provision. This is consistent with other industry supervision Acts including the Insurance Act 1973 and the Life Insurance Act 1995.The new objects provision notes that one of the objectives of the Banking Act is to protect the interests of depositors.

Human rights implications

3.16 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.17 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 4 Credit card reforms

Outline of chapter

4.1 Schedule 5 to the Bill amends the Credit Act to introduce a number of reforms to improve consumer outcomes under credit card contracts.

4.2 The reforms include tightening responsible lending obligations prohibiting credit card providers from offering unsolicited credit limit increases simplifying the calculation of interest charges and requiring credit card contracts to allow consumers to reduce credit limits and terminate credit card contracts, including by online means.

4.3 The purpose of the amendments is to reduce the likelihood of consumers being granted excessive credit limits, align the way interest is charged with consumers' reasonable expectations and make it easier for consumers to terminate a credit card or reduce a credit limit.

4.4 All legislative references in this Chapter are to the Credit Act unless otherwise specified.

Context of amendments

4.5 On 16 December 2015, the Senate Economics References Committee released its report into interest rates and informed choice in the Australian credit card market. The report examined the level of credit card interest rates and the competitive dynamics of the credit card market, as well as the impact of responsible lending obligations on credit card debt.

4.6 The report made eleven recommendations, mostly relating to improving disclosures on the costs of credit cards, improving cancellation and switching options and tightening responsible lending obligations. The Government supported the majority of the recommendations.

4.7 In response to the Senate Inquiry, the Government released the consultation paper Credit cards: improving outcomes and enhancing competition on 6 May 2016. The consultation paper identified that there is a small subset of consumers that persistently incur very high credit card interest charges due to the inappropriate selection and provision of credit cards as well as certain patterns of credit card use.

4.8 The consultation paper identified that these outcomes reflect a relative lack of competition on credit card interest rates (partly compounded by the complexity with which interest is calculated) and behavioural biases which contribute to consumers borrowing more and repaying less than they would otherwise intend.

4.9 To address these problems, the Government proposed a package of reforms split between phase 1 reforms, which could be implemented as outlined in the consultation paper, and phase 2 reforms, which were recommended for further consumer testing by the Australian Government's Behavioural Economics Team (located in the Department of Prime Minister and Cabinet) to determine their efficacy.

4.10 As part of the 2017-18 Budget, the Government committed to implementing the phase 1 reforms from the consultation paper. These reforms are briefly as follows:

•

Reform 1: tighten responsible lending obligations to require that the suitability of a credit card contract for a consumer is assessed on the consumer's ability to repay the credit limit of the contract within a certain period;

•

Reform 2: prohibit credit card providers from making any unsolicited credit limit offers in relation to credit card contracts by broadening the existing prohibition to all forms of communication with a consumer and removing the informed consent exemption;

•

Reform 3: simplify the calculation of interest charges in relation to credit cards by prohibiting credit card providers from retrospectively charging interest on credit card balances; and

•

Reform 4: require new credit card contracts to allow consumers to reduce credit card limits and terminate credit card contracts and require credit card providers to establish and maintain a website that allows consumers to request to exercise these entitlements online.

Summary of new law

4.11 Schedule 5 to the Bill amends the Credit Act to introduce a number of reforms to improve consumer outcomes under credit card contracts.

4.12 The reforms include tightening responsible lending obligations, prohibiting credit card providers from offering unsolicited credit limit increases, simplifying the calculation of interest charges and requiring credit card contracts to allow consumers to reduce credit limits and terminate credit card contracts, including by online means.

Reform 1: tighten responsible lending obligations for credit card contracts

4.13 Reform 1 is implemented by Part 1 of Schedule 5 to the Bill, which introduces a new requirement that the unsuitability of a credit card contract or credit limit increase for a consumer be assessed according to whether the consumer could repay an amount equivalent to the credit limit of the contract within a period determined by ASIC.

4.14 This requirement will apply to licensees that provide credit assistance, and licensees that are credit providers, in relation to both new and existing credit card contracts from 1 January 2019. Existing civil and criminal penalties for breaches of the responsible lending obligations will apply to breaches of the new requirement. Existing infringement notice powers will also apply.

Reform 2: prohibit unsolicited credit limit offers in relation to credit card contracts

4.15 Reform 2 is implemented by Division 1 of Part 2 of Schedule 5 to the Bill, which prohibits credit card providers from making unsolicited credit limit offers in any form. This is achieved by broadening the existing prohibition to all forms of communication and removing the informed consent exemption. These amendments apply in relation to both new and existing credit card contracts from 1 July 2018. Existing civil and criminal penalties for breaches of the prohibition against unsolicited credit limit offers will apply. Existing infringement notice powers will also apply.

Reform 3: simplify the calculation of interest charges under credit card contracts

4.16 Reform 3 is implemented by Part 3 of Schedule 5 to the Bill. These amendments prevent credit card providers from imposing interest charges retrospectively to a credit card balance, or part of a balance, that has had the benefit of an interest-free period. These amendments apply in relation to both new and existing credit card contracts from 1 January 2019.

4.17 Failure to comply with this requirement attracts civil penalties of 2,000 penalty units and is an offence, attracting criminal penalties of 50 penalty units. It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provision.

Reform 4: reducing credit limits and terminating credit card contracts, including by online means

4.18 Reform 4 is implemented by Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill. A key amendment is to require credit card contracts entered into on or after 1 January 2019 to allow consumers to request to reduce the limit of their credit card (a 'credit limit reduction entitlement') or terminate a credit card contract (a 'credit card termination requirement').

4.19 Where a credit card contract contains a credit limit reduction entitlement or a credit card termination requirement, the amendments also require that:

•

the credit card provider must provide an online means for the consumer to make a request to reduce their credit card limit or terminate their credit card contract; and

•

if the consumer makes a request to reduce their credit limit or terminate their credit card contract, the credit card provider must not make a suggestion that is contrary to the consumer's request and must take reasonable steps to ensure that the request is given effect to.

4.20 These further amendments apply to credit card contracts entered into before, on or after 1 January 2019.

4.21 Failure to comply with these requirements attracts civil penalties of 2,000 penalty units. It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provisions.

4.22 A breach of the requirement that a credit card provider not make contrary suggestions or the requirement to give effect to the request are offences that attract criminal penalties of 50 penalty units.

Comparison of key features of new law and current law

Detailed explanation of new law

Reform 1: tighten responsible lending obligations for credit card contracts

Context of amendments

4.23 The suitability of a credit card contract for a consumer is typically assessed on the basis of whether the consumer can afford to pay the minimum monthly repayment on the proposed credit limit amount. This may result in some consumers incurring credit card debt that cannot be paid down in a timely manner, which in turn can be associated with large cumulative interest charges.

4.24 Reform 1 addresses this situation by introducing a requirement that a consumer's suitability for a credit card contact or credit limit increase be assessed according to their ability to pay the credit limit within a certain period.

Current law

4.25 The Credit Act requires persons who engage in credit activities to hold an Australian credit licence. A key obligation on licensees is to comply with the responsible lending obligations in Chapter 3. Relevantly, Part 3-1 imposes responsible lending obligations on licensees that provide credit assistance in relation to credit contracts, and Part 3-2 imposes responsible lending obligations on licensees that are credit providers under credit contracts.

4.26 A person provides 'credit assistance' to a consumer where they suggest the consumer apply for, or assist the consumer to apply for, a provision of credit or an increase to the credit limit of a particular credit contract with a particular provider. In addition, a person provides 'credit assistance' where they suggest the consumer remain in a credit contract.

4.27 The definition of 'credit assistance' applies to situations such as:

•

finance brokers where they recommend a particular credit contract; and

•

a person who suggests a consumer apply for a particular credit contract, but does not necessarily proceed to arrange the credit contract for the consumer.

4.28 A person is a 'credit provider' where they provide credit.

4.29 Licensees that provide credit assistance in relation to credit contracts and licensees that are credit providers under credit contracts must prepare an assessment of unsuitability of a credit contract for a consumer before providing credit assistance, or before entering into a credit contract or increasing the credit limit of a credit contract with the consumer.

4.30 Licensees that provide credit assistance in relation to credit contracts and licensees that are credit providers under credit contracts are also prohibited from providing credit assistance, or entering into a credit contract or increasing the credit limit of a credit contract, if the contract is unsuitable for a consumer.

4.31 One of the circumstances in which a contract is, or will be, unsuitable for a consumer is if it is likely that the consumer would be unable to comply with their financial obligations under the contract, or could only comply with substantial hardship. It is presumed that if a consumer would only be able to comply with their financial obligations under the contract by selling their principal place of residence, the consumer could only comply with their obligations with substantial hardship, unless the contrary is proven.

New law

4.32 Part 1 of Schedule 5 to the Bill introduces, in Parts 3-1 and 3-2 of the Credit Act, an additional circumstance in which a consumer could only comply with their financial obligations under a credit contract with substantial hardship. That is, a consumer is taken to be able to comply with their financial obligations under a credit card contract only with substantial hardship if the consumer could not comply with an obligation to repay an amount equivalent to the credit limit of the contract within a period determined by ASIC. [Schedule 5, Part 1, items 1 to 6, subsections 118(3AA), 119(3A), 123(3AA), 124(3A), 131(3AA), 133(3AA)]

4.33 This additional circumstance applies to licensees that provide credit assistance in relation to credit contracts and licensees that are credit providers under credit contracts for the purposes of:

•

particular circumstances when a credit contract will be unsuitable under paragraphs 118(2)(a), 119(2)(a), and 131(2)(a) (for preliminary assessments of unsuitability); and

•

when a credit contract will be unsuitable under paragraphs 123(2)(a), 124(2)(a) and 133(2)(a) (for the purposes of the prohibition on suggesting, or assisting with, unsuitable credit contracts and the prohibition on entering, or increasing the credit limit of, unsuitable credit contracts).

4.34 This additional circumstance only applies if the contract is a credit card contract.

4.35 ASIC may, by legislative instrument, determine the period within which a consumer must be assessed as being able to repay an amount equivalent to the credit limit of the credit card contract. The period may be a fixed period (for example, 3 years) or a range of time (for example, 2 to 5 years). [Schedule 5, Part 1, items 7 and 8, section 160A and subsection 160F(1)]

4.36 ASIC may determine different periods in relation to:

•

different classes of credit card contracts;

•

different credit limits; and

•

different rates of interest.

[Schedule 5, Part 1, item 8, subsection 160F(2)]

4.37 Allowing ASIC to determine the period provides flexibility to tailor the requirements to different circumstances. For example, ASIC may determine a period of years for a certain credit limit amount, or a different period of years for a certain rate of interest. These periods would apply to all consumer credit card contracts with that particular credit limit amount or rate of interest.

4.38 In determining a period, it expected that ASIC will have regard to ensuring that a reasonable balance is achieved between preventing consumers from being in unsuitable credit card contracts and ensuring that consumers continue to have reasonable access to credit through credit card contracts. This is consistent with the aim of the rules contained in Parts 3-1 and 3-2, which are to better inform consumers and prevent them from being in unsuitable credit contracts.

4.39 In order for this reform to be fully effective on its commencement date, and to provide certainty to industry, it is intended that ASIC would make a legislative instrument after Royal Assent and before the commencement of Part 1 of Schedule 5 to the Bill. This will ensure that the relevant provisions are fully operable upon commencement.

4.40 Existing civil and criminal penalties for breaches of the responsible lending obligations will apply to breaches of the additional circumstance. Existing infringement notice powers will also apply.

Application provisions

4.41 The amendments in Part 1 of Schedule 5 to the Bill commence on 1 January 2019. This is to give industry sufficient time to make necessary system changes prior to commencement. The amendments to sections 118, 119, 123, 124, 131 and 133 apply:

•

so far as the sections apply in relation to entering a credit card contract - to credit card contracts entered into on or after the commencement of Part 1; and

•

so far as the sections apply in relation to remaining in a credit card contract or increasing the credit limit of a credit card contract - to credit card contracts entered into before, on or after the commencement of Part 1.

[Schedule 5, Part 5, item 25, Part 3 of Schedule 6 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

Example 4.1 : Application of amendments to existing contracts

On 28 February 2019 Kamala applies to increase the credit limit of her Savings Bank credit card from $5,000 to $10,000. Kamala has had this particular credit card for 5 years.

Prior to increasing Kamala's credit limit, Savings Bank must make an assessment of unsuitability of the credit card contract for Kamala. As part of this assessment, Savings Bank must consider whether Kamala would be unable to comply with an obligation to repay the credit limit as proposed to be increased ($10,000) within a period determined by ASIC.

If Kamala is assessed as being unable to do so, then she would be taken to only be able to comply with her financial obligations under the contract with substantial hardship and the increased credit limit of the credit card contract must therefore be assessed as unsuitable for her.

Reform 2: prohibit unsolicited credit limit offers in relation to credit card contracts

Context of amendments

4.42 The Credit Act prohibits credit card providers from making unsolicited offers to increase a consumer's credit limit under a credit card contract in writing, unless the provider has received prior consent from the consumer to do so. This prohibition applies to written communication made to a consumer about their credit card contract. Written communication that is not specific to a consumer's credit card contract (for example, advertising or other information provided generally to consumers about credit cards or credit card features such as credit limits) do not come within this prohibition.

4.43 Some credit card providers circumvent this prohibition by making unsolicited offers by means other than in writing, such as over the phone or via online banking portals. Consumers are also often unaware that they have granted their prior consent to receiving unsolicited offers, because of the way in which consent is sought at the time of applying for a credit card.

4.44 Reform 2 addresses this situation by prohibiting unsolicited offers to increase a consumer's credit limit under a credit card contract by way of all forms of communication, and by removing the informed consent defence.

New law

4.45 Division 1 of Part 2 of Schedule 5 to the Bill amends Division 4 of Part 3-2B of the Credit Act to prohibit credit card providers from making unsolicited credit limit offers by broadening the prohibition against making written credit limit invitations so that it extends to all forms of communication and by removing the informed consent exemption.

4.46 The definition of 'credit limit increase invitation' in subsection 133BE(5) is amended so that a credit card provider will make a credit limit increase invitation if they give any form of communication to the consumer about their credit card contract which:

•

offers to increase the credit limit of the contract;

•

invites the consumer to apply for an increase of the credit limit of the contract; or

•

has the purpose of encouraging the consumer to consider applying for an increase of the credit limit of the contract.

[Schedule 5, Part 2, items 12 and 13, paragraph 133BE(5)(a) and subsection 133BE(6)]

4.47 Amending the definition of 'credit limit increase invitation' in this way is intended to extend the prohibition against unsolicited offers to increase a consumer's credit limit under a credit card contract to invitations made in any form (for example, letters, emails, phone, in branch, or through an online portal). However, this extension is not intended to limit the ability of credit card providers to provide general information to consumers about credit card features including credit limits or to provide the functionality for consumers to request a credit limit increase if they so choose (for example, through a website or call centre).

4.48 The informed consent defence in section 133BF is also removed. Previously credit card providers could give consumers credit limit increase invitations where the consumer had expressly consented for the provider to do so. This defence will no longer be available for credit card providers for both new and existing credit card contracts from commencement of Division 1 of Part 2 of Schedule 5 to the Bill. [Schedule 5, Part 2, items 9 to 11 and 14, the notes to subsections 133BE(1), (2) and (3) and section 133BF]

4.49 Existing civil and criminal penalties for breaches of the prohibition against unsolicited credit limit offers will apply. Existing infringement notice powers will also apply.

Consequential amendments

4.50 Section 133BG, which requires licensees to keep a record of consents obtained under section 133BF and withdrawals of such consents, is repealed. This provision is no longer required as the informed consent defence in section 133BF is repealed. [Schedule 5, Part 2, item 14, section 133BG]

4.51 Credit card providers may opt to retain a record of consents and withdrawals obtained in accordance with section 133BG in order to ensure they can demonstrate compliance with the law prior to commencement of Division 1 of Part 2 of Schedule 5 to the Bill.

Application provisions

4.52 The amendments in Division 1 of Part 2 of Schedule 5 to the Bill commence on 1 July 2018. The commencement date for reform 2 is earlier than the other reforms contained in Schedule 5 as Reform 2 involves fewer system changes for industry and thus can be implemented more quickly.

4.53 The amendments apply in relation to communications given on or after commencement of Division 1 of Part 2 of Schedule 5 to the Bill in relation to credit card contracts entered into before, on or after that commencement. [Schedule 5, Part 5, item 24, Parts 1 and 2 of Schedule 6 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

4.54 Credit card providers can rely on the informed consent exemption in respect of credit limit increase invitations made prior to commencement of Division 1 of Part 2 of Schedule 5 to the Bill, if they have maintained records of that consent. However, from commencement, credit card providers will not be able to make credit limit increase invitations for both new and existing credit card contracts, even where the consumer has previously provided express consent for the credit card provider to do so.

Reform 3: simplify the calculation of interest charges under credit card contracts

Context of amendments

4.55 The application of interest charges to credit card balances is complex and can be difficult for consumers to understand.

4.56 Many credit cards provide an interest free period for purchases made on the card. However, where a credit card balance is not paid in full by the payment due date listed on the monthly credit card statement, interest is generally charged on every purchase made on the credit card from the date of the purchase to the date on which the repayments are made. This interest is charged in the subsequent statement period for the credit card. As a consequence:

•

interest is charged not only for that second statement period but also the previous one, back to the date on which the purchase was made; and

•

interest is retrospectively charged on the total balance of the credit card - not just the unpaid balance - such that any interest free period is lost for all purchases in that statement period and not merely those that were unpaid by the due date.

4.57 These arrangements are explained in product terms and conditions and other relevant disclosure documents (such as on the credit card provider's website). However, the complex nature of the calculation means that industry practice may not align with consumers' understanding and expectation about how interest is to be charged in the event a credit card balance is not paid off in full by the payment due date. As a result, many consumers incur unexpected and disproportionate interest charges when their credit card balance is not paid off in full.

4.58 Reform 3 addresses this situation by standardising and simplifying the application of interest to credit card balances when the balance is only partly paid off in a statement period. The amendments do not directly affect consumers who repay their balances in full every month, or those who have already lost their interest free period by only making a partial payment of the credit card balance in a previous month.

New law

4.59 Part 3 of Schedule 5 to the Bill amends Part 3-2B of the Credit Act to impose new requirements relating to the application of interest charges under credit card contracts.

4.60 A credit card provider is prohibited from imposing a liability to pay a rate of interest retrospectively to the balance (or part of the balance) of a credit card contract. A liability to pay a rate of interest is deemed to have been applied retrospectively on a day if the facts and circumstances that trigger the application of interest on that day - for example, the non-payment of some or all of the credit card balance - come into existence after the end of that day. [Schedule 5, Part 3, items 19 and 20, section 133BS]

4.61 The prohibition on backdating interest charges means that if some or all of a credit card balance is subject to an interest free period on a day, a credit card provider will not be permitted subsequently to apply a liability to pay a rate of interest to that balance for that day because that balance was not paid off in full by the payment due date. However, a credit card provider will be able to apply a rate of interest to any unpaid balance on days that occur after the unpaid balance's payment due date.

4.62 Failure to comply with the prohibition on charging interest retrospectively attracts a civil penalty of up to 2,000 penalty units and is an offence, attracting a criminal penalty of up to 50 penalty units. A contravention will arise for each statement period covered by a statement of account in which interest is imposed in contravention of the prohibition. [Schedule 5, Part 3, item 20, subsections 133BS(1) and (2)]

4.63 It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provision.

4.64 The changes described above will also strengthen the existing prohibition in section 28 of the Code, which prevents interest from being imposed on the part of a balance that has been paid off, but does not prohibit backdating interest charges on the unpaid part of a balance where a consumer does not comply with the conditions of an interest-free period.

Example 4.2 : Contravention of prohibition on backdating interest charges

Sam has a credit card with an interest-free period of up to 44 days with Northern Bank. His first credit card statement period runs from 1 April to 30 April with a credit card repayment due on 14 May.

Sam makes a purchase of $1,000 on day 5 of his statement period. At the end of his statement period, Sam's outstanding credit card balance is $1,000. On the statement due date (day 44), Sam makes a credit card repayment of $250. The remaining balance of $750 is rolled-over into the next statement period.

In Sam's second credit card statement (for the period from 1 May to 31 May), Northern Bank charges Sam backdated interest from the purchase date of 5 April on the outstanding balance of $750.

As Northern Bank has charged Sam backdated interest for purchases made within an interest-free period, it has contravened the prohibition on the backdating of interest charges.

Example 4.3 : Compliance with prohibition on backdating interest charges

Lisa has a credit card with an interest-free period of up to 55 days with Savings Bank. Her credit card statement period runs from 1 June to 30 June and a credit card repayment is due on 25 July.

Lisa makes a purchase of $600 on day 10 of her statement period. Her outstanding credit card balance at the end of the statement period is $600. On the statement due date (day 55), Lisa makes a credit card repayment of $200. The remaining balance of $400 is rolled-over into the next statement period.

In Lisa's second credit card statement (from the period 1 July to 31 July), Savings Bank charges Lisa interest on the outstanding balance of $400 from the previous statement's due date.

As Savings Bank has charged interest on the unpaid balance from the credit card due date of the June statement period, it has complied with the prohibition on the backdating of interest charges.

Application provisions

4.65 The amendments in Part 3 of Schedule 5 to the Bill commence on 1 January 2019. This is to give industry sufficient time to make necessary system changes prior to commencement.

4.66 The prohibition on imposing retrospective interest charges applies to credit card contracts entered into before, on or after the commencement of Part 3 of Schedule 5 to the Bill. [Schedule 5, Part 5, item 25, subitems 5(1) and (2) of Part 4 of Schedule 6 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

4.67 However, the prohibition does not apply in relation to use of a credit card before the commencement of Part 3 of Schedule 5 to the Bill. That is, while the amendments apply to credit card contracts entered into before 1 January 2019, the new requirements relating to application of interest only apply on transactions made on or after 1 January 2019. [Schedule 5, Part 5, item 25, subitem 5(3) of Part 4 of Schedule 6 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

Reform 4: reducing credit limits and terminating credit card contracts, including by online means

Context of amendments

4.68 Consumers wishing to reduce the credit limit of their credit card or terminate their credit card contract are often required to do so by visiting a bank branch or by calling a customer service representative. This process can be unnecessarily onerous and can constrain a consumer's willingness to initiate a credit limit reduction or credit card termination. It is also possible that a consumer could be convinced to retain their current credit limit or remain in their credit card contract.

4.69 Reform 4 addresses this situation by introducing a requirement that credit card providers provide an online means for consumers to request to reduce their credit limit or terminate their credit card contract. Once a request is made, credit card providers will be prohibited from making suggestions that are contrary to the consumers request and the credit provider must take reasonable steps to give effect to the request.

New law

4.70 Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill insert new requirements into Part 3-2B of the Credit Act to improve consumers' abilities to reduce the credit limit of their credit cards and terminate their credit card contracts. These requirements apply to licensees that are credit providers in relation to credit card contracts.

4.71 Key amendments include introducing a requirement that all credit card contracts give consumers who are debtors under the contract a 'credit limit reduction entitlement' and a 'credit card termination entitlement'. Additional requirements are imposed on a credit card provider where a consumer has a credit limit reduction entitlement or a credit card termination entitlement.

4.72 From commencement of Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill, all new credit card contracts entered into will be required to contain both these entitlements. However, it is important to note that some credit card contracts entered into before commencement may also contain these entitlements. Where this is the case, credit card providers will need to comply with the additional requirements detailed below.

Credit card contracts must allow consumers to reduce their credit limit and terminate their credit card contract

4.73 Licensees that are credit providers must not enter into, or offer to enter into, a credit card contract with a consumer unless the consumer would have a 'credit limit reduction entitlement' and a 'credit card termination entitlement' under the contract. [Schedule 5, Parts 2 and 4, items 15 to 18 and 21 to 23, the definitions of 'credit card termination entitlement' and 'credit limit reduction entitlement' in subsection 5(1), section 133B and subsections 133BF(1) and 133BT(1)]

4.74 A consumer has a credit limit reduction entitlement under a credit card contract where, for a contract that does not have a minimum credit limit - the consumer is entitled to reduce the credit limit to any amount or, for a contract that has a minimum credit limit - the consumer is entitled to reduce the credit limit to an amount that equals or exceeds that minimum. [Schedule 5, Part 2, item 18, subsection 133BF(3)]

4.75 A consumer has a credit card termination entitlement under a credit card contract if the consumer is entitled, under the contract, to terminate the credit card contract. [Schedule 5, Part 4, item 23, subsection 133BT(3)]

4.76 Failure to comply with either of these requirements attracts a civil penalty of up to 2,000 penalty units and is an offence, attracting a criminal penalty of up to 50 penalty units. [Schedule 5, Parts 2 and 4, items 18 and 23, subsections 133BF(1) and (2) and 133BT(1) and (2)]

4.77 It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provisions that apply to breaches of these requirements.

4.78 If a credit card contract is entered into in breach of either of these requirements, it is still valid and enforceable, pursuant to section 333.

4.79 If a consumer has a credit limit reduction entitlement or a credit card termination entitlement under a credit card contract, then additional requirements are imposed on the credit provider. These are described in further detail below.

4.80 These changes compliment sections 26 and 82 of the Code, which entitle a debtor to pay out a credit contract at any time, subject to certain exceptions.

4.81 The exercise of a consumer's entitlement to reduce their credit limit will be subject to the consumer meeting their obligations under the credit contract: for example, first repaying any outstanding balance that exceeds the requested lower credit limit. Similarly, the exercise of a consumer's entitlement to terminate their credit card contract will be subject to the consumer paying the outstanding balance and meeting any other obligations in relation to the contract.

4.82 Nevertheless, if a consumer has requested to exercise their entitlement to either reduce their credit limit or terminate their credit card contract, the credit card provider must not unreasonably delay progressing the consumer's request. Additional requirements that a credit card provider must comply with following a request by a consumer to reduce their credit limit or terminate their credit card contract are described in detail below. That is, the credit card provider must give effect to the consumer's request, and not make suggestions that are contrary to the consumer's request.

Example 4.4 : Entitlement where credit card contract entered into before 1 January 2019

Kamala entered into a credit card contract with Savings Bank in 2014.

The credit card contract contains a clause that allows Kamala to terminate the contract at any time, provided there is no outstanding balance. The contract does not contain a clause that would allow Kamala to reduce the credit limit of the credit card.

This means that Kamala has a credit card termination entitlement but not a credit limit reduction entitlement.

From 1 January 2019, Savings Bank will need to comply with the additional requirements that flow from Kamala having a credit card termination entitlement under her credit card contract. However, Savings Bank will not need to comply with the additional requirements for a credit card provider where a debtor under a contract has a credit limit reduction entitlement, at least in relation to Kamala.

Example 4.5 : Entitlement where credit card contract entered into after 1 January 2019

On 15 March 2019, Abby entered into a credit card contract with Barkly's Bank.

As the credit card contract is entered into after 1 January 2019, it must give Abby a credit limit reduction entitlement and a credit card termination entitlement.

Barkly's Bank will need to comply with the additional requirements for credit card providers that flow from both these entitlements.

Credit card provider must provide online options for consumers to request to reduce their credit limit or terminate their credit card contract

4.83 Where a consumer has a credit limit reduction entitlement or a credit card termination entitlement under a credit card contract, the credit card provider must establish and maintain a website that allows the consumer to request a reduction in their credit limit or termination of their credit card contract. [Schedule 5, Parts 2 and 4, items 18 and 23, subsections 133BFA(1) and (2) and 133BU(1) and (2)]

4.84 The credit card provider must ensure that the website informs the consumer that they are able to use the website to request a reduction in their credit limit or termination of their credit card contract, what information the consumer needs to enter in order to request the reduction or termination and instructions on how to make the request. [Schedule 5, Parts 2 and 4, items 18 and 23, subsections 133BFA(2) and 133BU(2)]

4.85 Information the consumer needs to enter might include information that is reasonably necessary to identify the consumer or to ensure the consumer's address and contact details are up to date.

4.86 If the consumer enters the information and follows the instructions the consumer is able to use the website to request a reduction in their credit limit or termination of their credit card contract. [Schedule 5, Parts 2 and 4, items 18 and 23, paragraphs 133BFA(2)(c) and 133BU(2)(c)]

4.87 The credit card provider must ensure that the website is available on the day the consumer seeks to request the credit limit reduction or credit card termination. [Schedule 5, Parts 2 and 4, items 18 and 23, paragraphs 133BFA(2)(d) and 133BU(2)(d)]

4.88 Failure to comply with either of these requirements attracts a civil penalty of up to 2,000 penalty units. [Schedule 5, Part 2, items 18 and 23, subsection 133BFA(2) and 133BU(2)]

4.89 It is a defence if the website is reasonably unavailable on the day the consumer seeks to request the credit limit reduction or credit card termination. For example, a website might be unavailable because of scheduled maintenance or unexpected and unavoidable systems issues. [Schedule 5, Parts 2 and 4, items 18 and 23, subsection 133BFA(3) and 133BU(3)]

4.90 It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provisions that apply to breaches of these requirements.

Example 4.6 : Using website to terminate credit card contract

Prath has a credit card contract with Northern Bank under which he has a credit card termination entitlement.

Prath decides to terminate his credit card contract and so uses Northern Bank's website to make his request.

The website prompts Prath to provide certain information to ascertain his identity and account details. Prath enters these details and the website informs him that he has a current outstanding balance of $75.

The website informs Prath that he must pay the outstanding balance before his credit card contract can be terminated and that Northern Bank may require him to undertake further steps according to the terms of the contract before the termination can be completed.

Credit card provider must give effect to a consumer's request to reduce their credit limit or terminate their credit card contract

4.91 Where a consumer has a credit limit reduction entitlement or a credit card termination entitlement and the consumer exercises either of these entitlements by requesting that their credit limit be reduced or their credit card terminated, the credit card provider must take reasonable steps to ensure that the request is given effect to as soon as practicable. [Schedule 5, Parts 2 and 4, items 18 and 23, subsections 133BFC(1) and (2) and 133BW(1) and (2)]

4.92 Reasonable steps may include communicating any further actions that must be undertaken by the consumer for the credit provider to complete the request. For a credit card termination, a reasonable step may be communicating to the consumer that they are required to repay any outstanding balance (if the consumer has an outstanding balance) and cancel any credit card authorisations such as direct debit authorisations (if the consumer has made any authorisations) before the contract can be terminated. For a credit limit reduction, a reasonable step may be communicating to the consumer that they are first required to repay an outstanding balance down to the requested lower credit limit before the credit limit can be reduced to that amount.

4.93 Failure to comply with either of these requirements attracts a civil penalty of up to 2,000 penalty units and is an offence, attracting a criminal penalty of up to 50 penalty units. [Schedule 5, Parts 2 and 4, items 18 and 23, subsections 133BFC(2) and (3) and 133BW(2) and (3)]

4.94 It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provisions that apply to breaches of these requirements.

Example 4.7 : Credit limit cannot be reduced below the current outstanding balance

Dan has a credit card with Barkly's Bank with a credit limit of $10,000. Dan has a credit limit reduction entitlement under his contract.

Dan decides to reduce his credit limit from $10,000 to the minimum credit limit for the card ($6,000) and so visits his local branch and makes his request.

The customer service representative at Barkly's Bank informs Dan that his credit card contract has a current outstanding balance of $6,500 and that he will need to make a payment of $500 before the reduction is able to be made.

Communicating to Dan that he needs to make a payment before the credit limit can be reduced is a reasonable step taken by Barkly's Bank to give effect to the request. Once Dan makes the required payment Barkly's Bank must continue to give effect to the request as soon as practicable.

Credit card provider must not make suggestions that are contrary to the consumer's request to reduce their credit limit or terminate their credit card contract

4.95 Additionally, where a consumer has a credit limit reduction entitlement or a credit card termination entitlement and the consumer exercises either of these entitlements by requesting that their credit limit be reduced or their credit card contract terminated, the credit card provider must not make suggestions to the consumer that are contrary to that request. That is, in respect of a request to reduce the credit limit of a credit card contract, a credit card provider must not do any of the following:

•

suggest that the consumer apply for an increase to the credit limit of the contract;

•

suggest that the consumer not reduce the credit limit of the contract;

•

if the consumer's request is to reduce the credit limit of the contract by a specified amount - suggest that the consumer instead reduce the credit limit by a smaller amount.

[Schedule 5, Part 2, item 18, subsections 133BFB(1) and (2)]

4.96 In respect of a request to terminate a credit card contract, a credit card provider must not suggest that the consumer remain in the credit card contract, which includes suggesting the consumer increase or retain their credit limit. [Schedule 5, Part 4, item 23, subsections 133BV(1) and (2)]

4.97 This prohibition is intended to prevent credit card providers from using retention techniques to persuade a consumer to remain in a credit card contract that the consumer has decided does not suit their circumstances.

4.98 However, it is not intended to prevent credit card providers from requesting feedback from a consumer on why they have made the request (for example, to inform product development), or from suggesting alternative credit products that may better meet the consumer's requirements.

4.99 Failure to comply with either of these requirements attracts a civil penalty of up to 2,000 penalty units and is an offence, attracting a criminal penalty of up to 50 penalty units. [Schedule 5, Parts 2 and 4, items 18 and 23, subsections 133BFB(2) and (3) and 133BV(2) and (3)]

4.100 It is intended that consequential amendments will be made to the Credit Regulations to extend the infringement notice scheme contained in the Credit Act to contraventions of the civil penalty provisions that apply to breaches of these requirements.

Example 4.8 : Prohibition against making contrary suggestion not triggered

Kai has a credit card with Savings Bank that has a high interest rate and an annual fee. He is interested in exploring alternative credit card contracts that have a lower interest rate and no annual fee.

He contacts Savings Bank and informs the customer service representative that he is not happy about the high interest rate and annual fee attached to his current credit card contract and wants to explore alternative products, including with other providers. The customer service representative offers to reduce the interest rate under his credit card contract. Kai considers this offer and decides to remain in the credit card contract, with a lower interest rate.

The prohibition against a credit card provider suggesting a consumer remain in a credit card contract has not been triggered in this instance as Kai did not request to terminate his credit card contract. Savings Bank has not contravened the prohibition in this instance.

Example 4.9 : Contravention of prohibition against making suggestions

Following on from Example 4.8, a few weeks after deciding to remain in the credit card contract Kai remains unhappy about the annual fee on his credit card and decides to terminate the credit card contract after all.

He contacts Savings Bank and makes a request to terminate his contract. The customer service representative tries to dissuade Kai from terminating his credit card contract and offers to remove the annual fee if Kai remains in the contract.

As Kai has requested to terminate his credit card contract Savings bank contravenes the prohibition against a credit card provider suggesting a consumer remain in a credit card contract.

Example 4.10 : Compliance with prohibition against making suggestions

Mary decides to terminate her credit card contract with Northern Bank so she visits her local branch and makes her request.

The customer service representative asks Mary for feedback about her concerns with her current contract and, based on this discussion, informs Mary that there are alternative products that might better suit her needs. After considering the alternative products, Mary decides that a low fee/low rate product would be more suitable for her.

Mary's current credit card contract is terminated and, after the credit provider has conducted an unsuitability assessment, a new credit card contract for the low fee/low rate product is entered into.

As Savings Bank did not suggest Mary remain in her current credit card contract, there is no contravention of the prohibition against suggesting a consumer remain in a credit card contract.

Application provisions

4.101 Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill commence on 1 January 2019. This is to give industry sufficient time to make necessary system changes prior to commencement.

4.102 The provisions that require credit card contracts to allow consumers to reduce their credit limit or terminate their credit card contract apply to credit card contracts entered into on or after the commencement of Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill. [Schedule 5, Part 5, item 25, subitem 3(1), and subitem 6(1) of Part 5 of Schedule 6 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

4.103 This means that all credit card contracts entered into on or after 1 January 2019 must give consumers an entitlement to reduce their credit limit (subject to the minimum limit for that card) and terminate their credit card contract.

4.104 The provisions that impose the following requirements apply to credit card contracts entered into before, on or after commencement of Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill:

•

the requirement for credit card providers to provide an online means for consumers to make a request to reduce their credit card limit or terminate their credit card contract;

•

the requirement that, following a request to reduce a credit card limit or terminate a credit card contract, a credit card provider must not suggest that the consumer apply for an increase to their credit limit, not reduce their credit limit, reduce by a smaller amount than that requested or remain in the credit card contract; and

•

the requirement that credit card providers must give effect to a request to reduce a credit limit or terminate a credit card contract.

[Schedule 5, Part 5, item 25, item 3, and item 6 of Part 5 of Schedule 6 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

4.105 This means that, if a credit card contract entered into before 1 January 2019 contemplates a consumer reducing their credit limit or terminating their credit card contract, the credit card provider will need to comply with the above requirements in relation to those contracts from 1 January 2019. Credit card providers will also need to comply with these requirements in relation to all credit card contracts entered into on or after 1 January 2019 as those contracts will be required to allow consumers to reduce their credit limits and terminate their credit card contracts.

Application and transitional provisions

4.106 Division 1 of Part 2 commences on 1 July 2018 (reform 2). Part 1, Division 2 of Part 2 and Parts 3 and 4 commence on 1 January 2019 (reforms 1, 3 and 4).

4.107 The provisions in Part 5 that relate to credit limit increase invitations commence on 1 July 2018 (reform 2). All other provisions in Part 5 commence on 1 January 2019 (reforms 1, 3 and 4).

4.108 Application provisions for each Part are discussed separately above.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Credit card reforms

4.109 Schedule 5 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.110 This Schedule amends the Credit Act to introduce a number of reforms to improve consumer outcomes under credit card contracts.

4.111 These reforms are briefly as follows:

•

Reform 1: tighten responsible lending obligations to require that the suitability of a credit card contract for a consumer is assessed on the consumer's ability to repay the credit limit of the contract within a certain period;

•

Reform 2: prohibit credit card providers from making any unsolicited credit limit offers in relation to credit card contracts by broadening the existing prohibition to all forms of communication with a consumer and removing the informed consent exemption;

•

Reform 3: simplify the calculation of interest charges in relation to credit cards by prohibiting credit card providers from retrospectively charging interest on credit card balances; and

•

Reform 4: require new credit card contracts to allow consumers to reduce credit card limits and terminate credit card contracts and require credit card providers to establish and maintain a website that allows consumers to request to exercise these entitlements online.

4.112 The purpose of the amendments is to reduce the likelihood of consumers being granted excessive credit limits, align the way interest is charged with consumers' reasonable expectations and make it easier for consumers to terminate a credit card or reduce a credit limit.

Offences and civil penalties

4.113 Schedule 5 to the Bill introduces offences and civil penalties in respect of reforms 3 and 4. Reforms 1 and 2 are implemented by amending existing provisions of the Credit Act and so existing civil penalties and offences will apply.

Reform 3 - calculation of interest charges under credit card contracts

4.114 Part 3 of Schedule 5 to the Bill imposes, from 1 January 2019, a requirement on credit card providers that they must not impose retrospective interest charges under credit card contracts.

4.115 Failure to comply with this requirement attracts a civil penalty of up to 2,000 penalty units (currently $420,000). An offence is also introduced to prohibit a credit card provider engaging in conduct that contravenes this requirement. A breach of this offence attracts a criminal penalty of up to 50 penalty units (currently $10,500).

Reform 4 - reducing credit limits and terminating credit card contracts

4.116 Division 2 of Part 2 and Part 4 of Schedule 5 to the Bill impose requirements aimed at ensuring a consumer can reduce the credit limit of their credit card contract and ensuring a consumer can terminate their credit card contract.

4.117 From 1 January 2019, it is a requirement that a credit card provider must not enter into a credit card contract unless the consumer has a credit limit reduction entitlement and a credit card termination entitlement under the contract. Further, if a consumer under a credit card contract has a credit limit reduction entitlement or a credit card termination entitlement and requests to exercise either of those entitlements, the credit card provider must not make suggestions that are contrary to the request and must take reasonable steps to ensure that the request is given effect to.

4.118 Failure to comply with any of these requirements attracts a civil penalty of 2,000 penalty units (currently $420,000). Offences are also introduced to prohibit a credit card provider from engaging in conduct that contravenes any of these requirements. A breach of these offences attracts a criminal penalty of up to 50 penalty units (currently $10,500).

4.119 Further, from 1 January 2019, if a consumer under a credit card contract has a credit limit reduction entitlement or a credit card termination entitlement it is a requirement that a credit provider establish and maintain a website that allows the consumer to make a request to reduce their credit limit or terminate their credit card contract.

4.120 Failure to comply with this requirement attracts a civil penalty of up to 2,000 penalty units (currently $420,000). An offence is not introduced in respect of this requirement.

Human rights implications

4.121 This Schedule does not engage any of the applicable rights or freedoms.

4.122 In forming this view, consideration has been given to the introduction by this Schedule of several offences and civil penalties. An assessment of these offences and civil penalties is made below.

Assessment of civil penalties

4.123 Practice Note 2: Offence provisions, civil penalties and human rights^[9], observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR), regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of the Articles 14 and 15 of the ICCPR.

4.124 The civil penalty provisions in Schedule 5 to the Bill should not be considered 'criminal' for the purposes of international human rights law. While the civil penalty provisions included in Schedule 5 to the Bill may be considered high (currently a maximum of $420,000) this is consistent with existing civil penalties in the Credit Act.

4.125 Further, the civil penalty provisions included in Schedule 5 to the Bill are directed at people in a specific regulatory context (that is, credit card providers in relation to credit card contracts) rather than applying to the general public. Credit card providers are generally corporate entities and not individuals. Also, none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty.

4.126 The statement of compatibility therefore proceeds on the basis that the civil penalty provisions in Schedule 5 to the Bill are not 'criminal' for the purposes of Articles 14 and 15 of the ICCPR.

Assessment of offences

4.127 The offence provisions in Schedule 5 to the Bill do not engage any of the applicable rights or freedoms. The offence provisions in Schedule 5 to the Bill are not reverse burden offences, offences of strict or absolute liability, and do not require mandatory minimum sentencing. The offence provisions in Schedule 5 to the Bill have been modelled on existing offence provisions in the Credit Act. Consistent with these existing provisions, the criminal penalties that apply to a breach of an offence in Schedule 5 to the Bill have been set at 50 penalty units (currently $10,500).

4.128 Further, the offence provisions in Schedule 5 to the Bill are directed at prohibiting behaviour in a specific regulatory context, namely, credit card providers in relation to credit card contracts. Credit card providers are generally corporate entities and not individuals and, as such, it is unlikely that the offence provisions in Schedule 5 to the Bill will engage the human rights of individuals.

Conclusion

4.129 This Schedule is compatible with human rights as it does not raise any human rights issues.

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:

•

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;

•

prohibiting unsolicited credit limit increase invitations;

•

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

•

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.