Second Reading Speech
Mr SWAN (Treasurer)I move:
That this bill be now read a second time.
Today I introduce a bill which delivers on our election commitment to crack down on unfair treatment of Australians with credit cards, and to help them get a better deal in the banking system.
In December, I announced new reforms to promote a competitive and sustainable banking system to give every Australian a fairer go.
We are introducing three broad streams of reform to empower consumers, to support smaller lenders, and to secure the flow of credit to our economy.
Today we are building on our new national responsible lending reforms by giving credit card holders more control over the amount they borrow.
We went to the last election promising to stamp out lender practices which see consumers pay more interest than they should.
And today that is precisely what we will do.
There are some 15 million credit card accounts in Australia.
We simply could not get by from day to day without our credit cards.
An average Australian family will often have two or three different credit cards.
That is why these reforms are so important.
Even if we only save hardworking families a few dollars a week, it will always be a worthwhile thing to do to put in reform in this area.
Of course we recognise businesses need to make a profit, but credit cards are so integral to the family budget that we must ensure every dollar of a borrower's hard-earned repayments work hard for them.
So the objective here is simple - to encourage the responsible use of credit cards by informed consumers, and to make sure that all Australians get value for money.
This bill also delivers on our commitment last year to introduce a compulsory, one-page key facts sheet for new home loan customers.
Again, this is not going to change the world, but it is very important step in empowering Australians to make the best financial decisions for themselves.
Consumers will be able to compare a loan they are offered by a big bank side by side with what will often be a better deal from their local credit union or building society.
Credit cards
This National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill contains strong measures to give hardworking Australians a better deal when it comes to their credit cards.
We have already overhauled our consumer laws in the past two years.
The commencement of the Australian Consumer Law marked the first time in 100 years that Australians have had a uniform consumer law.
The new National Credit Code introduced for the first time a national consumer credit law with tough new protections for consumers.
Today we deliver on our promise to fast-track reforms through the national credit laws to increase fairness for credit cards holders.
This bill will give consumers more say over how they use their credit cards and help them better understand what they are signing up for.
Banning unsolicited offers to borrowers to increase their credit limit
The bill prohibits lenders from sending unsolicited invitations to borrowers to increase their credit limit, as they sometimes cannot easily afford to do so.
Australian families who accept these types of offers can, over time, end up with too much credit card debt which can take years to pay off.
Of course this means they are saddled with significant interest payments which make it that much tougher to balance the family budget.
Some families have seen their credit card limit blow out to over $10,000 after a series of unsolicited offers, and may only be able to afford repayments of around $200 a month.
On a typical credit card at an interest rate of around 20 per cent interest per year it would take them about nine years to repay this level of credit card debt, and, of course, they would be slugged with over $11,000 in interest bills.
Of course, lenders will be able to continue providing factual advice to their customers about options for reviewing their credit limit.
Consumers will always have the opportunity to consider raising their credit limit if they decide that is the most appropriate way for them.
But this bill ensures credit card lenders will not any longer be allowed to bombard consumers with pre-approved, tick'n'flick offers to increase their credit limit every time they open the mail.
These types of offers will simply be banned.
Consumers will be able to agree upfront to receive pre-approved offers to increase their credit limit - if that is what they want.
But consumers who want to carefully manage their finances will no longer have to resist the temptation these types of offers present.
They will be able to make an informed decision to modify their credit limit - either up or down - if that suits them and their family budget.
But they will not be doing it because they were encouraged to do so by a lender who just wants to make a very quick buck out of them.
Use of credit card in excess of credit limit
The bill prevents lenders charging fees to customers who go over their credit limit, unless they have expressly asked for this service.
Of course, the government recognises that lenders will need the discretion to approve some payments which go over the credit limit.
A customer may have only gone over the limit by a few dollars, so it is important that we leave a bit of flexibility here while protecting the customer.
For example, it is in the interests of the borrower's family for their lender to honour a payment of their electricity bill so their power is not cut off.
So the industry and consumer groups have agreed it is appropriate to give credit providers the discretion to approve payments like this up to a default buffer equal to 10 per cent of a consumer's credit card limit.
This is a common-sense outcome which protects consumers, while giving them plenty of flexibility to manage their monthly budget.
However, credit providers will be banned from imposing fees or charges or a higher interest rate on any borrowings using this default buffer.
It is estimated that Australians will save around $225 million annually from this reform alone.
Consumers can opt out of this default buffer if that is best for them. They may consider it would help them manage their finances better.
They will also be able to ask their lender, if they choose, for a larger buffer if they decide they are prepared to pay fees for this service.
But it is up to every consumer to make their own informed decision.
Overall, this critical reform will mean an end to most credit limit overdraw fees and significant savings for Australian families and all consumers.
Warning on statements about only paying minimum repayments
We will further make regulations requiring all lenders to clearly warn consumers on their monthly credit statement of the consequences of only making minimum repayments.
Many consumers fall into the trap of only paying the bare minimum required each month, which ends up costing them dearly over time.
Even slightly higher payments can make a big difference to how much interest they are charged.
This reform is therefore absolutely critical to helping Australians manage their household budget.
The bill also forces lenders to allocate repayments to higher interest debts first, so families do not pay more interest than they should.
Currently, consumers do not have any control at all over how their repayments are allocated, with lenders often using their money to pay off parts of the loan which are actually only incurring low or no interest.
This means that the remainder of the consumer's debt can be accruing interest at a higher rate, and without being reduced by the repayment.
The reform will address this by ensuring repayments are allocated to the higher interest balances first.
I could not even begin to count the number times that people have come up to me and complained about this particular practice.
This reform might not look like it is a big reform, but it will end up saving money for many Australian consumers from their hard-earned pay packets.
A family could save something like $360 a year or more, depending on their spending habits and credit limit - and of course every dollar counts.
Put simply, we are ensuring that every dollar repaid by a consumer works harder to pay down their debts.
One-page home loan key facts sheet
In December I announced we would introduce a simple, standardised, one-page fact sheet for consumers to compare loans.
Families will be able to compare the cost of different home loans by putting one-page facts sheets from different lenders side by side.
They will be able to tell instantly the savings they could make between different mortgages every year and over the life of the loan.
A potential home borrower could easily compare the relative cost of a mortgage from a credit union against, for example, that of a big bank.
Buying a home is the biggest investment many Australians will ever make, and this bill helps them shop around for the best deal.
Choosing the wrong loan can be very expensive. Half a per cent more interest on a $250,000 loan can cost a borrower $30,000 or more over 30 years.
We are ensuring consumers know how many dollars they will repay for every dollar they borrow so they can compare this across lenders.
Consumers will be able to see and understand the true cost of a home loan, at a single glance.
This reform is all about forcing banks and other home loan providers to be honest and transparent with Australian families.
It is about promoting competition in the banking system and doing a little bit to help all Australians meet the costs of living.
Conclusion
The Gillard government is changing the way banks do business, and putting the power back in the hands of consumers.
We worked hard through the global financial crisis to secure our financial system, and preserve the competitive foundations of our banking sector.
In December, I announced a further reform package to help build up competition again in the banking system for all Australians.
There is no silver bullet here, but the bill I am introducing today is part of our commitment to always stand on the side of consumers.
I encourage all members of this House to do the same. I commend the bill to the House.
Debate (on motion by Mr Andrews ) adjourned.