Second Reading Speech
Mr SHORTEN (Maribyrnong - Assistant Treasurer and Minister for Financial Services and Superannuation)I move:
That this bill be now read a second time.
Today I introduce the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. This bill continues the government's commitment to ensuring that all Australians get a fair deal when they use credit. It also underlines how this Gillard Labor government is unquestionably both pro-business and a consumer champion.
This government has already introduced the most important national reforms in the history of Australian credit regulation. We have introduced a national licensing scheme for lenders and brokers, responsible lending obligations that seek to prevent consumers entering into contracts where they cannot afford the repayments, and, earlier this year, new requirements in relation to the two most popular forms of credit, home loans and credit cards.
This bill maintains our commitment to ensuring that the balance of fairness is not lost, particularly for the most vulnerable of consumers.
The package of reforms introduced in this bill address four main topics, relating to short-term lending, reverse mortgages, enhancements to the national credit legislation and closing the current regulatory gap in respect of consumer leases.
I will address each of these in turn.
Payday lending
With the first - short-term lending, also known as payday lending - it is estimated that at least $500 million is lent annually in short-term, small amount loans. At one end it can include small loans in which a person borrows $300 which must be repaid plus interest a week or two later, on the borrower's next payday. It also covers larger loans up to $2,000.
The vast majority of these loans are sought by low-paid workers or people on Centrelink benefits. It is estimated that nearly half of payday borrowers have incomes of less than $24,000 a year, and up to two-thirds earn less than $36,000. We do not believe it is acceptable that these consumers are left to pay exorbitant rates of interest because they have a very urgent need for a small amount of money.
Australians who use payday loans are usually unable to access other cheaper forms of credit. As a result they face two risks.
The first is the risk of excessively high costs, as consumers who cannot shop around can end up paying whatever the lender decides to charge. For example, there have been documented cases of lenders charging $1,477 in interest and fees on a loan of $1,000 for 26 weeks, or $2,074 on a loan of $1,000 for 52 weeks.
The second risk that consumers face is the risk of a debt spiral, where an existing loan is extended or rolled over into a new loan. The consumer is then faced with using even more of their scarce income to meet repayments, reducing their ability to meet other expenses from their own income.
Borrowing for these basics might seem like it helps in the short term, but for many people it simply makes things worse.
Borrowing money at very high interest leaves the underlying financial difficulties unresolved. When the direct debit payment comes out automatically at the next payday, it can leave the borrower with no cash for the next week's basics, so they have to go and get another loan, trapping them again in a cycle of debt.
A significant number of borrowers take out multiple loans and there is evidence that some lenders' existing business models actually rely on this occurring. They need people to keep coming back again and again, borrowing more and more, and paying larger and larger fees.
Take the example of a person on a fortnightly Centrelink benefit. They are caught short one week - they have to replace the tyres on their car or fix up the engine - and they take out a loan of $300, filling in a direct-debit form with the paperwork for the day their next payment will hit their account. Typical fees - not exaggerated fees - on that loan will be around $105 (35 per cent as a fee). So, if you borrow $300, you have to pay interest of $105 to establish the loan. So on their next payday $405 comes out of their account, leaving them short for that week as well. So this time they take out another loan - $350, and a higher rate again - and so the spiral of debt commences.
We believe the responsible role of government is, on one hand, to facilitate a competitive market for microloans but, on the other hand, to intervene when the market fails. There is a case to argue that in payday lending there is a significant example of market failure: the price of borrowing money is simply too high. Borrowers who are desperate for cash will pay whatever it costs to get them their loan quickly, whatever the consequences might be the next week.
What is more, Australian payday lenders' fees have grown substantially in the last decade and are now among some of the highest in the world.
In America, some states have adopted caps of between 16 per cent and 35 per cent. In Canada, rates are capped as low as 17 per cent in some provinces. Interest rate caps apply in 14 European Union nations: France, Germany, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain, Slovenia, Greece, Ireland, Malta, Belgium and Estonia.
So what we are now doing is the following. We are implementing Australia's first national cap on costs for 'small amount' contracts - that is, contracts for $2,000 or less that run for less than two years. Lenders will be limited to charging an upfront fee - a percentage in the case of this bill - of 10 per cent of the amount of credit the borrower receives, and then two per cent each month for the life of the loan.
This cap delivers real outcomes for consumers. It ensures that borrowers who are in need of a small amount loan will not face relatively high costs, and will reduce the risk of an ongoing cycle of dependency through the continued use of this form of credit.
But providing for a cap on costs is only part of the protections under this package. The bill addresses the risk of a debt spiral by introducing prohibitions on refinancing small amount contracts, and on lenders and brokers providing or arranging multiple loans. It may be convenient or simple for a consumer to take out one loan to meet the repayments under a second loan. However, in the long term they are only going backwards financially until they reach a point where they can no longer repay their debts and seek help.
Also, we think more could be done to encourage consumers to utilise other cheaper options. There are currently cheaper alternatives to small-amount loans, such as Centrelink advances, utility hardship programs from the large utility companies, and no-interest and low-interest microfinance schemes. Under these reforms small-amount lenders will be required to disclose the availability of these options to their customers.
And lenders who generate their businesses from websites will be required to provide a link to the ASIC website at moneysmart.gov.au.
These measures will tackle the problem of long-term debt dependence, and ensure that borrowers are aware of alternatives that may better meet their needs.
There is no doubt that over the course of the government's consultations regarding the reforms which have got to this point, strong views have been expressed by both sides, from lenders and consumer groups. The effects of payday lending on the welfare of Australian households have been strongly debated. Let me be clear, the Gillard government strongly believes that short-term loans do have a role in the Australian economy and should be a part of everyday life, but we are also focussed on protecting vulnerable consumers, not terminating the payday lending industry. We do believe it is time that the interests of consumers are improved.
Whilst early negotiations with payday lenders perhaps have not seen much movement from payday lenders, I do remain optimistic that, in the process of consultation and negotiation of this bill, sensible heads and pragmatic business operators amongst the payday lenders will recognise that change is inevitable and the status quo can no longer remain. I look forward to that process.
Reverse mortgages
The bill also introduces new protections for seniors seeking to take out a reverse mortgage.
Many senior Australians have worked hard to own their home before their retirement. If they now need to access the equity in their home through a reverse mortgage then they deserve to be adequately protected.
This class of borrowers can be particularly vulnerable for a number of reasons. Firstly, a senior Australian may be unlikely to recover financially if they enter into the wrong loan and exhaust their equity. Secondly, reverse mortgages are very different from other credit products and most borrowers will not be familiar with how they work.
The most significant risk to our senior Australians is that they could end up with a debt greater than the value of their home, known as negative equity. That is why the government is implementing Australia's first statutory protection against negative equity. This will ensure that older Australians are not caught short at a time in their life when financial stability is so important as their capacity to earn may be less than it once was.
The other major risk is that consumers will make poor choices because they are unaware of, do not appreciate or have not been advised about all the consequences of entering into a reverse mortgage. For example, they may borrow too much while still relatively young and unknowingly restrict their future choices if they later need to move into aged-care accommodation or have greater health bills.
Reverse mortgage lenders and brokers will therefore be required to meet specific disclosure requirements. They will need to sit down with consumers before they take out a reverse mortgage and walk them through the different scenarios. These scenarios will show them how the equity in the home will reduce according to how much they borrow, and different movements in house prices.
I am pleased to say this approach is supported by industry and will result in consumers making more informed and empowered choices in balancing their current and future needs.
Enhancements to the national credit regime
This bill also introduces several important enhancements to the national consumer credit law.
Firstly, there are changes to reduce the risk that borrowers in genuine hardship will face enforcement action by lenders, including losing their homes. The government considers it important that borrowers should have the best possible chance to come to an arrangement with the lender that avoids court action.
The procedures in relation to hardship variations will therefore be more flexible. And the restriction that means borrowers cannot apply for a variation because they borrowed more than $500,000 will be removed.
Secondly, providers of credit services such as brokers will be made more accountable by introducing a remedy for conduct that is unfair or dishonest. Unfortunately there will always be a minority of brokers who exploit the consumer's trust in them for their own benefit - this remedy will require them to adopt high levels of conduct, consistent with the standard of fairness, or face action by consumers.
Thirdly, this bill will restrict the use of the following words or phrases: 'independent', 'financial counsellor' and 'reverse mortgage'. These types of terms have an emotional or high-impact resonance and have been used in ways which mislead or manipulate consumers on occasion. We want these words and phrases to be used only where they strictly describe or relate to particular types of conduct or arrangements.
Consumer leases
This bill also provides for regulatory balance between credit contracts and consumer leases. Currently, the National Credit Code imposes significantly different obligations according to whether or not the consumer has a right or obligation to purchase the hired goods at the end of a consumer lease.
The experience of over a decade with the old state and territory Uniform Consumer Credit Code was that the technical nature of this distinction has resulted in regulatory arbitrage or people cherry-picking what suits the lender not the borrower. Some providers elected to offer consumer leases because of the lower regulatory requirements, and not necessarily because the consumer does not want to own the goods at the end of the contract. This particularly affects low-income consumers who may not have other finance options - in other words, they can end up paying for the use of goods such as refrigerators or computers without ever being able to own them.
Under this bill, consumer leases will be largely regulated consistently with credit contracts, to reduce the incentives for some providers to use leases in a way that can disadvantage consumers.
Executive remuneration: clarification of role of chair
Finally, the bill contains a measure to clarify a requirement in the Corporations Act 2001 relating to executive remuneration.
The government recently enacted reforms to strengthen Australia's remuneration framework. As part of these reforms, key management personnel and their closely related parties were prohibited from participating in the non-binding shareholder vote on remuneration.
However, an exception was provided to allow the chair of an annual general meeting to vote undirected proxies in remuneration related resolutions where the shareholder provides informed consent for the chair to exercise the proxy. Some confusion has arisen about whether this exception applies to the non-binding vote on remuneration. The bill clarifies that this exception applies to the non-binding vote required under section 250R.
Conclusion
The Gillard government is ensuring that fairness remains a feature of Australia's credit markets. In particular, we are ensuring that the regulation of credit does not happen in a way that ignores the vulnerable - such as some seniors or those on low incomes or people who find themselves in financial hardship.
The bill I am introducing today demonstrates our commitment to stand alongside consumers, but it also puts the importance of the access to credit and the growth and long-term sustainability of financial services businesses at the heart of our vision for the future. I encourage all members of this House to support its passage.
Debate adjourned.