House of Representatives

Explanatory Memorandum

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

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:

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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;

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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;

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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

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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:

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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

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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:

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finance brokers where they recommend a particular credit contract; and

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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:

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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

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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:

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different classes of credit card contracts;

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different credit limits; and

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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:

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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

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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:

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offers to increase the credit limit of the contract;

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

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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:

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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

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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.