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Responsible Credit Card Lending

Once again, banks find themselves in the spotlight for selling inappropriate products to their consumers. Earlier this week, the Australian Securities and Investment commission (ASIC) released Credit Card Lending in Australia, a report that highlighted some of the challenges of credit card lending. This week, the regulator also released the consultation paper Credit Cards: Responsible Lending Assessments, which is based on a review into credit card lending in Australia that began in 2017. The research found that the $14 million open credit card accounts were collectively being charged $1.5 billion in fees in 2017. “Only a handful of credit providers take proactive steps to address persistent debt, low repayments or poorly-suited products. There are a number of failures by lenders to act in the interests of consumers and we expect them to respond swiftly to our findings. We will be following up to ensure the problems we have identified are addressed, including public updates later this year,” said ASIC Deputy Chairman Peter Kell. In an official statement, the conduct regulator said there are almost 550,000 people in arrears and 930,000 in persistent debt. One of the findings highlighted by ASIC is that consumers are being provided with credit cards that are not financially suited to their needs. “For instance, many consumers carry balances over time on high interest rate products, when lower-rate products would save them money. ASIC estimates that these consumers could have saved approximately $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate,” ASIC indicated. The regulator continued that when looking at balance transfers, while large numbers of people reduce their credit card debt during a ‘promotional period’, 30 per cent actually increased their debt by 10 per cent after their balance transfers. Consultation in credit card lending The deadline for submissions on responsible lending assessments for credit cards is 31 July, with the final draft expected to be released in August or September. Changes that come out of this consultation will affect licensees that are credit providers or that provide credit assistance from 1 January 2019. It is hoped these changes will address concerns around the revolving debt of Australians. The regulator is proposing a three-year period to strike a balance 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.

GRC Professional caught up with David Jacobson, who has been following the developments with credit card lending and credit card lending assessments. Jacobson said the introduction of the three-year assessment could be a significant change, since the introduction of a two-year period can be a significant restriction.

“ASIC thinks that the proposed three-year period addresses the problem of long amortisation periods by ensuring that consumers are assessed on their ability to repay the credit limit on materially-higher amounts than the minimum repayments that are typically required under credit card contracts,” Jacobson explained. “The issue is how best to ensure that credit card debt does not become “hard core” (or persistent) indefinite debt upon which interest, fees and charges exceed the principal. ASIC’s proposal takes into account the UK’s Financial Conduct Authority’s view that, when assessing a consumer’s ability to repay, credit card providers: (a) should consider the consumer’s ability to repay the credit limit within a reasonable period; (b) in considering what is a reasonable period, may have regard to the typical time required for repayment of an unsecured personal loan for that amount; and (c) should not use the assumption of the amount required to make only the minimum monthly repayment.” Jacobson added that, “The FCA expects a reasonable period to be between three and four years. Only in exceptional circumstances should the repayment period extend beyond four years. Even then, the extension should not be significant and there should be no additional cost to the consumer.” Almost all credit providers currently assess their consumer’s ability to repay a fixed proportion of the proposed credit limit every month. “The proportion varies between providers, but is between 2.5% and 5% of the credit limit in all cases; the most common proportion used is 3%. Most providers do not currently assess how long the consumer would take to repay the credit limit if making those repayments.” You can download a Credit Card Lending in Australia here and you can download the consultation into the Credit Card: Responsible Lending Assessments here.

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