ASIC is looking to update responsible lending assessments that could restrict the provision of credit cards, following a review of credit card usage that found Australians owe a staggering $45 billion on their cards.
The financial services regulator has released a new consultation, off the back of findings released in its review of credit card lending in Australia.
REP 580 Credit card lending in Australia looked at 21.4 million credit card accounts open between July 2012 and June 2017.
It found that there were over 14 million open credit card accounts as at June 2017, with outstanding balances totalling almost $45 billion.
According to the report, the regulator noted that while credit cards offer flexibility, they can “present a debt trap for more than one in six consumers”, as 18.5 per cent of consumers were found to be struggling with credit card debt.
In June 2017, there were almost 550,000 people in arrears, an additional 930,000 with persistent debt (the average balance of the card was 90 per cent of the credit limit over the previous year) and an additional 435,000 people repeatedly repaying small amounts.
Consumers were charged approximately $1.5 billion in fees in 2016–17, including annual fees, late payment fees and other amounts for credit card use.
The review found that young people were credit-hungry, being more likely to be in delinquency and making up the majority of the demographic for those holding more than one credit card.
Further, the regulator found that as at June 2017, balances had been transferred onto 7.6 per cent of open credit card accounts.
However, while more than half of consumers reduced their debt by 10 per cent or more by doing so (with almost 8 per cent paying off their debt completely), more than 31 per cent increased their debt by 10 per cent or more after transferring.
It added that this, therefore, suggested that a “debt trap” risk for balance transfers “affects a substantial proportion of consumers”.
Conduct of four lenders “out of step” with industry
The regulator also noted that several lenders had failed to update their credit card repayment practices for older credit cards.
Additional requirements introduced in 2012 required lenders to apply repayments against amounts accruing the highest interest before those with lower interest rates. This was intended to standardise practices and prevent terms that maximised the time and money needed to repay credit card debt.
However, the report found that four lenders (Citi, Latitude, American Express and Macquarie) had retained old rules for grandfathered credit cards open before June 2012.
As such, ASIC estimated that almost 525,000 consumers have been charged extra interest as a result, including on more than one card.
The report reads: “While these four credit providers are not breaking the law, they are charging their long-standing customers more interest than they should, and their conduct is out of step with the rest of [the] industry.”
However, it noted that in anticipation of a new Code of Banking Practice, from 2019, Citi and Macquarie will no longer use the previous method of allocating repayments for grandfathered credit cards, and American Express has indicated that it will make this change in 2019.
Latitude is reportedly “considering its position”.
Consultation opens on new credit card responsible lending assessments
Given the findings of the credit card report, ASIC has now launched a consultation on updating responsible lending assessments for credit cards.
The regulator is seeking feedback on a proposal to use its power under the National Credit Act to ensure consumers can afford to repay their credit card debts within a “reasonable period” by setting a specific time period.
ASIC is looking to prescribe a period of three years for responsible lending assessments for new credit card contracts or credit limit increases.
Under the proposal, which is open for consultation, ASIC proposes that:
- assessments would be based on the consumer’s ability to repay the credit limit within three years, and
- this period would apply to all classes of credit card contracts.
According to ASIC, the three-year period would “strike an appropriate 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”.
The proposed new reform would apply to credit licensees providing credit or credit assistance in relation to both new and existing credit card contracts from 1 January 2019.
This proposal follows recent reforms to the regulation of credit card lending. Under the revised responsible lending obligations, a credit card contract or credit limit increase must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within a period prescribed by ASIC.
The closing date for submissions is 31 July 2018.
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