On 28th November, a press release was posted on the Hon Kelly O’Dwyer MP’s web site which outlined the Government response to the Small Amount Credit Contract Review which was completed in April 2016. Given the holiday break, and the fact this was not announced via the Treasury it may have got lost. I certainly missed it! The entry was tagged “budget” on her site.
Essentially the government has accepted many of the the recommendations, and will legislate the changes in 2017, with some grandfather provisions for existing contracts. A further review will be done in 3 years time.
The Turnbull Government has today released its response to the final report of the independent review of the small amount credit contract (SACC) laws.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, said the Government supported the vast majority of the recommendations, in part or in full.
“The final report has made a number of recommendations designed to increase financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments,” Minister O’Dwyer said.
“Implementation of these recommendations will ensure that vulnerable consumers are afforded appropriate levels of consumer protection while continuing to access SACCs and leases.”
The Government undertook further consultation following the release of the final report, and thanks all who participated in this process.
The Government’s response supports:
- retaining the existing price caps on SACCs;
- extending the SACC protected earnings amount requirement to all consumers and lowering it to 10 per cent of the consumer’s net income (currently, for those consumers who receive 50 per cent or more income through payments from Centrelink, total SACC repayments are capped at 20 per cent of a consumer’s gross income);
- introducing a cap on total payments on a consumer lease equal to the base price of the good plus 4 per cent of that price per month; and
- introducing a protected earnings amount requirement for consumer lease providers of 10 per cent of net income for all consumers, equivalent but separate to the requirement for SACCs.
It is intended that the changes will apply 12 months following the passage of the legislation through Parliament. Legislation will be developed subject to the Government’s other legislative priorities, but at this stage is expected to be progressed during 2017.
The Government acknowledges the significant impact these changes will have on existing industry participants, and will put in place appropriate grandfathering arrangements for existing contracts.
The Government again thanks the independent panel for their detailed consideration of the issues.
The review was established to fulfil a statutory requirement under the National Consumer Credit Protection Act 2009 to examine and report on the effectiveness of the law relating to SACCs. The full report is available at the Consumer Credit website.
Given the extent of the reforms announced today and the ongoing need to ensure that vulnerable consumers are protected, while still allowing appropriate access to finance, the Government will conduct a further review of the small amount credit contract and consumer lease laws within three years from the commencement of the legislative changes.
SACCs
Recommendation 1 – Affordability
Extend the protected earnings amount regulation to cover SACCs provided to all consumers. Reduce the cap on the total amount of all SACC repayments (including under the proposed SACC) from 20 per cent of the consumer’s gross income to 10 per cent of the consumer’s net (that is, after tax) income. Subject to these changes being accepted, retain the existing 20 per cent establishment fee and 4 per cent monthly fee maximums.
Recommendation 2 – Suitability
Remove the rebuttable presumption that a loan is presumed to be unsuitable if either the consumer is in default under another SACC, or in the 90-day period before the assessment, the consumer has had two or more other SACCs. This recommendation is made on the condition that it is implemented together with Recommendation 1.
The Government accepts these recommendations in full.
The Government supports the panel’s direction to promote financial inclusion by ensuring that consumers do not enter into unaffordable SACCs whose repayment absorbs too large a proportion of their net income.
The Government notes that these recommendations directly target the harm associated with repeat borrowing, rather than repeat borrowing per se, by reducing the likelihood of a debt spiral occurring, while still enabling consumers to access further SACCs if the repayments are affordable.
The Government notes that it is unusual to have such prescriptive requirements regarding the amount that a consumer can devote to a particular form of finance; however, the panel’s report highlighted the vulnerable customer base of SACCs.
The panel noted that the principles based responsible lending obligations appear insufficient alone to prevent observed harm; a more strict affordability test is warranted. The Government accepts this proposal.
To assist SACC providers in complying with this obligation, the Government will provide a safe harbour allowing providers to rely on a consumer’s bank statements when determining a consumer’s average income for the purposes of the protected earnings amount, unless there is evidence suggesting that it is inappropriate to do so.
The Government supports removing the current rebuttable presumption that a SACC is considered unsuitable if a consumer has had two or more SACCs in 90 days.
Recommendation 3 – Short term credit contracts
Maintain the existing ban on credit contracts with terms less than 15 days.
The Government accepts this recommendation in full.
Currently there is an outright ban on a provider offering a credit contract which has a term of 15 days or less irrespective of whether the credit contract is secured. The Government supports the panel’s recommendation to maintain this ban.
Loans of less than 15 days consume a disproportionate amount of a consumer’s income due to large repayment amounts in a short period of time. These loans are more likely to trap consumers in a debt spiral than loans with longer durations.
Recommendation 4 – Direct debit fees
Direct debit fees should be incorporated into the existing SACC fee cap.
The Government notes this recommendation.
This recommendation is the responsibility of ASIC, as the independent regulator.
In response to the recommendation, ASIC announced on 4 November 2016 that it would remove ASIC Class Order [CO 13/818] Certain small amount credit contracts. The class order allowed SACC providers to charge a separate fee for direct debit processing.
The removal ensures that consumers are not charged direct debit fees when taking out a SACC. The change will apply to any SACC provided from 1 February 2017. Loans that commence before 1 February 2017 will continue to operate under the existing rules and third party direct debits will be able to be charged on those loans.
Recommendation 5 – Equal repayments and sanction
order to meet the definition of a SACC, the credit contract must have equal repayments over the life of the loan (noting that there may need to be limited exceptions to this rule).
Where a contract does not meet this requirement the credit provider cannot charge more than an annual precent rate (APR) of 48 per cent.
The Government partially accepts this recommendation.
The Government supports the panel’s recommendation that SACCs should have equal repayments over the life of the loan as it will stop SACC providers artificially extending the term of the loan.
ASIC will have the power to allow limited exceptions where appropriate.
However, the Government does not support the panel’s recommendation that, where a contract does not meet the equal repayment requirement, a credit provider cannot charge more than an annual percentage rate (APR) of 48 per cent. This would effectively create a specific penalty regime for this requirement, and the Government would prefer a consistent approach to penalties across the SACC regime.
Recommendation 6 – SACC database
A national database of SACCs should not be introduced at this stage. The major banks should be encouraged to participate in the comprehensive credit reporting regime at the earliest date.
The Government accepts this recommendation in full.
This does not preclude the industry from developing its own database.
Recommendation 7 – Early repayment
No 4 per cent monthly fee can be charged for a month after the SACC is discharged by its early repayment. If a consumer repays a SACC early, the credit provider under the SACC cannot charge the monthly fee in respect of any outstanding months of the original term of the SACC after the consumer has repaid the outstanding balance and those amounts should be deducted from the outstanding balance at the time it is paid.
The Government accepts this recommendation in full.
This will allow consumers, if their loan is discharged early, to only pay fees for the new shorter length of the loan.
Recommendation 8 – Unsolicited offers
SACC providers should be prevented from making unsolicited SACC offers to current or previous consumers.
The Government accepts this recommendation in full.
The Government agrees with the principle that consumers should only apply for a SACC when they pro-actively choose to do so, rather than being prompted by a SACC provider.
Recommendation 9 – Referrals to other SACC providers
SACC providers should not receive a payment or any other benefit for a referral made to another SACC provider.
The Government does not accept this recommendation.
The panel considered that it would be inappropriate for SACC providers to refer a customer to another SACC provider after determining that the customer is unsuitable to receive a SACC. During the consultations undertaken following receipt of the final report, it became apparent that there are legitimate instances where it may be appropriate for a referral to occur. For example, some SACC providers only target specific geographical locations. If such a SACC provider receives an application from a consumer from another location, they may wish to refer that consumer to another SACC provider.
In addition, paying for referrals may be less expensive than other means of attracting customers, who are in any case subject to a cap on costs (a 20 per cent establishment fee and a 4 per cent monthly fee).
Recommendation 10 – Default fees
SACC providers should only be permitted to charge a default fee that represents their actual costs arising from a consumer defaulting on a SACC up to a maximum of $10 per week.
The existing limitation of the amount recoverable in the event of default to twice the adjusted credit amount should be retained.
The Government does not accept this recommendation.
The Government will maintain the existing default cap of twice the adjusted credit amount.
Evidence provided by the SACC industry suggests that the $10 per week default fee does not cover the costs of managing a defaulting borrower. The Government considers the existing cap provides sufficient restrictions to prevent SACC providers from over-charging a consumer.
Consumer Leases
Recommendation 11 – Cap on cost to consumers
A cap on the total amount of the payments to be made under a consumer lease of household goods should be introduced. The cap should be a multiple of the Base Price of the goods, determined by adding 4 per cent of the Base Price for each whole month of the lease term to the amount of the Base Price. For a lease with a term of greater than 48 months, the term should be deemed to be 48 months for the purposes of the calculation of the cap.
The Government accepts this recommendation in full.
The Government supports this recommendation. The SACC review identified the high cost of consumer leases, particularly to vulnerable consumers.
This will provide, for example, a cap of 1.48 times of the Base Price of the goods for a 12 month lease and a multiple of 1.96 times the Base Price of the goods for a two year lease. Leases of four years or more would be subject to a cap of 2.92 times the Base Price of the goods.
For example, a two year lease for a TV valued at $500 would be limited to total payments of $980.
This recommendation will make the regulation of consumer leases more consistent with that of credit contracts, which are subject to a 48 per cent APR cap. However, in recognition of the different costs facing consumer lease providers, the Government supports a higher cap on costs for consumer leases.
Recommendation 12 – Base Price of goods
The Base Price for new goods should be the recommended retail price or the price agreed in store, where this price is below the recommended retail price.
Further work should be done to define the Base Price for second hand goods.
The Government accepts this recommendation with an amendment.
The Government supports this recommendation for new goods.
To provide a clear understandable process for applying the cap to second hand goods, second hand goods will be subject to the same cap as new goods, with a 10 per cent discount to the original Base Price per annum, up to a maximum of 30 per cent.
For example, a $500 TV re-leased after two years would have a new base price of $400 for the purposes of calculating the cap.
Recommendation 13 – Add-on services and features
The cost (if any) of add-on services and features, apart from delivery, should be included in the cap. A separate one-off delivery fee should be permitted. That fee should be limited to the reasonable costs of delivery of the leased good which appropriately account for any cost savings if there is a bulk delivery of goods to an area.
The Government accepts this recommendation with an amendment.
The Government accepts that certain leased goods may necessarily have significant installation costs, and is therefore allowing installation on some items be excluded from the cap.
The Government will provide ASIC with the ability to exempt the installation costs of certain leased goods from inclusion in the cap on costs where ASIC considers it appropriate to do so.
Recommendation 14 – Consumer leases to which the cap applies
The cap should apply to all leases of household goods including electronic goods.
Further consultation should take place on whether the cap should apply to consumer leases of motor vehicles.
The Government accepts this recommendation with an amendment.
Following further consultation after the release of the final report, the Government will apply the cap on costs to all consumer leases.
The Government notes that novated leases and small business leases are not covered by the Credit Act, and will not be affected by any changes.
Recommendation 15 –Affordability
A protected earnings amount requirement be introduced for leases of household goods, whereby lessors cannot require consumers to pay more than 10 per cent of their net income in rental payments under consumer leases of household goods, so that the total amount of all rental payments (including under the proposed lease) cannot exceed 10 per cent of their net income in each payment period.
The Government accepts this recommendation in full.
The Government notes that it is unusual to have such prescriptive requirements regarding the amount that a consumer can devote to a particular form of finance; however, the panel’s report highlighted the vulnerable customer base of consumer leases.
The panel noted that the principles based responsible lending obligations appear insufficient alone to prevent observed harm; a more strict affordability test is warranted. The Government accepts this proposal.
Capping the amount of income that can be devoted to lease payments will ensure that consumers do not get locked into long term lease contracts they cannot afford, while still enabling consumers to lease a wide range of goods.
To assist lessors in complying with this obligation, the Government will provide a safe harbour allowing lessors to rely on a consumer’s bank statements when determining a consumer’s average income for the purposes of the protected earnings amount, unless there is evidence suggesting that it is inappropriate to do so.
Recommendation 16 – Centrepay implementation
The Department of Human Services consider making the caps in Recommendations 11 and 15 mandatory as soon as practicable for lessors who utilise or seek to utilise the Centrepay system.
The Government supports this recommendation in-principle.
The Government supports this recommendation in-principle. Action in response to the recommendation will take account of the outcome of litigation between The Aboriginal Community Benefit Fund Pty Ltd and the Chief Executive Centrelink.
Recommendation 17 – Early termination fees
The maximum amount that a lessor can charge on termination of a consumer lease should be imposed by way of a formula or principles that provide an appropriate and reasonable estimate of the lessors’ losses from early repayment.
The Government accepts this recommendation in full.
The Government supports this recommendation in-principle, and will undertake further consultation to finalise the formula or principles.
Recommendation 18 – Ban on the unsolicited marketing of consumer leases
There should be a prohibition on the unsolicited selling of consumer leases of household goods, addressing current unfair practices used to market these goods.
The Government partially accepts this recommendation.
The Government will prohibit door to door selling of consumer leases.
The final report highlights the concerns that sales through unsolicited approaches are unfair and have the capacity to cause financial harm irrespective of the target market. However, difficulties with distinguishing between unsolicited selling and marketing mean that the Government will only prohibit door to door sales.
Combined recommendations
Recommendation 19 – Bank statements
Retain the obligation for SACC providers to obtain and consider 90 days of bank statements before providing a SACC, and introduce an equivalent obligation for lessors of household goods.
Introduce a prohibition on using information obtained from bank statements for purposes other than compliance with responsible lending obligations.
ASIC should continue its discussions with software providers, banking institutions and SACC providers with a view to ensuring that ePayment Code protections are retained where consumers provide their bank account log-in details in order for a SACC provider to comply with their obligation to obtain 90 days of bank statements, for responsible lending purposes.
The Government accepts this recommendation in full.
The Government supports retaining the requirement for SACC providers to collect 90 days of bank statements before providing a SACC as well as introducing a requirement that lessors must also collect 90 days of bank statements.
Evidence from the final report shows that lessors are not making sufficient inquiries when providing a lease and may be in a position to make a more accurate assessment of consumers’ circumstances if they collected at least 90 days of bank statements, in addition to their responsible lending obligations.
The Government also supports introducing a prohibition on using information obtained from bank statements for purposes other than compliance with responsible lending obligations.
Recommendation 20 – Documenting suitability assessments
Introduce a requirement that SACC providers and lessors under a consumer lease are required at the time the assessment is made to document in writing their assessment that a proposed contract or lease is suitable.
The Government accepts this recommendation in full.
This recommendation strengthens the responsible lending obligations.
Recommendation 21 – Warning statements
Introduce a requirement for lessors under consumer leases of household goods to provide consumers with a warning statement, designed to assist consumers to make better decisions as to whether to enter into a consumer lease, including by informing consumers of the availability of alternatives to these leases.
In relation to both the proposed warning statement for consumer leases of household goods and the current warning statement in respect of SACCs, provide ASIC with the power to modify the requirements for the statement (including the content and when the warning statement has to be provided) to maximise the impact on consumers.
The Government accepts this recommendation in full.
The Government supports lessors being required to provide consumers with a warning statement to assist consumers in making more informed decisions.
The Government considers that giving ASIC the flexibility to modify the requirements for the statement will likely result in a more effective warning over time.
Recommendation 22 – Disclosure
Introduce a requirement that SACC providers and lessors under a consumer lease of household goods be required to disclose the cost of their products as an APR.
Introduce a requirement that lessors under a consumer lease of household goods be required to disclose the Base Price of the goods being leased, and the difference between the Base Price and the total payments under the lease.
The Government partially accepts this recommendation.
The Government supports disclosing the base price of a lease and the difference between the base price and the total cost of a consumer lease.
The Government does not consider it appropriate to require disclosure of an APR for consumer leases as in order to calculate an APR it is necessary to treat the lease as a sale by instalment and assume that the consumer owns the good at the end of the lease. This is not the case.
In addition, the Government does not consider it appropriate to require disclosure of an APR for SACCs. While the APR does accurately reflect their high cost nature, this is partly a reflection of the short term nature of SACCs.
Recommendation 23 – Penalties
Encourage a rigorous approach to strict compliance by extending the application of the existing civil penalty regime in Part 6 of the National Credit Code to consumer leases of household goods and to SACCs, and, in relation to contraventions of certain specific obligations by SACC providers and lessors, provide for automatic loss of the right to their charges under the contract.
The Government accepts this recommendation in full.
The Government supports this recommendation as it will encourage SACC providers and lessors to comply with the Credit Act.
Recommendation 24 – Avoidance
The Government should amend the Credit Act to regulate indefinite term leases, address avoidance through entities using business models that are not regulated by the Credit Act, and address conduct by licensees adopting practices to avoid the restrictions on the maximum amount that can be charged under a consumer lease of household goods or a SACC, or any of the conduct obligations that only apply to a consumer lease of household goods or a SACC.
The Government accepts this recommendation in full.
The Government supports regulating indefinite term leases. As these products are currently exempted from the consumer protections in the Credit Act, providers are not required to hold an Australian Credit Licence or meet responsible lending obligations. This has resulted in opportunities for regulatory arbitrage and has been relied upon by fringe providers of short-term and indefinite leases to avoid regulation, including where the consumer may be disadvantaged by the use of an unregulated lease relative to a consumer lease.
The introduction of an anti-avoidance provision will assist in avoiding a drift to non-compliance where providers who are complying with the Credit Act are losing business to those who are not complying and are, therefore, under financial pressure to lower their own standards. It will also minimise consumer detriment resulting from businesses which are avoiding compliance with cost caps and additional responsible lending and conduct requirements.
