Consumer Reform and Consumer Credit

08 June 2011

Good morning ladies and gentlemen. 

It's a pleasure to be here in Sydney to talk with you about the Gillard Government's consumer law reform agenda.

I thought my friend and colleague David Bradbury, the Parliamentary Secretary to the Treasurer, made an astute point about the ever modern nature of the Australian consumer marketplace in his address to the Conference yesterday.

David highlighted how in today's technology driven landscape not only do we use credit as consumers to purchase the goods and services we want but all we have to do now is wave a computer-chip equipped card in front of a sensor to complete our transactions.

When David says the modern marketplace has presented us with some of our most challenging consumer issues he's right on the button.

And I want to spend a bit of time outlining talk how when it comes to any number of consumer reforms across a range of policy areas: what's good the consumer is usually good for the industry too.

In that way the Gillard Government is one that is consistently both pro industry and pro consumer.

Earlier this year we received a bit of political heat from some well known names in the bricks and mortar retail sector about the Low Value Threshold - or how the GST isn't applied to goods purchased online from overseas - and in short how they didn't think this was fair cop.

Leaving aside the administrative feasibility of applying to the GST to low value goods bought online, or the success of the relevant retailers advertising campaign, or the reasons they might want to find someone to blame for some of their difficulties - there is an important lesson I'd like you to draw from this particular issue and the Government's considered response.

Now we have asked the Productivity Commission to have a look at the LVT specifically but also the retail sector more broadly and what the digital revolution and online shopping means for the industry.

We took this approach because we know that shopping online isn't going anywhere because getting a better deal is what consumers love.

Firstly, it's well known that consumers can get better prices online.

Choice and range is also a big plus - with many more brands being available online than in-store.

Consumers have made clear during the LVT debate the convenience of shopping online instead of going to busy shopping malls or CBD department stores.

There is evidence that elements of the traditional business model of bricks and mortar retailers is outdated - whether it's do with supply chains, over exposure to property or levels of service.

Australia also needs to think carefully about why we don't have serious global brands like Amazon or even something more niche like Strawberrynet (for cosmetics).

So sure there are some challenges but there are also some huge opportunities for Australian retailers in a tech savvy world of buyers - so better understanding the forces of change - with some sage findings and advice from the Productivity Commission - can only be a good thing.

But my point in raising this now is to say loudly and clearly that when it comes to public policy settings and administration even if there are loud vested interests and public campaigns - whether it's on matters of taxation, on retirement savings, in respect to financial advice, access to credit or indeed something like online shopping - you ought to know that the Gillard Government are always going to place the consumer front and centre in our thinking and our construction of whatever response is required.

I am certainly committed to doing this.

Consumer protection makes good sense.

Not just good common sense, but good economic sense, because it empowers consumers and fosters economic sustainability.

History of consumer protection

Australia has come a long way since our early days of consumer protection.

As far back as the 1890's, when the colonies experienced their first severe economic crisis, people recognised that consumers face particular vulnerabilities when dealing with suppliers of goods and services — vulnerabilities that could not be left to the market to address.

Even back then, there was a realisation that market misbehaviour warrants legislation.

For example, the NSW Factories and Shops Act of 1912, enacted by the McGowen Labor Government, was an early predecessor of the prohibition on deceptive and misleading conduct in advertising.

Since those early days, Australia has had a strong and consistent tradition of consumer protection with many legislative milestones.

For example, the NSW Hire-Purchase Agreements Act of 1941 was, at the time, considered to be one of the most comprehensive and effective measures of its kind in the world.

The 1960's and 70's elevated consumer protection to another level with the establishment of dedicated consumer affairs offices and agencies across the country.

More recently, reforms to unfair contract terms, the Australian Consumer Law, and the National Consumer Credit Protection Act have harmonised and modernised Australia's consumer laws.

These are the most important reforms to Australia's consumer protection framework in decades.

Changes to consumer law have often been driven by changes in the behavior of the market and the way that consumers interact with it.

And today, the speed and saturation of information and communication technology means that life has become even more complex.

The range of products, sophistication of marketing, and pervasiveness of advertising and online commerce means that there is a continuing role for Government to ensure that we do not lose the balance of fairness.

Without a doubt, our modern economy holds many positives for consumers.

More choice means more competition.  And this means that consumers are better able to get the products and services they want, at the most competitive prices.

But progress often has a downside.

Unfortunately, predatory and rogue operators are still with us.  In fact, they have developed even more sophisticated ways to exploit consumers.

As well, consumers' increasing reliance on credit creates the additional risk of household over-indebtedness, which can lead to both individual and broader social detriment.

It's ironic to me that in the mainstream political debate today we heard a lot - thanks to a 'long on opportunism short on substance' Leader of the Opposition - we hear a lot about public debt, which in fact is very low in Australia by any international comparison, but we hear comparatively little about private debt.

Because when it comes to cost of living pressures and getting a fair go from a free market - it's private debt and the arrangements by which our citizens can access credit that we need to keep a very,very close eye on.

The GFC bought some persistent vulnerabilities into stark view for us all.

For example, it highlighted that the provision of irresponsible credit is bad for lenders, the economy and the welfare of households.

Other economies have learned these lessons the hard way.

Through the National Credit Reforms, particularly specific obligations relating to assessing a borrower's capacity to meet the repayments under their contract, the Gillard Government has moved to ensure that toxic credit cannot become a systemic issue for our economy.

The consumer credit reforms

I would like to explore in a little more detail what we have achieved in the area of credit since the onset of the GFC.

In 2008, the Government made a commitment to modernise Australia's consumer credit laws under a Council of Australian Governments' two-phase implementation plan.

Phase 1 was implemented with the passage of the National Consumer Credit Protection Act 2009.

As you would all know, it includes a licensing scheme, conversion of the Credit Code from State and Territory law to Commonwealth law, with some improvements, and the introduction of responsible lending conduct obligations for both lenders and intermediaries such as mortgage brokers.

These reforms have been crucial in making explicit the standards of lending this Government expects, and the level of consumer protections they create.

The reforms take aim at practices such as equity stripping and irresponsible lending so that they cannot become a systemic feature of our economy.

COAG agreed that the credit reforms would not end there and proposed consideration of several other topics to be undertaken as Phase 2.

Under this phase, the Government is considering what further work needs to be done in relation to topics such as the regulation of credit to small business or for investment purposes, credit card practices, reverse mortgages, consumer leases and further enhancements to the new national credit regime.

All this work is designed to ensure that our credit markets have nationally consistent and modernised credit regulation and that consumers continue to have access to credit on fair terms.

Credit card reforms

So what is fair for consumers?  How do we find the balance between what is fair for consumers, and what businesses can do in their normal commercial practices?

The Home Loans and Credit Cards Bill currently before Parliament will give you some idea of where the Government thinks the bar should be set when it comes to consumers and their credit cards.  The Bill introduces a suite of reforms in relation to credit cards.  These are:

  • a prohibition on over-limit fees unless consumers specifically agree that their account can go over the limit;

  • requiring credit card providers to allocate repayments to higher interest debts first;

  • requiring greater consistency in the operation of interest charges;

  • prohibiting unsolicited credit limit extension offers unless the consumer has agreed to the service;

  • giving consumers more say over nominating their own credit limit;

  • disclosing a clear summary of key account features on credit card application forms; and

  • disclosing information to consumers about the implications of making only minimum repayments.

The Bill also introduces a requirement for lenders to provide Home Loan Key Facts Sheets for their standard home loan products when a consumer asks for one, or to allow a consumer to print one from their website.

So how do these reforms help to achieve better outcomes for consumers?

They address some of the complex practices that have become associated with many credit cards, and that didn't always work in the interests of the consumer.  For example, the capacity to charge multiple different interest rates according to the character or source of the liability led to lenders allocating repayments to the lower interest-bearing debts first.  Inevitably, this resulted in consumers carrying higher-cost debt for a longer period.

And similarly — to paraphrase George Orwell — complexities in the operation of credit cards mean that some "interest free" periods are more "free" than others.

I guess the measure that has promoted most debate, both for and against, is the ban on unsolicited credit limit offers.

What we've heard from consumers, not just through consumer groups but through people writing to us, is that these "tick and flick" offers make it all too easy to get credit.  When you offer someone money, it's easy for them to say "yes" — only to find later that the easy choice is also the most expensive.

In this case, we considered that the offer — or the temptation — is not really a fair choice to offer a consumer, particularly if they are on a low income.

Of course, consumers still need to take some responsibility for their actions.  This Bill doesn't relieve them of the responsibility to manage their spending and money.

But this reform does mean that consumers will apply for more credit only when they need it, and make active, rather than passive, choices.

Next issues: consumer lease reforms

Another area where the Government will carry out further work under Phase 2 is the regulation of consumer leases.

There are significant differences in the application of the National Credit Act to credit contracts and to consumer leases. Currently, the 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 the lease.

Experience of over a decade with the old State-based Credit Code suggests that the technical nature of this distinction has created an identified risk of regulatory arbitrage.

This particularly affects low income consumers who may not have other finance options, and who may end up paying for the use of goods without ever owning them.

We will assess whether this technical ground should continue to be the basis for two substantially different sets of regulatory obligations.

Reverse mortgage reforms

Phase 2 of the consumer credit reforms also gives us the opportunity to consider the type of credit products which may become more sought after as Australia's population ages.

As baby boomers leave the workforce, there will be an increasing focus on financial products such as reverse mortgages which help Australians to achieve the lifestyles they want during retirement.

That's why the Government is committed to ensuring that senior Australians have adequate protections when seeking to access the equity in their home by using a reverse mortgage.

This type of product poses some interesting practical questions.

Firstly, a reverse mortgage is significantly different from any other type of credit contract because it does not require the same repayment discipline as a traditional home loan.

Secondly, because reverse mortgages have only been available in Australia over the last few years, consumers have not developed experience with this form of credit and may not know what to look for.

These borrowers are also particularly vulnerable in that they may not have the ability to recover financially if the product turns out to be inappropriate for them, since they generally cannot return to the workforce.

The combination of these factors creates a significant risk that consumers may make poor choices because they are unaware of, or do not appreciate, all the consequences of entering into a reverse mortgage.

And the consequences can be considerable.

For example, reverse mortgage borrowers may incur negative equity.  That is, they may need to pay off more than the value of their home as repayment for the loan.

As you could imagine, if a borrower dies and their home is sold to pay off the loan, there may be significant complications if additional funds need to be found from their estate in order to pay out the remainder of the loan.

Recognising the need for industry-wide reform, 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.

Interest rate caps

Turning now to another area which is commonly associated with consumer vulnerability — interest rate caps applied to short term, or "pay-day", lending.

It's estimated that at least $500 million is provided annually in these types of loans, predominantly to low-income earners.

The opportunity for exploitation is obvious.  Some lenders may charge excessive costs simply because the consumer is unlikely to be able to obtain credit elsewhere.  And repeated borrowings can result in a debt spiral as an increasing proportion of the borrower's income is used to pay the costs associated with borrowing.

This type of lending is subject to caps on costs in the Australian Capital Territory, New South Wales, Queensland and Victoria under existing State and Territory legislation.

But these caps are not consistent.  For example, the Victorian model caps only interest but not fees, while the New South Wales approach is to include a broad range of fees in the costs to be included in calculating whether the cap has been exceeded.

We also think that more could be done to encourage consumers to utilise other, cheaper options.  There are currently several alternatives, including Centrelink advances, utility hardship programs, and no-interest and low-interest microfinance loan schemes.

Given the risks associated with this type of lending, and the lack of national consistency, the Government has asked Treasury to examine the implications of introducing a national cap on costs.

We are concerned that relatively easy access to high-cost credit of this type may not be in the borrower's long-term interests.

Other portfolio work with a consumer focus

This morning, I have spoken about the work being undertaken in relation to credit.  But this is only part of the Government's more substantive commitment to reform.


For example, as well as the unfair contracts legislation I mentioned earlier, the Government has also delivered the Future of Financial Advice reforms.

I strongly believe that financial planners should only have one master - the consumer.

Yet for years product providers have called the tune because they are ones paying the planners through sales commissions and other kick-backs like expensive conferences.

Any industry that survives on these kinds of practices will not be trusted by consumers.

This lack of trust is one reason why up to 80% of Australians have never used a financial adviser.

It's time that the regulatory framework governing the provision of financial advice shifted the focus back to the consumer.

That's exactly what this Government will be doing by introducing a statutory "best interests" duty and a ban on advisers receiving conflicted remuneration.

The Future of Financial Advice reforms are not just about improving consumer protection.  They are also about improving the trust and confidence of consumers in the financial advice industry, so they will be more willing to approach financial advisers for assistance.

The key elements include:

  • A ban on sales commissions and "soft dollar" kick-backs like expensive  trips from 1 July 2012

  • A new duty for advisers to put their client's interests ahead of their own;

  • A compulsory requirement for adviser to renew their services every two years; and

  • Stronger powers for ASIC - allowing them to intervene an earlier stage if they detect problems.

Our financial advice reforms also complement the Government's historic commitment to increase the Superannuation Guarantee to 12 per cent.

We cannot reasonably encourage Australians to save more for their retirement without ensuring the retirement savings system is operating in their best interests.

Stronger Super

In terms of financial weight and enduring value I believe the Gillard Government's "Stronger Super" package is an especially solid commitment to consumer protection.

This consists of a range of reforms that will increase the retirement incomes of all Australians.

A key component is of course MySuper, a low cost and simple default fund option... SuperStream, which will enhance back office functions and thus improve the productivity and efficiency of the super system... plus a range of measures to strengthen the governance, integrity and regulatory settings of the super system, including self managed superannuation funds.

We will introduce tough new standards that providers of MySuper products must meet including:

  • No entry fees, with exit fees limited to cost-recovery.

  • A ban on commissions and conflicted remuneration structures in relation to retail distribution and advice in line with Government's financial advice reforms.

  • New duties that require superfund providers to deliver value for money or be stripped of their licence by the regulator.

  • A single, simple and easy-to-understand investment option designed to maximise a person's retirement income.

  • Standardised reporting requirements in plain English.

  • MySuper funds will be licensed by APRA, who will also monitor and publish MySuper fund investment returns and costs to ensure members are getting value for money.  Anyone making contributions to superannuation will be able to open a MySuper account.

  • This key component of the Gillard Labor Government's economic plan will work with other initiatives to increase the efficiency of the superannuation system and to lower fees by up to 40 per cent.  For a 30 year-old worker on average wages this would lift their retirement savings by $40,000.


The Government announced in last month's Budget, three key reforms to the not for profit sector, all of which will enhance greater transparency for the sector:

  1. the creation of the Australian Charities and Not-for-profit Commission (ACNC)

  2. the introduction of a statutory definition of charity, and

  3. tightening the availability of tax concessions to the unrelated business profits of NFPs.

A key function of the ACNC will include the establishment of a not-for-profit information portal.

This portal will allow NFPs to submit their information once - and only once - to a single Commonwealth agency and is an important reform to reduce red tape for the sector.  But it will also be a valuable information tool for consumers by giving donors information about the NFP they are donating to.

It's about transparency and accountability.

This will allow consumers to ensure that their generous donations are being utilised effectively by the NFP they have donated too.

And naturally taxpayers (we're all consumers) also want to know that foregone government revenue, through tax concessions, is being used for legitimate, rewarding endeavours for social good.

So a standard definition of what constitutes a charity and clarifying the tax treatment of unrelated commercial profits is good for taxpayers and consumers too.

Tax administration

And yet another example of our work to enhance consumer protections is the introduction of the new national tax agent services regime.

The tax agent services regime, which started on 1 March 2010, and is administered by the Tax Practitioners Board, was established to regulate tax agents and BAS agents.  It is designed to enhance consumer protection by improving the standard of tax advice delivered to consumers.

This regime will also be extended to financial planners who provide tax advice.  This will ensure that consumers of financial planning services receive accurate advice.


Following the tragic and devastating floods and Cyclone Yasi over summer, the Gillard Government has also embarked on an ambitious set of reforms to the insurance sector aimed at protecting consumers and ensuring that everyone has access to decent disaster - especially flood - insurance.

Working with the insurance industry and consumer groups we're introducing a new, easy-to-read, one page key facts statement, so consumers can tell at a glance exactly what they are and are not covered for under the terms of their insurance policy.

We're also introducing a standard definition for 'flood'.

At the moment, each insurance company defines flood in a different way, meaning that, for example, we have the ridiculous situation of one family being covered for flood damage while their neighbour, who is with a different insurer with a different definition of 'flood', isn't covered.

That has to change and this government is moving swiftly to solve the problem.


We in the Gillard Government are well aware that as times change, public policy must change with the times.

We must meet the challenges and take advantage of the opportunities that change presents.

As the other speakers at this conference remind us, only a substantial reform agenda will ensure that Australians are empowered to participate effectively in our modern economy and to send the right signals to business about what they want and need.

This Government looks forward to working with you on delivering just that.

And always keeping consumers interests front and centre in all our deliberations.

To put it simply we are a Government of consumer crusaders while being ardent encouragers of industrial and business innovation - because we think that is a modern approach that's very much in the national interest.

Again, thank you for the opportunity to speak with you this morning, and I trust that you enjoy the rest of the conference.