Submission - Credit Reporting Regulatory Framework: Submission to ALRC Privacy Inquiry (December 2007)

2.15. Responsible credit marketing

This section describes consumer concerns about industry practice, using the terms ‘responsible lending’ and ‘responsible credit marketing’. The term responsible lending has, in practice, been restricted to the actual decision to provide credit. Many irresponsible lending practices start at the marketing step – well before credit reporting information is involved.

There is some doubt that more comprehensive reporting would have a significant positive impact on the marketing of credit and the exact links between marketing and credit reporting are unclear.

Some credit marketing practices are regulated in Australia – notably the provision of false or misleading information and the requirement to include detailed information on fees and interest rates (including comparison rates).

However, many other marketing practices have raised concerns. The following list is non-exhaustive:

Unsolicited credit
There is a general concern that the amount of credit and high levels of consumer debt have been fuelled by unsolicited credit offers, usually through direct marketing campaigns (although this might also include unsolicited approaches in shopping centres etc.). The marketing of credit ‘door to door’ is banned in Australia[57] and there is also a general ‘do not call’ register.[58] However, there are few other restrictions on the unsolicited marketing of credit. In December 2007 the Federal Minister for Consumer Affairs announced that he was considering an inquiry into the prohibition of unsolicited credit offers after household credit levels hit a record high.[59] It is also interesting to note that the unsolicited sale of many other financial services products is prohibited or heavily regulated under the Corporations Act 2001.[60]
Personalised marketing
There are some specific concerns about using personalised marketing for credit products, as ‘personalising the offers makes it more appealing as many believe if the banks think they can afford that level of debt then they can.’[61]
Unsolicited limit increases
Unsolicited credit limit increases can be sent to existing consumers. These types of offers have been a major area of concern as the consumer has not asked for additional credit and they may be targeted at consumers who have existing debts.
Pre-approved credit
It is, in fact, unlikely that a lender would provide ‘pre-approved’ credit to a new customer in Australia, but the term ‘pre-approved’ (or words to that effect) are often used in credit marketing campaigns. Letters to new customers may even suggest a specific pre-approved credit limit for a new credit card. Letters to existing customers might also suggest a pre-approved cash advance. Some lenders even send sample cheques with the offer for the pre-approved cash advance sum. There may be a link between the use of the term ‘pre-approved’ and the use of credit reporting information in pre-screening. For example, direct marketing campaigns that have been pre-screened often use the term ‘pre-approved’. The question is whether the term ‘pre-approved’ represents a responsible lending practice, as it would appear to encourage an applicant to apply for additional credit whether or not they could afford it on the basis that the lender appears to believe they can afford it. Lenders are presumed to be acting professionally by most consumers.
Sending samples
As discussed above, some lenders send sample cheques showing how much money a person could have under a personal loan or cash advance. Other lenders send sample plastic credit cards (sending actual credit cards is prohibited in Australia[62]) There are concerns about whether sending samples represents a responsible lending practice.
Balance transfer offers – no requirement to cancel existing credit
Balance transfer offers have become an important marketing tool in recent years. They provide an opportunity for the industry to churn consumers from one provider to another. The marketing is built around lower interest rates for balance transfers, usually for a short period (3-6 months). As there is no requirement to cancel existing credit products when a balance transfer is undertaken, the overall amount of credit available to consumers increases. Consumer caseworkers and financial counsellors cite this as a common factor in consumer over-commitment.
Balance transfer offers – to be paid first
There are some important tricks in balance transfer marketing. For example, the card rules usually state that balance transfer amounts will be paid off first. So any monthly payment to the card will be applied to the transfer amount, not to recent purchases or card fees, which will therefore accrue compound interest at the full rate. This issue can be exacerbated by links between new card offers and rewards schemes. A typical example is a new card product that offers a rewards points bonus on the ‘first card spend’, often with an expiry period. Balance transfers and card fees will not count for this bonus, so a consumer will spend some money on the card in the first month to claim the rewards bonus. They will then find that they cannot pay off this transaction until the transfer sum has been paid off (often years later). Compound interest will accrue on the transaction for the entire period.
Interest free products
There are concerns about the use of interest free products as bait for expensive credit products. There are also instances where consumers have been offered credit limits that are substantially higher than the amount needed to cover the initial purchase.
Emphasising non-credit features
There is a strong emphasis in many credit marketing campaigns on non-credit features, including rewards schemes, status (for example, products that offer exclusive access or recognition) and even fashion (for example, credit cards that are marketed as design icons or fashion accessories). This marketing tends to downplay the serious nature of credit products and the risks involved in credit over-commitment. This is in contrast to many jurisdictions where the risks of credit need to be highlighted in credit marketing. For example, regulations in the UK require all home loan marketing, including television advertising, to carry a credit ‘health warning’.

It would appear that there are links between at least some of these issues and the use of credit reporting information in marketing campaigns.

The use of credit reporting information for direct marketing is likely to be subject to a general prohibition. However, pre-screening remains an outstanding regulatory issue. It may be necessary to consider pre-screening hand in hand with the regulation of responsible credit marketing. For example, if there was an Australian regulatory initiative on the responsible marketing of credit that helped to address this long list of concerns, support for pre-screening might improve.

[57] Section 146, Uniform Consumer Credit Code, appendix 1 of the Consumer Credit (Queensland) Act 1994 (Qld), <http://www.legislation.qld.gov.au/LEGISLTN/CURRENT/C/ConsumCredCode.pdf>.

[58] <https://www.donotcall.gov.au/>. The do not call register only covers telemarketing, not direct mail campaigns.

[59] Dasey D and Taverniti M, Credit's getting simpler, Sun-Herald, 9 December 2007, <http://www.smh.com.au/articles/2007/12/08/1196813081907.html?page=fullpage>.

[60] Section 1012C, Corporations Act 2001 (Cth),
<http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/F78309782A654198CA25736B0020BCEF>.

[61] Payplan, Irresponsible Lending - Are creditors to blame for the increase in consumer debt?, Website, accessed on 10 December 2007, <http://www.payplan.com/reasons-for-debt/irresponsible-lending.php>.

[62] Section 63A, Trade Practices Act 1974 (Cth), <http://www.austlii.edu.au/au/legis/cth/consol_act/tpa1974149/>.





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