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

3.3. Consumer protection regulation

3.3.1. General principles
3.3.2. Detailed regulations
3.3.3. Industry operating rules and best practice

3.3.1. General principles

The majority of financial services products in Australia are regulated by the Corporations Act 2001 (as amended by the Financial Services Reform Act). This legislation contains high level principles that require all financial services providers to obtain a licence. Under Section 912A of the Act, licence holders have several ‘general obligations’. These include:

To do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly;
To undertake training and maintain the competence of staff and representatives; and
To join an approved EDR scheme.

Unfortunately, these basic general principles do not apply to the provision of consumer credit in Australia. Credit continues to be regulated (for the most part) by the States and Territories through the application of the UCCC and other State and Territory legislation (such as local fair trading laws). These laws do not include general principles in relation to fairness, honesty training, competence or EDR schemes. There is no ‘licence’ for credit providers (although some credit providers will also be financial services licence holders under the Corporations Act 2001 as result of other lines of business – e.g. deposits and insurance).

The general principles that are contained in the UCCC focus on disclosure requirements and the conduct of the credit provider at the time of a credit application. Briefly, the key requirements include:

A prohibition on false and misleading information;
Restrictions on unconscionable conduct;
Disclosure requirements relating to interest rates (e.g. comparison rate information); and
Disclosure requirements relating to fees and charges.

As discussed in this Report in Section 2.16 (page 34), the UCCC does not include a proactive requirement for credit providers to assess a consumers’ ability to repay a loan without suffering undue hardship.

In other general consumer law the only relevant principle is contained in Section 28A of the Fair Trading Act 1992 (ACT).[88] This requires credit providers to conduct a satisfactory assessment of a consumer’s ability to repay, but it only applies to credit contracts involving consumers in the Australian Capital Territory – one of Australia’s smallest jurisdictions.

A recent development is the release of the Exposure Draft of the Finance Broking Bill 2007 (NSW).[89] Although this legislation has been submitted in NSW it is designed as uniform legislation for all States and Territories, who will pass mirror legislation once the NSW Act is passed. This proposed legislation contains a requirement to assess a consumer’s ability to repay – although it only applies to credit arranged by finance brokers.

The missing element in Australian law is a set of high-level general principles that covers all credit providers and includes the following elements:

A requirement to act honestly and fairly;
A requirement to undertake training and maintain the competence of staff and representatives;
A requirement to join an approved EDR scheme; and
A requirement to assess a consumers’ ability to repay a loan without suffering undue hardship.[90]

These elements could be packaged together and appear in specific responsible lending legislation (similar to the US Truth in Lending Act) or general credit legislation (similar to the UK Consumer Credit Act 2006[91]). This would probably be achieved in Australia by an amendment to the UCCC. Alternatively the Corporations Act 2001 could be amended so that credit was included as a financial service - the requirement to assess ability to repay could then be added to the Corporations Act 2001 as a ‘general obligation’.

Moving credit to the Corporations Act 2001 is a significant change requiring national coordination. Interestingly, such a move has been recommended by several inquiries and further consideration of this proposal is included in the policy of the incoming ALP Government. Such a move should not be dismissed lightly.

Concerns over more comprehensive reporting will remain strong while there is no obligation to lend responsibly or to market credit responsibly in Australian law.

As noted earlier in this report, the ALRC is in a difficult position on this issue as they have been asked to consider the reform of credit reporting privacy regulation only and they have no brief to cover general (non-privacy) consumer protection arrangements. This is a very difficult issue to address with one hand effectively tied behind their back. However, the ALRC may be able to note some of the shortcomings in consumer protection law and the impact that this has on credit reporting privacy regulation.

3.3.2. Detailed regulations

In addition to the general principles discussed above, more detailed regulation may be required. The key issue is what test will be used to determine if a credit provider is acting as a responsible lender.

In the US these detailed regulations are contained in legislation.[92] In the UK the detailed regulations are contained in a Guideline issued by the regulator,[93] and further developed in industry codes, such as the Banking Code.[94]

In Australia, the likely location of detailed regulations is in the UCCC (if it were amended to include responsible lending provisions) or the Corporations Act (if it were amended to include credit). An example of detailed regulation has now been set by Section 33 of the proposed Finance Broking Bill 2007 (NSW). This includes very detailed regulations on what information should be included in an assessment of capacity to repay.

Similarly, there may need to be some further detailed regulation of responsible credit marketing. This could potentially be located in the same regulatory instrument (e.g. the UCCC). However, there is a history of addressing marketing concerns in the financial services industry through best practice guidelines issued by the regulator (usually ASIC). This may be a worthwhile option in addressing irresponsible credit marketing.

This Report suggests that legislation (either an amended UCCC or Corporation Act) is the best location for detailed regulation in relation to responsible lending and responsible credit marketing. The content could include:

Regulation on what factors should be included in a proper assessment of a consumer’s capacity to repay a loan (e.g. verification of income, assessment of credit reporting information etc.);
Tests or definitions of terms, including ‘capacity’ and ‘hardship’;
Regulation of what content should be prohibited in responsible credit marketing (e.g. use of the term ‘pre-approved’); and
Limits on credit marketing (e.g. regulation, if appropriate, of unsolicited credit marketing).

3.3.3. Industry operating rules and best practice

Industry codes may play a role in the regulation of responsible lending and responsible credit marketing.

For example, the Code of Banking Practice[95] has played a significant role in Australia and could be amended to include criteria for assessing ability to pay and guidance on the responsible marketing of credit. This may be easy to achieve as several major Australian banks have already adopted responsible lending principles.[96]

However, such an approach may limit regulation to specific credit providers. Many credit providers will not currently be signatories of an industry Code.

A more effective approach may be to develop a specific credit marketing best practice guideline (or guidelines), covering responsible lending and responsible credit marketing. This could take the form of a regulator’s best practice guideline (similar to the UK), and cover all credit providers.

An alternative is to allow the industry to develop its own self regulatory scheme – perhaps through ARCA. Industry wide self regulation may be difficult to achieve on an issue like responsible lending. In 2006 a similar scheme was proposed in the UK, where there was an attempt to develop a Responsible Lending Index (RLI) for the credit industry. The RLI proposed to voluntarily benchmark lending standards and promote best practice within the credit industry by involving suppliers of credit, customer representatives and regulators.[97] The scheme was not successful and has subsequently been replaced by reform of the Consumer Credit Act 2006 and specific guidance from the regulator.

A further source of potential guidance is to rely on scheme rules and best practice guidance issued by EDR schemes. These schemes could issue best practice guidance on responsible lending. However, the history of compliance with this type of guidance is poor. In 2002, the BFSO issued a Bulletin requiring members to complete a full assessment of income and liability for consumers as best practice for all unsolicited credit card limit increases.[98] This guidance is simply ignored by the industry and no members currently conduct such an assessment.

This Report suggests that an industry Code (covering all credit providers) or a regulator’s guideline is the best location for detailed industry operating rules and best practice guidance in relation to responsible lending and responsible credit marketing. The content could include:

Guidance on what inquiries constitute a proper assessment of a consumer’s capacity to repay a loan; and
Guidance on what content should appear in responsible credit marketing (e.g. warnings about credit risk).

[88] Fair Trading Act 1992 (ACT), <http://www.legislation.act.gov.au/a/1992-72/current/pdf/1992-72.pdf>.

[89] Finance Broking Bill 2007 (NSW), Exposure Draft; refer to footnote 65.

[90] The requirement to assess a consumer’s ability to pay should include a link to credit reporting information. This is the case in the UK and USA. Refer to Section 2.16 (page 34) in this Report for further details.

[91] Consumer Credit Act 2006 (UK), <http://www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060014_en.pdf>.

[92] Truth in Lending Act (15 USC 1601) (US), section 1639(h), <http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=browse_usc&docid=Cite:+15USC1639>.

[93] United Kingdom Office of Fair Trading, Consumer credit licensing: General guidance for licensees and applicants – Draft guidance on fitness and requirements, Consultation document, July 2007, <http://www.oft.gov.uk/shared_oft/consultations/oft920con.pdf>.

[94] Young M, Report of the Independent Reviewer to the Sponsors of the Banking Codes’ Review 2007, May 2007, <http://www.bba.org.uk/content/1/c6/01/15/40/Independent_Code_Review_2007.pdf>.

[95] Australian Bankers’ Association, Code of Banking Practice, May 2004, <http://www.bankers.asn.au/ArticleDocuments/20040603_FINAL_CODE_MODIFIED_PDF.pdf>.

[96] Refer to Section 2.16 (page 34) in this Report for further details.

[97] Richards M, Palmer P and Bogdanova M, Irresponsible Lending? A Case Study of a U.K. Credit Industry Reform Initiative, Journal of Business Ethics (online only), 26 July 2007, <http://www.springerlink.com/content/g7g0tl6454672h21/>.

[98] Banking and Financial Services Ombudsman, Bulletin 33, March 2002, <http://www.bfso.org.au/abioweb/ABIOWebSite.nsf/0/9751BF600EF7F1D9CA256C100009C42E/$file/Bulletin+33.pdf>.





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