Credit contract lenders and providers of consumer leases could be forced to make significant changes to their businesses, if the 24 recommendations in the final report of the Review of the Small Amount Credit Contract Laws, released for consultation two weeks ago, are accepted by the Federal Government.
Businesses should review the recommendations and make submissions within the four-week consultation period which closes on Tuesday, 17 May 2016.
Background to the Small Amount Credit Contract Review
The terms of reference for the review were released on 7 August 2015 and the report was finalised on 3 March 2016 after more than 70 responses were received by the panel conducting the review.
The 24 recommendations affect:
- small amount credit contracts (SACCs);
- consumer leases; and
- both SACCs and consumer leases.
Small amount credit contracts recommendations: repayments, fees caps, bans on unsolicited offers and referral payments
All SACCs should be subject to regulations concerning protected earnings amounts under which SACC repayments will be capped at 10% of the consumer's net income. Currently, protected earnings amount regulations only apply to a class of consumer who receive at least 50% of their gross income as payments under the Social Security Act 1991 and the cap applied is 20% of the consumer's gross income.
If these changes are accepted, the report recommended retaining the existing 20% establishment fee and 4% monthly fee maximums, and the removal of the rebuttable presumption that a loan is unsuitable if either the consumer is in default under another SACC, or has had two or more other SACCs in the 90 day period before the assessment.
The existing ban on credit contracts with terms less than 15 days should be maintained.
Direct debit fees should be incorporated into the existing SACC fee cap. The Government has indicated its support of this recommendation and ASIC acting on it when ASIC considers it to be appropriate.
The definition of SACC under the National Credit Act should require that repayments be equal over the life of the loan (with exceptions where suitable, for example if a final repayment is a lesser amount for legitimate reasons). This recommendation was made to prevent lenders from front-loading repayments and unnecessarily extending loans.
A SACC database should not be introduced, however major banks should be encouraged to participate in comprehensive credit reporting at the earliest date. There should, however, be further consultation on this, and using of unique identifiers for SACC repayments made through the direct debit system as an alternative option to the introduction of SACC database.
The National Credit Act should be amended to prohibit the charging of a monthly fee for a month after a SACC is discharged by its early repayment. This would align with the approach to interest under the National Credit Act (which says it cannot be charged before the end of a day to which an interest charge applies).
SACC providers should be prevented from making unsolicited offers to current or previous consumers (in any form). This prohibition would go much further than the National Credit Act's current ban on sending of unsolicited credit card limit increase offers unless the consumer has consented.
SACC providers should not receive a payment or any other benefit for a referral made to another SACC provider, and further work be undertaken to determine whether lead generators should also be subject to this prohibition.
Default fees should be capped to a representation of the actual costs to a lender arising from a consumer defaulting on a SACC and to an absolute maximum of $10 per week (with the existing limitation on the amount recoverable in the event of default to twice the adjusted credit amount being retained).
Consumer leases: caps on cost, protected earnings amounts restrictions
A cap on the cost of consumer leases should be introduced, calculated as a multiple of the base price of the goods rather than an annual percentage rate. It should also allow a return of 4% of the base price of the goods per month of the lease. This aligns with the 4% monthly fee allowed for SACCs, however unlike SACCs an additional 20% establishment fee would not be allowed. For leases of greater than 48 months, the report recommended that calculation of the cap should be based on a lease term of 48 months.
The base price should be the lower of the recommended retail price and the price agreed in store. The report also recommended that further work should be done to define the "base price" for second-hand goods and noted the difficulties that arise in relation to the calculation of the base price where the lessor leases its own branded goods.
The cost (if any) of add-on services and features other than delivery should be included in the cap and a separate one-off delivery fee should be permitted (though this should be limited to the reasonable costs of delivery, taking into account any cost savings of bulk delivery of goods to an area).
Protected earnings amounts restrictions should be introduced for leases of household goods in line with the recommended approach to SACCs, ie. 10% of the consumer's net income. The report also recommended that the Department of Human Services consider making this cap and the cap on the cost of consumer leases mandatory as soon as practicable for lessors who utilise or seek to utilise the Centrepay system.
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 lessor's losses from early repayment.
Unsolicited selling of consumer leases of household goods should be prohibited.
Finally, it suggests further consultation be undertaken on whether the cap on the cost of consumer leases should apply to consumer leases of motor vehicles, and the Government should also consider extending the report's other recommendations relating to consumer leases of household goods to consumer leases of motor vehicles.
SACCs and consumer leases: use of bank statements, new warnings, disclosure, civil penalty regime
Lessors of household goods should be required to obtain and consider 90 days of bank statements (in line with the existing requirement for SACC providers), and they and both SACC providers should both be prohibited from using information obtained from bank statements for purposes other than compliance with the responsible lending obligations. Additionally, ASIC should continue its discussions on ensuring that ePayments Code protections are retained where consumers provide their bank account log-in details to a third party in these circumstances.
SACC providers and lessors should be required to document in writing their assessment that a proposed contract or lease is suitable at the time the assessment is made.
Lessors under consumer leases of household goods should be required to provide consumers with a warning statement. The report also recommended that ASIC be given the power to modify the requirements for the statements to maximise the impact on consumers for both the proposed warnings statement for consumer leases of household goods and the existing warning statement provided in respect of SACCs.
SACC providers and lessors under a consumer lease of household goods should be required to disclose the cost of their products as an annual percentage rate and those lessors should also 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 application of the existing civil penalty regime should be extended to consumer leases of household goods and to SACCs. The report also recommended that rights under the contracts to charges be automatically lost if certain specific obligations are contravened.
Finally, the National Credit Act should regulate indefinite term leases, address avoidance through entities using business models that are not regulated by the National Credit Act and address avoidance of 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.
Next steps: submissions due by Tuesday, 17 May 2016
The Government has indicated that it will consult with industry and consumers before making any decisions on the recommendations, however it has already provided its support of ASIC acting on the inclusion of direct debit fees within the existing cap on SACC fees when it considers it appropriate.
The Government has invited interested parties to comment on the recommendations by Tuesday, 17 May 2016, and asked Treasury to further consult on:
- whether the consumer lease recommendations should apply to all consumer leases (including motor vehicles) rather than only to leases of household goods; and
- how to treat second-hand goods.
If you'd like further information on the proposed reforms, or need help in making a submission, please contact us.
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