Consumer Credit Card Debtdebts on consumer credit cards
The ASIC has published Report 580 Credit Card Credits in Australia and Consultation Paper 303 Credit Cards: CP303 (Responsible Credit Assessments), which describe ASIC's results in detail following a credit card industry audit in Australia and propose next actions. Twelve credit service provider (including large commercial credit institutes and a mix of medium and offshore credit institutes, client own credit institutes and non-banks) participated in the 2012-2017 survey, which found that more than one in six consumer groups was facing credit card debt.
The ASIC audit focussed on the following three core areas: consumer results - the objective is to help credit card users understand debt results; efficacy of major reform - analysis of consumer support disclosure; and requests to standardise the allocation of refunds to pending outpayments. Debts on credit cards are a problem for many users and can last from the age of 18.
5 per cent of those households that meet at least one of the ASIC's debt problem indicator measures as of June 2017. A few users receive credit card that does not fit their behavior or needs well. Only a few credit institutions take active action to respond to continued debt, low redemptions or inappropriate product offerings.
Often more so for certain kinds of consumer and credit provider, in particular those with a higher degree of credit card debt in all their credit card transactions. For one third of consumer the risks of a "debt trap" are a fact of life after a net movement. A consistent approach to repayment can help individuals who are transferring funds to cut their debt, but lenders can do more.
The ASIC found that half of the 10 credit institutions surveyed that offered promotion tariffs did not take pro-active action to alert clients when the promotion was about to end. However, a large proportion of those users (over 63%) who have paid by credit transfer have not cancelled any of their credit card and are still using them, resulting in interest costs.
When choosing a credit card, many users do not use the Key Facts Sheet, a standardized one-page paper that helps users select the right credit card for their needs. An obligation to initially split refunds between higher interest rate accounts will save the consumer time. ASIC suggested three points for actions in reaction to these results, namely: improving good credit governance through the introduction of recent reform - ASIC suggests a three-year timeframe for such good credit ratings, as described in CP303 (see below); update of information on ASIC's MoneySmart website - ASIC plans to make information on lenders that have
pledged to devise and implement pro-active policies to tackle problem credit card debt and inappropriate product; do not inform customers before the expiry of credit card advertising deadlines and do not carry out any follow-up work on credit card transactions - ASIC has indicated that a follow-up check will be carried out in two years to monitor problem credit card debt, the impact of credit card balances on debt performance and whether termination ratios have altered.
ASIC has set out its reasons in CP303 for requiring a three-year deadline to be used to assess whether a credit card agreement or credit line enhancement is inappropriate for sound credit assessment. From 1 January 2019, this new obligation will be applicable to borrowers who are lenders or credit support agencies in respect of new and legacy credit card agreements.
The ASIC has also developed a proposal for an amendment to indicate what the resulting law will look like under the National Consumer Credit Protection Act 2009 (Cth). In June 2015, the Senate Investigation and Reporting Committee (Senate Investigation) was asked by the Senate to investigate credit card interest issues in order to initiate the need for legal reforms.
Senate investigation found that a concern arose when customers used their card as a credit line to repay unpaid credit instead of managing money and suggested that sound credit ratings should be predicated on the capacity to repay debt over a fair amount of time. Reaffirming its endorsement of the Senate's May 2016 Senate recommendations on the investigation, the Government noted that the lenders' practices of evaluating a consumer's capacity to fulfil minima repayment obligations could result in accumulative interest costs that could cause significant pecuniary difficulties.
ASIC responded by developing the design of the tool and concluding that a three-year timeframe strikes an appropriate balance between protecting the consumer from inappropriate credit card agreements and guaranteeing adequate credit availability through these agreements. The ASIC has also received from the Office of Best Practice Regulation endorsement that the adoption of the credit card-responsible credit issuance reforms through the suggested tool is in line with the government's demands for regulation effects assessment.
ASIC has found from a general point of view that such a timeframe is consistent with the UK policy. UK's Financial Conduct Authority or FCA governs the behaviour of credit card issuers as part of their Consumer Credit Sourcebook (CONC). When a consumer persists in stubborn debt for 3 years, CONC notes that credit card companies must help the consumer by suggesting faster payment options within a timely time.