Safe and fair credit card marketing: why the credit industry is so keen not to speak to its customers
Paper presented to the Consumer Affairs Victoria Consumer Credit Conference 8 November 2004, Melbourne
David Tennant – Director, Care Inc Financial Counselling Service and the Consumer Law Centre of the ACT
This paper explores the nature of the ACT’s legislative amendment dealing with credit card limit increases in more detail, looks at what it is and is not and discusses some of the impacts that have been noted at the consumer coal-face.
1. Introduction
On 21 July 2000, the Ministerial Council on Consumer Affairs (MCCA) met in Perth, Western Australia. Amongst the documents circulated for the meeting was a Discussion Paper entitled ‘Credit Over-commitment and Responsible Lending’, prepared by the NSW Department of Fair Trading and tabled by then NSW Fair Trading Minister, John Watkins. 1 Recommendation 6 in the Discussion Paper, urged the MCCA to:
Consider a requirement that any increase in the credit limit (on an existing credit card) only be allowed at the borrower’s request. Consider what measures could be taken to ensure adequate assessment of capacity to repay before a credit limit is increased..2
Since that meeting in July 2000, MCCA members have done little more than continue to ‘consider’ whether they should take actions of the type referred to in the preceding recommendation. Of the member governments, only the Australian Capital Territory has proceeded with an active step, introducing an amendment to its Fair Trading Act prescribing some new rules in relation to credit card marketing. In the ACT, from November 2002, before advancing credit on new cards or increasing the limits on existing facilities, credit providers have been required to ask questions about and assess the borrower’s capacity to repay the credit being offered.
1 NSW Department of Fair Trading, ‘Credit Over-Commitment and Responsible Lending’, Discussion Paper, July 2000
2
ibid., Recommendation 6, p. 11.
This paper will explore the nature of the ACT’s legislative amendment in more detail, look at what it is and is not and discuss some of the impacts that have been noted at the consumer coal-face. To provide some context to an apparent lack of real action by governments however, it is worth considering the changing nature of the credit card market in Australia. At the end of June 2000, just before the MCCA meeting in Perth, Australians collectively owed $13.9 billion on credit and charge cards. A year earlier on 30 June 1999, that figure had been just shy of $11 billion. At the end of financial year 2004, the figure was $27.7 billion. 3
2. A consumer perspective on the problem – unsafe, unfair and unasked for
Like many consumer agencies around Australia, Care has been making complaints for years about the manner in which credit cards are marketed. One of the central issues of concern has been the making of unsolicited card offers that are described as ‘preapproved’. Typically, all a consumer receiving such an offer is required to do is sign an acceptance form and return it to the credit provider, often in a reply paid envelope. The practice has lead to some bizarre and, in our service delivery experience, fundamentally unfair outcomes for consumers who clearly did not have the capacity to meet their financial obligations on the products being offered. When members of the ACT Legislative Assembly began to show interest in the issue as a possible target for law reform, Care was both supportive of and engaged in the resultant investigations. With a sense that consumers were more likely to be receptive to and possibly more frequently targeted by credit card marketing in the lead up to a Christmas period, Care conducted a brief study through our information line in December 2001. A short survey was devised and offered to new callers between 1 and 21 December, asking for information about any unsolicited credit card offers callers had received in the preceding year. Twelve callers completed the survey and seven provided Care with permission to report their experiences to the ACT Assembly to inform its consideration. The case study material made disappointing reading and did not sit well with the insistence of credit card providers that there was no problem to be addressed. Included in the list were: A couple who were in the process of making an application for a hardship variation to their home loan provider, when the same bank offered them an increase on their credit card facility from $1000 to $7000. An unemployed single mother who had accepted an increase on her credit card from $2000 to $3000. Another couple in severe financial difficulty, one in hospital at the time of the call, who had received several offers for increased limits in the preceding
3
Reserve Bank of Australia, ‘Credit and Charge Card Statistics’, at: www.rba.gov.au/Statistics/Bulletin/C01hist.xls
months, when the only contact they had initiated was a request for a limit to be reduced, which was ignored. An 81-year-old self-funded retiree who had received and accepted an offer for a ‘Gold Card’, increasing his credit limit from $10 000 to $31 000, well in excess of his annual income. 4
Just as disappointing as the preceding reports from consumers is the cavalier attitude with which some in the credit card industry have sought to discredit or dismiss such experiences. Take for example the comments of VISA International in its November 2002 report, which whilst not singling out Care’s comments, suggested consumer input in the debate to be nothing more than:
…assertions, false analysis and anecdotes…5
In a recent paper to the 2004 Credit Law Conference in Queensland, my colleague and Principal Solicitor of the Consumer Law Centre of the ACT, Tim Gough, provided a response to comments such as those made by VISA, which goes to the heart of our frustrations:
If stakeholders are to engage in this debate in good faith, it is not the experiences of consumers that need to be discredited, but rather the fallacy that these experiences have no legitimate role to play. Those experiences may not establish in any empirical sense the extent of the problem – exactly what proportion of consumers suffer or are susceptible to financial overcommitment – but they absolutely confirm that there is a problem, and that it is one of sufficient proportions as to demand a response.6
Let me go further and present what I believe to be a reasonable assertion. You do not see the amount of debt on credit cards in Australia increase by 150 per cent in five years, without an increase in the numbers of consumers facing financial problems and the depth of those problems, as a result. Against what other information might that assertion be tested? Take your pick really: That Australians have been reported as spending more than they earn consistently in recent months7. That ABS data estimates the incidence of financial stress (financial stress being indicated by a number of factors including cash-flow problems, inability to pay bills as they became due and so on) as involving 1 321 245 low-income people nationally8.
4
Care Inc Financial Counselling Service, attachment to correspondence to a number of ACT Legislative Assembly members including Chief Minister Jon Stanhope, MLA, 4 March 2002. 5 VISA International, ‘The Credit Card Report, Credit Card Spending in Perspective’, Volume 1, November 2002, Sydney, p. 7. 6 Tim Gough, ‘Giving credit where it is due: Overcoming overcommitment’, Paper delivered at the Lexis Nexis 14th Annual Credit Law Conference, Queensland, 30 September 2004, p. 3. 7 ANZ Banking Group, ‘ANZ Economic Snapshot’, March Quarter 2004 (see quote on p.2 ‘expenditure has increased in excess of income gains, and the household savings ratio has moved firmly into negative territory. Households have become increasingly debt ridden.’); Frank Walker, Sydney Morning Herald, ‘Credit card debt at record $24 bn’, 20 July 2003. (The article reported that Australian families spend $1.29 for every $1 earned.) 8 Australian Bureau of Statistics, General Social Survey (GSS) 2002.
That related data prepared by the ACT Chief Minister’s Department suggests 12 892 low-income people in the ACT alone are in financial stress 9 . That after two modest interest rate rises late in 2003, incoming demand to Care’s general services rose by 20 per cent 10 and in February and March 2004 we were forced to turn away more consumers than we were able to assist at first contact.
To round out the reference to Care’s service data, of the over 1000 new contacts between January and June 2004, 25 per cent reported credit card debt as a key presenting reason for seeking assistance. Is that enough data for our friends at VISA, or would the preceding list be dismissed as just a larger number of anecdotes? Apparently Care has not been alone in obtaining disturbing reports from consumers about the manner in which new credit cards and limit increases are spread around like confetti. In a media release dated 14 March 2003, the Victorian Minister for Consumer Affairs, John Lenders, released a report on a survey of over 300 consumers that, amongst other things indicated:
Over 40 per cent of those surveyed felt ‘in over their heads’ because of their credit card debt. Over 20 per cent had cancelled their credit card or taken other drastic measures such as cutting up or freezing their cards. Over half the respondents had been approached by their credit provider to increase their credit limit in the past 12 months.
In expressing his concerns, Minister Lenders was quoted as saying:
It is socially irresponsible for credit card issuers to offer credit limit increases without assessing a customer’s capacity to repay.
That comment provides a neat transfer from discussion of what the problem clearly is, to a consideration of the action taken by the only jurisdiction in the country so far to start doing something about it.
3. Making credit providers speak to their customers – section 28A of the ACT Fair Trading Act
Referred to in the introduction, from November 2002, credit providers offering new credit cards or increases in credit limits on existing cards in the ACT, are required to check the capacity of the consumer to repay the credit being offered. That checking is achieved through a mandated ‘satisfactory assessment process’. The process is defined as meaning:
9
ACT Chief Minister’s Department, Briefing paper (unpublished) for the ACT Community Inclusion Board, ‘The relationship between household and personal debt, financial stress, and social exclusion’, June 2004, p. 5, 10 Care Inc, six monthly report (Jan to June 2004) to the ACT Department of Disability, Housing and Community Services. (This data was annexed to Care’s submission to the Commonwealth Financial Literacy Taskforce and it can be accessed at: http://cfltaskforce.treasury.gov.au/content/_download/submissions/care_app.pdf
An assessment of the debtor’s financial situation sufficient to satisfy a diligent and prudent credit provider that the debtor has a reasonable ability to repay the amount of credit provided or to be provided.11
More specifically and without limiting that definition:
An assessment process is a satisfactory assessment process only if the credit provider(a) asks the debtor for a statement of the debtor’s financial situation including (i) income; and (ii) all credit accounts and applicable limits and balances; and (iii) repayment commitments; and (b) takes the statement into account in making the assessment. 12
The proposed amendment to the ACT Fair Trading Act which eventually delivered section 28A, was introduced to the ACT Legislative Assembly on 6 March 2002, by Green MLA, Kerrie Tucker. A similar Bill had been introduced to the Assembly in the preceding May by Independent MLA, Dave Rugendyke. Mr Rugendyke’s Bill had however lapsed when the Assembly rose for the Territory’s election later in 2001. Mr Rugendyke was not returned in the election. In presenting the Bill to the Assembly, Ms Tucker noted the:
…provisions are based, in part, on the uniform national consumer credit code – the code. Specifically, the intent of this amendment is drawn from section 70, which provides that credit contracts may be reopened by a court if the credit provider failed to take a number of steps before activating a contract. These steps include undertaking reasonable inquiries as to the debtor’s capacity to repay, on the terms provided, without incurring substantial hardship. A prudent and diligent credit provider would therefore ensure that any credit contract they are a party to is made on the basis of due assessment of the debtor’s capacity to repay, without substantial hardship. Some credit providers, in competition for credit contracts, presently mail out to their customers pre-approved offers to extend credit card limits. These are sometimes in the vicinity of three times the existing limit. In many cases, for the new credit limit to apply, the debtor only has to sign the form and return it. No additional creditworthiness assessment is carried out. These mail-outs are generated on the basis of marketing susceptibility, rather than capacity to pay…13
One critically important issue raised in the preceding comments relates to an apparent frustration of the intention behind section 70 of the Uniform Consumer Credit Code (the Code). Sections 70 and 71 of the Code provide a mechanism for reopening unjust contracts. Included in the list of considerations that might point to unfairness is:
Whether at the time the contract…was entered into or varied, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that
11 12
s 28A(3), Fair Trading Act 1992 (ACT). s 28A(4), Fair Trading Act 1992 (ACT). 13 Hansard, ACT Legislative Assembly, 6 March 2002, p. 594.
the debtor could not pay in accordance with the terms or not without substantial hardship.14
Central to discussions about whether or not to introduce uniform legislation on unfair contract terms in Australia, is the recognition that providing a mechanism to respond to individual instances of unfairness is not the same as a proactive tool to prevent or attack unfair standard terms. Section 70 suffers from the limitation of looking backwards on the allegation of unfairness. It does not sufficiently prescribe the standard by which a credit provider will be judged, other than to suggest reasonable inquiry should be made of the debtor. In my view, it beggars belief that the credit industry would suggest reasonable inquiry will be established without having asked the debtor anything more than whether he or she wants the credit. That is however precisely the position put forward in the guise of sophisticated systems of credit scoring. More on credit scoring follows in the section describing responses to section 28A both within and outside the borders of the ACT. After several months of discussion concerning Ms Tucker’s proposal and some minor amendments, the Bill returned to the Assembly on 29 August 2002. It was passed unanimously. Indeed the most substantial concern expressed by both the Government and Opposition was not the impact or intention of the Bill itself, but whether it would in any way threaten the ACT’s position under an agreement to maintain uniformity in credit laws as between the States and Territories. All parties recognised that a solution delivered in the Code was preferable. The interests of the immediate and continuing consumer danger the Bill sought to address won out, with the Chief Minister, Jon Stanhope MLA noting:
Although foreshadowed changes to the consumer credit code are still in the ministerial council’s agenda, the matter has not progressed as quickly or as well as the government had anticipated.15
Section 28A commenced in November 2002, in time for the Christmas spending and marketing rush. Just so we do not lose sight of what that means in terms of the explosion in the credit card market, at the end of October 2002, Australians owed around $22.5 billion on credit and charge cards. 16 That was approximately $5.2 billion ago. The MCCA still has not acted.
4. What impact has the arrival of section 28A of the ACT Fair Trading Act had?
Let me commence this section by describing a bizarre phenomenon, given some of the highly critical warnings provided by the credit card industry before section 28A passed into law. ACT consumers still use credit cards. My wife and I have one each and they still work. Even more surprisingly, new cards are still being sold and limits are still being increased. How remarkable — or not. The credit industry has a long
14 15
s 70(2)(l) Uniform Consumer Credit Code. Hansard, ACT Legislative Assembly, 29 August 2002, p. 3083. 16 Reserve Bank of Australia, ‘Credit and Charge Card Statistics’ (see Reserve Bank web site in Footnote 3.
history of suggesting that any new regulation will be an end to commerce as we know it. Very clearly that has not been the case. Section 28A imposes a step that must be taken before credit is advanced. It does not however prevent card issuers from sending unsolicited offers to consumers. The NSW Department of Fair Trading Discussion Paper referred to earlier and tabled at the MCCA meeting in July 2000, recommended consideration for an even tougher approach, including:
…banning unsolicited direct mailing to people’s homes and workplaces.17
In our interactions with clients at Care and the Consumer Law Centre, we have had an excellent opportunity to observe the practical impacts of the Fair Trading Act amendment. There have been considerable changes to the marketing materials used by a variety of credit card issuers. Some acted well in advance of the arrival of section 28A, perhaps even without regard to the legislative change itself. Others, and there have been a number of large national and international companies falling into this category, did not act in time or in full. Both Care and the Consumer Law Centre have identified a number of systemic breaches of section 28A. Those breaches have been reported to the companies involved and the ACT Office of Fair Trading. No such breaches have yet resulted in prosecution, as allowed in the legislation, and most companies have responded promptly when alerted to the compliance problems. Some, most notably Citibank and the Commonwealth Bank of Australia, have sought to deny that problems exist. Discussions or debate, and in one instance litigation, continue in relation to those denials. In a smaller number of matters, there has been evidence of consumer detriment, potentially caused by an alleged breach of section 28A. The majority of those matters have resulted in relatively prompt settlements, in the process tackling and responding to the reported consumer detriment. Those matters bear a similarity to negotiations that sometimes follow complaints of unconscionable conduct under section 70 of the Code. The difference, from my perspective, has been that the negotiations are more straightforward and the solutions provided more timely with the impact of section 28A, perhaps because the assessment required under the legislation has either been carried out or it has not been. Suggestions of a compliance problem under 28A do not tend to be muddied by communications that, again in my experience, can sometimes take on an unfortunate flavour of assessing the complainant consumer’s ‘worthiness’ to receive a settlement offer. What then does the credit card industry offer in response to section 28A, or in arguments against a similar mechanism being adopted elsewhere? The answer is a reliance on credit scoring techniques, to properly identify the consumers to whom credit card offers should be made and the nature and extent of those offers. There is no doubt that the design and capacity of credit scoring technology has improved. So too has the capacity of credit providers to use that technology to its best
17
NSW Department of Fair Trading, ‘Credit Over-Commitment and Responsible Lending’, July 2000, Recommendation 5, p. 10.
effect. The focus in industry commentary has been aggregated data comparing default rates on accounts using scoring technology and those that might apply when credit providers make decisions based on what they are told by their customers alone. Unfortunately, the spin that has been put to that information does not tell the full story. Returning to the VISA report of November 2002, VISA confidently asserts:
Consumer credit card limits are not set at inappropriate levels. Financial institutions do not indiscriminately set limits on credit cards. Factors such as income, credit history and wealth are considered. Assertions that increased credit limits are causing financial difficulty are inconsistent with the decrease in default rates.18
Elsewhere in the same report is information that substantially undermines the assertion that there is no hardship. Specifically the material relating to average monthly spending on credit cards, discloses that cardholders in households with incomes less than $15 000 per annum are spending on average $603 per month on credit cards. 19 That equates to over 48 per cent of household income for that income demographic. How can that possibly be presented as not disclosing hardship? As Tim Gough points out:
A random sample may show how many consumers regularly pay interest, how many pay off the balance at the end of each month, make regular lump sum payments or pay only the minimum monthly payment, and how many consumers default on payments. That data will not show how many consumers are using one card to pay another; it will not show how many consumers are making lump sum payments by selling household goods or obtaining a Centrelink advance; it will not show how many consumers have paid out their accounts having obtained a high cost personal loan to ‘consolidate’ all outstanding debts, including other credit card accounts, it will not show those who make payments at the expense of other necessities.20
For me, the difference between the propositions put forward in support of section 28A and that of the credit industry is straightforward. The former does not dismiss credit scoring as a valid tool, just insists that it is not the only one. The latter chooses not to engage with consumers for one simple over-riding reason – cost. It costs more to ask consumers whether they can afford the credit being offered. To take that further, what we are looking at in the industry pressure exerted for status quo, is a battle to maintain profit and profit growth. When industry players call for more time to debate and consider whether anything should be done 21 they should at least be up-front enough to declare the primary motivation for maintaining profit margins, in an area of quite extraordinary recent growth. The problem is not unique to Australia, nor is the articulation of it new or contained to what industry might seek to dismiss as the views of ‘ratbag’ consumer advocates. For example, the Chairman of the UK Banking Code Standards Board, Richard Farrant, dealt with similar concerns in his Statement in the 2003-2004 Annual Report:
18 19
VISA International, op. cit., p. 3. ibid., p. 12. 20 Tim Gough, op. cit., p. 3. 21 For example, the euphemistic reference in the National Australia Bank publication ‘There are more sides to the National than you think’ (Melbourne 2004), to unsolicited credit card limit increases as being an ‘Issue we need to talk more about’, pp. 36 –7.
Like others, we have concerns that dealing with personal over-indebtedness may become a much bigger issue in future, despite the conviction of many in the industry that when interest rates rise this time it will be different. Credit scoring techniques aim to deliver a good overall result for subscribers, not to cover every circumstance. There is worrying evidence that those people whose situations are not well captured by credit scoring techniques are becoming increasingly vulnerable to unexpected changes in personal circumstance. They deserve particularly sympathetic treatment, but do not always get it, despite in many cases the clear wishes of senior management.22
In this quote, Mr Farrant might have been dealing with the responses to cases of hardship. His observation that credit scoring techniques do not ‘cover every circumstance’ however, is just as applicable to what those techniques miss in the process of extending credit to already vulnerable or disadvantaged consumers.
5. Re-challenging regulators to adopt a principles based approach
The commencement of section 28A in the ACT has not ended over-commitment in the Territory, or the need for some consumers to seek the assistance of an agency like Care. To have expected just one reform in one jurisdiction to have produced such an outcome would be foolhardy. It has however added an extra important protection, by articulating in more detail how a credit provider establishes it has reasonably assessed the financial capacity of the consumers to which it is offering to advance funds. That protection is achieved by writing the consumer into the process. In other words, while 28A may not be the entire answer, and undoubtedly it is not, it is a useful first step. In this paper, I have been critical of the general failings of State and Territory governments to respond adequately to the increasing levels of credit card debt in Australia. There is more research underway and, whilst Care and other consumer groups are supportive of efforts to understand financial hardship and overcommitment in more detail, gathering more information should no longer be used as an excuse for not acting on problems that are self-evident and increasing. To return to the numbers again, if the rate of increase experienced in the last five years is repeated, then by June 2009, Australians will owe over $69 billion on credit cards. That is indeed a staggering sum. At the risk of allowing the credit card industry to level yet more criticism about the use of anecdotes, it seems appropriate to conclude by making reference again to the continuing consumer detriment that unsafe, unfair and unasked for credit card marketing delivers. It is drawn from the 2003–2004 Annual Report of the Banking and Financial Services Ombudsman:
In November 2003, Mrs T approached a financial counselling service with an unsecured credit card debt of $74,000. Mrs T was a 60 year old pensioner on a disability support pension. She rented emergency government housing, had no assets and had not worked for several years. Mrs T had initially approached a financial counsellor to discuss the option of bankruptcy as she could no longer afford to continue making payments.
22
Banking Code Standards Board Limited, Fifth Annual Report 2003–2004, London, p. 5.
The financial counsellor was concerned that the member had not adequately assessed Mrs T’s ability to service the debt. The account showed that the disputant was making regular fortnightly payments however, she was in fact depositing her fortnightly pension to the card account and then withdrawing it again as a cash advance. The financial counsellor lodged a dispute with BFSO on behalf of the disputant. Resolution Following referral to the member, the member wrote to the financial counsellor and stated that it did not believe any maladministration had occurred in relation to the credit approval. However, in order to resolve the dispute it offered to reduce the credit card debt from $74,000 to $5,000. The member also offered to accept interest free payments of $50 per fortnight until the residual debt was repaid. Mrs T accepted this offer.23
The outcome of Mrs T’s case is not an example of the system working, but of a system that is currently failing to address a structural problem. Her experience, until the consideration of bankruptcy, would have shown up in reports such as that produced by VISA, as an example of the market working swimmingly. The member’s insistence that there had been no maladministration was an example of the confidence that the credit scoring process had appropriately selected Mrs T as an excellent customer. The question for governments, and in this respect I congratulate the legislature of the Territory in which I live for grasping the mettle, is how long you will continue to sit on your hands?
23
Banking and Financial Services Ombudsman Limited, Annual Report 2003–2004 Summary, Melbourne, October 2004.