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					                      COMMONWEALTH OF AUSTRALIA


           Official Committee Hansard

                            SENATE
             ECONOMICS REFERENCES COMMITTEE


Reference:Possible links between household debt, demand for imported goods and
                        Australia’s current account deficit

                        MONDAY, 16 MAY 2005
                                   SYDNEY




                            BY AUTHORITY OF THE SENATE
                            INTERNET

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                                                        SENATE
                                   ECONOMICS REFERENCES COMMITTEE
                                                Monday, 16 May 2005

Members: Senator Stephens (Chair), Senator Brandis (Deputy Chair), Senators Chapman, Lundy, Ridgeway
and Webber
Participating members: Senators Abetz, Barnett, Boswell, Brown, Buckland, George Campbell, Carr,
Cherry, Colbeck, Conroy, Coonan, Eggleston, Chris Evans, Faulkner, Ferguson, Ferris, Fifield, Forshaw, Har-
radine, Kirk, Knowles, Lightfoot, Ludwig, Mackay, Mason, McGauran, Murray, Payne, Robert Ray, Sherry,
Stott Despoja, Tchen, Tierney, Watson and Wong
Senators in attendance: Senators Brandis, George Campbell, Chapman, Stephens and Webber
Terms of reference for the inquiry:
  To inquire into and report on:
  Possible links between household debt, demand for imported goods and Australia’s current account deficit, with
  particular reference to:
  (a)   current levels of household debt and whether these are historically high (as a proportion of household income or
        otherwise);
  (b)   the factors, including the lending policies of banks and other financial institutions, that contribute to household
        debt levels;
  (c)   the extent to which demand for imported goods contributes to household debt levels;
  (d)   the extent to which demand for imported goods by Australian households contributes to the current account
        deficit;
  (e)   risks for households and the economy of high household debt levels;
  (f)   whether there is a case for addressing the lending policies of banks and other credit providers and if so, what
        practical options are available;
  (g)   whether there are other measures that might be taken in place of possible restrictions on lending practices which
        would be as effective;
  (h)   whether any Commonwealth social and economic policy settings should be changed as a result of matters
        identified above;
  (i)   whether there is a need for any other form of regulatory intervention in relation to this issue; and
  (j)   any related matters.
                                                                            WITNESSES
BELL, Mr David Peter, Chief Executive Officer, Australian Bankers Association................................... 68
CHRISTIAN, Ms Christine, Chief Executive Officer, Dun and Bradstreet Australasia........................... 44
CONROY, Mr Pat, National Projects Officer, Australian Manufacturing Workers Union..................... 12
COX, Ms Karen, Coordinator, Consumer Credit Legal Centre (New South Wales) Inc.......................... 21
GAMBLE, Mr Rohan, Managing Director, Virgin Money (Australia) Pty Ltd .......................................... 1
HOSSACK, Mr Nicholas, Director, Prudential Payments and Competition Policy, Australian
Bankers Association......................................................................................................................................... 68
LANE, Ms Katherine, Principal Solicitor, Consumer Credit Legal Centre (New South Wales)
Inc. ..................................................................................................................................................................... 21
NAFFAH, Mr Albert, Director, Strategic Business Development and Regulatory Affairs,
MasterCard International Inc......................................................................................................................... 55
Monday, 16 May 2005                     Senate—References                                      E1


Committee met at 9.35 am

GAMBLE, Mr Rohan, Managing Director, Virgin Money (Australia) Pty Ltd

  CHAIR—I call the committee to order. We are here today to take evidence on the
committee’s inquiry into possible links between household debt, demand for imported goods and
Australia’s current account deficit. This is the first public hearing of the inquiry and today the
committee will focus predominantly on the issue of household debt.

  Before we start taking evidence, I reinforce for the record that all witnesses appearing before
the committee are protected by parliamentary privilege with respect to their evidence.
Parliamentary privilege refers to the special rights and immunities necessary for the discharge of
the parliamentary functions without obstruction or fear of prosecution. Any act by any person
which operates to the disadvantage of a witness on account of evidence given by that witness
before this committee is treated as a breach of privilege. I remind witnesses and committee
members that witnesses have the right to request to have part or all of their evidence heard in
private and may also object to answering a question in circumstances that are consistent with the
Senate’s privilege rules. These measures are intended to protect witnesses. I must also remind
witnesses, however, that giving false or misleading evidence to the committee may constitute a
contempt of the Senate.

  I welcome Mr Gamble. The committee prefers all evidence to be given in public, but should
you at any stage wish to give any part of your evidence in private you may ask to do so and the
committee will consider your request. Would you like to make a short opening statement, and
then we will go to questions.

   Mr Gamble—I thank the committee for its invitation to make a submission to the inquiry and
the opportunity to present further today. Virgin Money entered the Australian financial services
market in May 2003 with the Virgin credit card. We saw an opportunity to shape up credit cards,
to raise the bar of competition in what was at that point, we believe, a lazy market. In the two
years since our launch we have captured more than half a million customers due to the good-
value product and honest and straightforward approach to consumers. During this time we have
also been a strong advocate of overhauling the Australian financial services industry to make it
more competitive and transparent for consumers and to bring it into line with world’s best
practice. In line with this, we therefore welcome this inquiry as it addresses the important topic
of household debt.

   Turning to the issue of household debt: we have the situation in Australia where household
debt is definitely on the increase. This makes sensible regulation extremely important. Around
70 per cent of Australian households have at least one credit card, and the latest Reserve Bank
statistics show that, on average, each credit card account holder owes more than $2,500, with the
nation owing a total debt of $30 billion. Furthermore, growth in credit card spending remains
strong, topping over 10 per cent in the previous year.

  It is not simply the amount of money owed on credit cards that is rapidly increasing. Interest
charges and fees are also rising. In the mortgage market, competition has forced interest margins
down, to the benefit of consumers, but unfortunately this has not happened in the credit card
market. In its recent quarterly report on monetary policy, the Reserve Bank said the average

                                          ECONOMICS
E2                                              Senate—References                             Monday, 16 May 2005


credit card interest rate has risen to 16.75 per cent, more than 10 percentage points above the
average variable mortgage rate. Recent research by CANNEX shows that, over the last decade,
credit card interest margins have on average increased from 8.5 per cent to 11 per cent. On top of
this, Reserve Bank figures show that household credit card fees increased by almost 40 per cent
in 2003, the last time it was looked at, and by an average of 30 per cent in each of the five
previous years.

   The impact of rising credit card fees and interest charges on consumers is compounded by a
lack of honesty and transparency in credit card marketing. Many Australians do not adequately
understand the terms and conditions of their credit, making it all too easy for the more
vulnerable to be trapped into accumulating unaffordable debt. It is this area where we believe
regulation can make a difference—in increased disclosure to consumers of basic credit card
product features.

  As outlined in our submission, Virgin Money believes the federal government has a role to
play in introducing standardised marketing practices for the credit card industry, just as their
counterparts in the US and the UK have already done. The approach is consistent with both the
federal government’s pursuit of greater financial literacy and its desire for constructive, yet not
overly onerous, regulatory reform.

   Virgin Money prides itself on a commitment to providing honest, upfront and straightforward
information in all our marketing literature. Our belief is that consumers must have all the critical
information about a financial product at their disposal before an informed decision can be made.
For Virgin Money, this means taking the information that is usually hidden in the fine print of
marketing literature and bringing that information out into the open. The Reserve Bank
Governor agrees. In December 2003, at a hearing of the Standing Committee on Economics,
Finance and Public Administration, Ian Macfarlane was questioned about rising credit card costs.
He said:

One of our aims has actually been to try and make the true cost visible to the people who are making the decision as to
whether or not to use a credit card.

Other industries, such as food and pharmaceutical industries, have already been required to
standardise their marketing practices in the interests of full product disclosure for the consumer.
Virgin Money suggests that, at this time of unprecedented levels of household debt, credit card
providers should also be subject to a level of product disclosure.

   We believe this can be achieved through the industry-wide adoption of what is known as an
honesty box. An honesty box forces credit card issuers to display the key fees and interest
charges up front, rather than hiding them in the fine print. It presents this vital information in a
clear and standardised manner that allows consumers to more easily compare credit cards and
make informed decisions about which product is most appropriate for them. The honesty box is a
practical and easy option to implement and one which has precedents in both the United States
and the United Kingdom.

   Virgin Money also believe that the uniform consumer credit code needs to be reviewed, as it
lies with the individual states and territories despite the bulk of the financial services industry
being regulated at a federal level. This seems to be an inconsistency. This was a recommendation

                                                   ECONOMICS
Monday, 16 May 2005                       Senate—References                                         E3


of the 1997 Wallis report that has not yet been acted upon. As such, it provides this committee
with a strong rationale for investigating the procedures required for the Commonwealth to
assume jurisdiction over consumer credit law. We believe the industry-wide adoption of the
honesty box can only occur if there is a national uniform approach to this issue. We therefore
encourage this committee to recommend a transfer of responsibility for consumer credit law
from the states and territories to the federal government.

   To sum up, Virgin Money believes that household debt is a significant and growing issue that
requires national leadership. We believe that an important part of managing household debt is
ensuring that Australians adequately understand the terms and conditions of their credit and
therefore that credit providers openly disclose fees and interest charges rather than burying them
in the fine print. Virgin Money proposes that this committee recommends regulatory reform for
the industry-wide disclosure of credit card interest rates and fees in key marketing materials in
the form of an honesty box.

   Finally, we encourage this committee to recommend a transfer of responsibility for consumer
credit law from the states and territories to the federal government to ensure there is national
leadership on the significant and growing issue of household debt. The introduction of these
measures would deliver greater transparency and accountability in credit card marketing and
would assist Australians to better understand their credit liabilities. This move would promote
competition, which would in turn lead to improved products for consumers. This is the trend
observed in the US and the UK—one that Australia would benefit from following. At the end of
the day, greater competition and better informed consumers are two outcomes worth having.

  CHAIR—Thank you for your submission; you have raised some important issues. I will begin
with the last point you made about transferring consumer credit rules to federal government
responsibility. What do you think would be the advantages of doing that?

   Mr Gamble—I think there is an inconsistency in the consumer credit industry, in that the
financial services industry is generally looked at on a nationwide level because it is a topic of
national interest. Household debt and consumer credit are topics of national interest and
therefore should be controlled at a national level. I think the advantage would be in having a
consistent approach for all Australian consumers and allowing for things like standard disclosure
laws, in the form of something like an honesty box, which would benefit all consumers in an
equal way. The financial services marketplace is national, and financial services companies
compete at a national level; therefore, I think it is right that it be regulated at a national level.

  CHAIR—So you are very keen to promote that national approach. Have you had an
opportunity to anticipate what the cost to industry would be to standardise disclosure
requirements?

   Mr Gamble—I do not think there is a significant cost to industry. Virgin Money have been
using an honesty box in advertising for well over a year now. We have standardised the use of
the honesty box, and we have it in all of our print advertising. It is not an onerous requirement; it
is a simple table that clearly states fees, charges and all the relevant measures for a credit card. If
you have that in a consistency of font and size, I do not think there is a cost at all to the industry.




                                            ECONOMICS
E4                                       Senate—References                     Monday, 16 May 2005


   CHAIR—Since Virgin Money started to do this, have you seen any other institutions take up
a similar approach?

  Mr Gamble—We have not. I think there is one view that it is up to the industry to self-
promote and do this itself; but we have not seen that happen, which is why we believe that the
government needs to have a role in this. It is our belief that regulation should not be particularly
onerous on industry and on competition but that it should promote competition. Standardised
disclosure is in the interests of promoting competition, because it forces all companies to
compete on a level playing field, which gives the consumer the best chance of making the best
decision. The result of regulating the whole industry to do this would be to reverse the trend that
we have seen where interest rate margins have increased on credit cards over the past few years,
and that is clearly to the detriment of consumers. But forcing disclosure of interest rates and fees
would drive natural competition to bring those down and improve the situation for consumers.
The industry definitely has not followed and is not planning to follow, because they adopt the
practice of hiding things in the fine print.

  CHAIR—Just one final question before I hand over to Senator Brandis: your submission, on
page 8, reflects on the Wallis report and a recommendation of the Wallis report that has not been
taken up. Have you any thoughts about why that has not occurred?

  Mr Gamble—I am not sure why it has not. There is a clear recommendation in the Wallis
report that the credit code should be subject to a comprehensive and independent review to
consider what improvements are necessary and whether a transfer to the Commonwealth would
be appropriate. That has not been acted upon. I guess our belief is that this committee provides a
great opportunity for that recommendation to be taken forward

  Senator BRANDIS—I have a couple of questions. Is your desire for the Commonwealth to
regulate this area because you want uniform national law? Is that the only reason?

  Mr Gamble—Virgin Money believe strongly in open, level competition and better products
for consumers. We believe that taking a national approach would lead to both those things.

  Senator BRANDIS—There are a couple of ways of doing that. One would be for the
Commonwealth to legislate. The other would be, for example, for the states and territories to
agree on a uniform set of laws through the Standing Committee of the Attorneys-General, which
has been done in a number of aspects of Australian commercial law. Do you have a preference
for one or the other as long as you get uniformity?

  Mr Gamble—As long as there is uniformity in competition and a level playing field; there
could well be other ways to achieve that result.

  Senator BRANDIS—I am interested in your honesty box. I am not fortunate enough to be
one of your customers, so I have never seen a Virgin credit card statement. But is it actually
called an ‘honesty box’ on the statement?

  Mr Gamble—I do not think we call it that as such.

  Senator BRANDIS—I am just wondering where this expression comes from.

                                           ECONOMICS
Monday, 16 May 2005                     Senate—References                                       E5


  Mr Gamble—There was an example in our submission of one of our print ads. It goes back
15 years to the US. In the US it is actually called the Schumer box, because Senator Schumer
was the one that pushed it through in the US. That goes back 15 years.

  Senator CHAPMAN—We could call it the Brandis box, in Australia!

   Senator BRANDIS—If it comes from a recommendation of this committee it would be called
the Stephens box, though, wouldn’t it, after the chair! Let us say that within two months the
interest rate moves up or down. Is there a little sign in the second month saying, ‘Your interest
rate has increased or reduced by 0.25 per cent’?

  Mr Gamble—That could be something that should be looked at.

  Senator BRANDIS—Is that something you do at the moment?

  Mr Gamble—In the honesty box?

  Senator BRANDIS—Yes.

   Mr Gamble—No, we do not do that explicitly. We release the change in our interest rate
clearly on the web site and to the press.

  Senator BRANDIS—Would you agree that that would perhaps be one of the most important
pieces of information—to alert consumers to movements in the interest rate?

  Mr Gamble—That is a good example of the sort of thing that should be made clear. If a
company makes a change that is relevant to the consumer then that should be openly
communicated to consumers.

   Senator BRANDIS—Finally, at the foot of page 4 of your submission you say, ‘Virgin
Money has implemented a responsible lending policy.’ There are three points in particular that
you make about what the features of that policy are. Could you take us through them and
elaborate on them?

   Mr Gamble—Virgin Money are committed to responsible credit lending. We have a
responsible lending policy, with three points. The first is the one we have talked about most
today, which is to do with transparent pricing. The second is that we do not have pre-approved
credit card offers. We make an assessment of every applicant’s ability to meet their credit card
payments before approving them for a new credit card. As a result, we do not make pre-approved
credit card offers to potential customers. This is a practice that is spreading in this marketplace
whereby consumers are being offered a pre-approved credit card, which I do not believe is good,
responsible lending. The third area is to do with responsible credit limit increases. Again, it is
standard industry practice to just give consumers a new credit limit without any assessment of
their ability to afford that credit limit. We do not do that. We may from time to time offer some
cardholders the opportunity to increase their credit limit, but no increase would be automatic.

  Senator BRANDIS—By ‘automatic’, you mean not as a response to a request by the credit
card user?

                                          ECONOMICS
E6                                       Senate—References                      Monday, 16 May 2005


  Mr Gamble—That is right. We make an assessment of the cardholder’s ability to meet the
card payments before confirming that increase. Cardholders always have the right to accept or
decline their existing limit or to request a smaller increase.

  Senator BRANDIS—Do you recommend to this committee that either of those additional
features of your responsible lending policy—that is, no pre-approved credit cards and no
automatic increases—should be legislated for? Or do you not go that far?

  Mr Gamble—I think they would also be good areas in which to consider legislation. I think
the area of transparent pricing and standardisation of disclosure would have a stronger impact,
but I do believe those two areas would be worthy of consideration as well.

   Senator GEORGE CAMPBELL—Following on from those questions from Senator
Brandis—and I thank him for drawing my attention to what was on page 5—I want to go to the
issue of credit cards. We will go first of all to the honesty box. Is that really the issue or is the
real issue not whether or not people know the rate of interest they are paying for their money but
the easy accessibility of the money?

  Mr Gamble—How do you mean?

  Senator GEORGE CAMPBELL—The problem we have is that credit card debt in this
country is at astronomical levels, and household savings have gone from plus 12.2 per cent in
March 1983 to minus 2.3 per cent today, which means we are spending a considerable lot more
money than we are earning, which means a lot of people have got debt generating out there. Isn’t
one of the problems with the credit card industry the fact that money is too easily accessible?

   Mr Gamble—Yes, that is definitely one of the problems. We have got a situation where credit
is easily accessible. We have just talked about two examples, where there are a lot of
preapproved credit cards being offered in the market and there are automatically approved limit
increases being given now. In both those situations credit is being made very easy for consumers
to get. At the same time, the credit that is being offered is being offered at a higher price. The
average price of credit is going up and not down. So we have got the combined effect, which
leads to increasing household debt, which we are seeing clearly in the statistics. As you point
out, our debt as a percentage of our income and so on is definitely on the rise. It is definitely
easier for consumers to get credit, and that should be looked at. It is easy for them to be trapped
into an unaffordable level because they are unaware of the price of the credit they are getting,
which is why we suggest that standardising the advertising of that credit is a good thing to do. I
think it is important that we maintain an open market and enable competition but facilitate that in
a fair and open way.

   Senator GEORGE CAMPBELL—You say that one of the things that your company does is
assess people’s capacity to pay before you provide them with a credit card. How do you do that?
On what basis do you assess their capacity to pay? Presumably you give them a limit, whether it
is $5,000 or $10,000. Do you assess that they can repay that in a month or that they can repay
that within 10 months or 20 months? How do you make that judgment?




                                           ECONOMICS
Monday, 16 May 2005                     Senate—References                                       E7


   Mr Gamble—The assessment is made on a series of credit criteria and history in the market
and consumers’ income and ability to pay. I guess it is a fairly complex equation that the banks
in this country are very good at. That is an important role that responsible lenders need to play.

   Senator GEORGE CAMPBELL—I understand that. But I am on a considerable salary and I
have a credit card that has, I think, $13,000 on it. If I run up debt of $13,000, I cannot pay that
off in a month, so I am automatically going to be beholden to you to pay interest. Do you make
an assessment as to whether or not the individual can pay the credit limit within the month—the
interest-free period—or do you make the judgment that, as long as they can make the minimum
payment, then that is fine and you will give them the credit?

 Mr Gamble—I do not have the exact details of the exact criteria that are used. We rely on
Westpac’s credit assessment strength as our partner in making those assessments.

  Senator GEORGE CAMPBELL—But do you feel that that should be an important feature
of the credit cards when they are issued—that an assessment is made as to whether or not the
individuals can pay—

  Mr Gamble—Absolutely.

  Senator GEORGE CAMPBELL—the borrowed amount within the interest-free period?

   Mr Gamble—It is important to assess consumers’ ability to pay. In terms of an exact formula,
I do not have a clear recommendation on whether or not there is a right formula, but it is
definitely important that that assessment is made in a way that is appropriate. We see in the
marketplace at the moment credit cards being offered without an assessment at all, which I think
is a dangerous practice.

  Senator GEORGE CAMPBELL—There is also a practice which I have heard repeated on a
number of occasions. Essentially, it is credit card jumping. In other words, I borrow off you, I
cannot make my payments, I go to ANZ and use my ANZ credit card to pay you off and I then
go to Westpac and use theirs to pay ANZ off. So I finish up with a series of credit cards and am
just transferring the debt around and accumulating debt. Why can’t the credit card industry
regulate that? Why can’t that be stopped? That should be fairly easy to identify, shouldn’t it?

  Mr Gamble—It should be, and the credit assessment of a new customer by any financial
institution should consider their behaviour and the other credit card products that they own. A
good credit assessment considers exactly what credit cards that person holds and brings to that
assessment. That is definitely good practice.

   Senator CHAPMAN—Don’t some credit card providers actually encourage people to
transfer their debt from one to another by sending out offers for new credit cards, saying that if
you transfer the accumulated indebtedness that you have on your card they will give you X
interest-free days or whatever? That is the very reverse of what Senator George Campbell is
suggesting should occur.

  Mr Gamble—We do that as well. But that is consolidating an individual’s debt onto a product
that is better suited for them. It is a good thing for the consumer. Many of our customers have

                                          ECONOMICS
E8                                       Senate—References                      Monday, 16 May 2005


come from products where they are on 16, 17 or 18 per cent interest. We absolutely encourage
them to consolidate their debt onto our product, which is going to be a much cheaper form of
credit for them and will save them a significant amount. That is exactly why we believe that,
when the consumer is in the mode of saying, ‘I should take a look at my credit card debt,’ they
should absolutely have it clear what the different pricing and features are and what effect they
will have on their repayments and their life, because that is the issue here.

   What you will find in the industry is a lot of practices whereby you transfer your credit but
after X months the credit card interest rate hikes to 16, 17 or 18 per cent. The problem is that that
interest rate hike is hidden at the decision point, the entry point, for the consumer and they make
the decision to go to one of those offers without knowing what the ongoing interest rate is. So in
six months they end up on 18 per cent and they did not realise they would because they thought
they were going to five per cent. That is exactly why we think that something like the honesty
box jumps on that issue, because it clearly states that you get X per cent—say, five per cent for
six months—but then you go to 18 per cent, so the consumer is informed at the point of making
the jump. If they are not informed and it is kept in the fine print, six months later they find
themselves on a high interest rate that they cannot afford and end up with unaffordable debt very
quickly.

   Senator GEORGE CAMPBELL—Should one of the issues that this committee considers be
whether or not people should be limited to holding one or two credit cards at any given point in
time?

  Mr Gamble—I think that is probably going too far. We believe in having fair and open
competition but not regulation that is too onerous. You need to have a level playing field that
enables open and fair competition without restricting that competition too greatly, in my view.

  Senator GEORGE CAMPBELL—But it may actually improve competition: if people are
limited then the banks and the credit card providers have to compete much harder for the
available business; they do not all get a share of the action.

  Mr Gamble—I think it would be something that would be difficult to regulate in terms of
administration and so on. I guess you would need to set up some form of central database of
credit card holders.

 Senator GEORGE CAMPBELL—Wouldn’t that necessarily be a good thing? I presume
most of the banks have got them now anyway.

  Mr Gamble—The risk with something like that is that you are driving cost back into the
industry, and to the extent that cost gets driven back in, it needs to come out somewhere, I guess.

   Senator GEORGE CAMPBELL—I do not see much relationship between costs and profits
in the banking industry, quite frankly, but we might leave that point. What do you say about the
issue of interest-free periods? Many retailers today are offering interest-free periods—24
months, 48 months—for all sorts of very expensive goods, such as electrical equipment,
furniture and so forth. Is that a practice that we should be looking to discourage?



                                           ECONOMICS
Monday, 16 May 2005                       Senate—References                                         E9


  I remember many years ago, in the UK, laws were introduced which made it compulsory to
charge a deposit of 25 per cent on any goods purchased over a certain cost. It seems to me that
what is being done is a marketing ploy, attracting people in to spend lots of money on very
expensive items, on the basis that you get it interest free for a period. But at the end of the day
they are bunging it on their credit cards, so they are making their payments on the credit card
and the interest is being transferred from Harvey Norman, David Jones or what have you to the
credit card holder.

  Mr Gamble—I think it is exactly the same issue. The issue there is that what happens beyond
the interest-free period is not disclosed to the consumer up front. Consumers end up, at the end
of that interest-free period of X months, going onto a very high-interest finance. Those products
have interest rates that are well above 20 per cent in some cases. So you might get a consumer
who thinks that they are getting a good deal for six or nine months on a fridge, or whatever it is,
but what they do not know when they buy that fridge is that their interest rate nine months from
now will be 25 per cent, and that is driving unaffordable purchase.

  I would suggest that the solution is the same, and that is disclosure up front. So when you are
buying the fridge and you get X months interest free, it should be clear to the consumer at that
point, and mandated on the retailer and the finance company behind them, that it must be
disclosed to the consumer in this simple form that it goes to 25 per cent at the end of that period.
At that point the consumer can make the right purchase decision. That is another example where
world best practice is showing the way, because if you go to the UK and walk around a
department retailer you will clearly see the interest-free offer and you will clearly see in bold
font—the size that it is mandated has to be there on the sign—what the interest goes to at the end
of that period. So it is exactly what overseas experience has done to get around that problem.

   Senator CHAPMAN—In relation to the Schumer box or honesty box, given the purported
benefits of this to the consumer, why in your view is it necessary to regulate for the provision of
this? Wouldn’t this give those companies that use it significant marketing advantage Therefore,
why do you need to regulate its use? If it is as good and beneficial as you say it is, wouldn’t
companies want to apply it in the way that you obviously do? You see it as a marketing
advantage yourselves, obviously, because you are already using it, so why make it mandatory?

   Mr Gamble—I think honest companies would, absolutely, and consumers love this. We have
got fantastic feedback from consumers that they love this and they love the brand image and
reputation that it portrays. The difference is that we have a product that represents good value for
the consumer. For a company that does not have a product that represents good value for the
consumer, it is not in their interests to advertise the poor-value features—there is too much
giving with one hand and taking with the other. A different approach that is taken in the market
is to advertise that there are five features here that are of relevance for a consumer to make a
credit card purchase decision, but many companies choose to advertise one feature. They can
make that feature look very exciting for the consumer, but the other four features might be very
poor for the consumer, so it is not in their interests at all to operate such a disclosure. That is why
we think it needs to be regulated. It will force all companies to reconsider the products that they
are offering consumers. That will increase competition and, in turn, that will lead to a better
product suite for consumers.




                                            ECONOMICS
E 10                                    Senate—References                     Monday, 16 May 2005


  Senator BRANDIS—As a rule, the lower your interest rate, the more interested you as the
provider are going to be in advertising it.

   Mr Gamble—That is exactly right. So, if you regulate disclosure, you are encouraging
companies to make better products for consumers. That is exactly the trend. We have seen that
trend in the US and the UK, where they have already done this. The average credit card product
for consumers in those countries is far superior to the Australian product. The way that they
track interest rates and so on is far superior to Australia because they have a much more open
environment where they need to compete.

  Senator BRANDIS—You are talking about the generic features of the product. Let us limit
ourselves to the interest rates. Have any studies been done, of which you are aware, in the United
States or the UK that show an empirical relationship between the introduction of these disclosure
boxes and movements in interest rates?

  Mr Gamble—I am not sure exactly. I am happy to look into that and see if there is anything
on that. Studies have been done in our local market that show that the interest margin has
actually been increasing over the past 10 years, despite more competition coming into the
market, because the majority of consumers are still on incumbent, poor-value products. So in the
local market we are seeing the opposite trend. Qualitatively, the US and the UK markets have
massively changed. Whether an empirical study exists, I am not sure. I am happy to check.

  Senator CHAPMAN—It has been put to me recently that Australia should move to a system
of positive credit reporting rather than our current credit reporting, which might be described as
negative. Do you have a view on that?

   Mr Gamble—I guess we take the view of the consumer. We think that what is right for the
consumer is, long term, right for the industry. The way for me to answer that is to say that the
issue is whether that move is right for the consumer or not. It is not something that we have a
strong view on one way or the other at this stage. But, like anything, we would take a consumer
view on that and analyse whether a move like that would benefit the consumer in the long run.
You will hear arguments for and against that. The argument for product reporting is that with
information companies are able to make a better informed decision on providing credit to
consumers and can therefore give them a product that is more appropriate to them or can decline
it if that is appropriate. There are also negative arguments around that access to consumer
information. I think those things need to be weighed up.

   Senator CHAPMAN—I understand, having looked at some of the overseas situations where
positive credit reporting has been introduced, that in some aspects it can be detrimental to
consumers in that if they default on one financial transaction the provider of some other
transaction might say: ‘We’ve been advised you have defaulted on this, so your interest rate’s
going up X per cent because you are a worse risk than you were.’ Under our current system, that
would not happen.

  Mr Gamble—It is all about the power of information and being able to provide the right
product for consumers. It allows a product rather than no product. You can argue whether it is a
good or a bad thing that the consumer has a product that they can use that is considered
appropriate for them versus being rejected on the basis of limited information.

                                          ECONOMICS
Monday, 16 May 2005                      Senate—References                                       E 11


  CHAIR—Positive credit reporting is something we will be going to later in the day. I do not
know if you have had any opportunity to look at any of the submissions to the inquiry that take
that issue up, but it is a vexed question and one that we will be pursuing fairly intensely, I think.
Thank you very much for your evidence today. We appreciate your submission. We will certainly
be considering those issues and, in particular, the recommendations that you make in the
submission.

  Mr Gamble—Thanks very much.




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E 12                                   Senate—References                     Monday, 16 May 2005




[10.15 a.m.]

CONROY, Mr Pat, National Projects Officer, Australian Manufacturing Workers Union

   CHAIR—Welcome. The committee prefers all evidence to be given in public but should you
at any stage wish to give any part of your evidence in private you can ask to do so and the
committee will consider your request. I invite you to make a short opening statement and then
we will go to questions.

  Mr Conroy—The AMWU thank the committee for the opportunity to appear before it. We
believe this is a very important issue. The AMWU are very concerned about the historic levels of
household debt, the flood of imports entering the nation and the unprecedented run of current
account deficits. Household debt has reached historic levels. This has driven a massive increase
in the importation of consumer goods, leading to an explosion in Australia’s foreign debt and
resulting in a series of record and unsustainable current account deficits.

   In June 1995 Australian households had an average debt of $40,000 and assets of about
$260,000. By June 2001, average debt had blown out to $71,000—a 13 per cent annual average
rise—while assets grew by only seven per cent to $347,000 on average. Some of this is
borrowing against the increased value of household assets; other debt has been racked up on
credit cards. Outstanding balances increased from $6.6 billion to over $30 billion between
March 1996 and December last year. What is more worrying about this fact is that some $20
billion of this is accruing interest. So it is not a matter of people putting everything on their
credit card to get reward points; these are people facing interest rates and interest debts.

  Household savings as a share of household disposable income fell from 14 per cent in 1983
when the Hawke government was elected to six per cent in 1996 and is now around minus three
per cent. By contrast, the household debt to income ratio gradually rose from 35 per cent to 50
per cent between 1976 and 1990. It reached 75 per cent by 1996 and has grown exponentially to
150 per cent in 2004. What is even more significant is that the Australian household debt
servicing ratio has exceeded the peak reached in 1991, and now 25 per cent of a household’s
disposable income is going to servicing debt.

  The AMWU believe that the current situation is extremely worrying. The share of consumer
debt in total household debt went from 16 per cent at the end of the 1980s to 35 per cent by
2003. The debt explosion cannot be solely attributed to increased borrowing to purchase costlier
assets due to the growth in housing values. Instead, the main driver of the debt explosion has
been the purchase of consumer goods. This is a situation which the AMWU believe is not
sustainable. The driver of the explosion in import growth and, hence, the disastrous current
account deficits has been this demand for consumer goods. Over the term of the Howard
government, the value of consumer goods imported has risen by 133 per cent, the value of
capital goods by 73 per cent and intermediate goods by 48 per cent. As a result, the total outlay
on imported goods has shifted over time towards non value creating items—that is, consumer
goods—relative to goods necessary to fuel capital accumulation.




                                          ECONOMICS
Monday, 16 May 2005                      Senate—References                                      E 13


   At the same time, Australia’s foreign debt has grown massively. In December 1999, it was
$245 billion and by December 2004 it was $394 billion—representing an increase in the share of
GDP from 40 per cent to 50 per cent in five years. All of this is accounted for by private debt,
public debt having been effectively eliminated over the past decade. The AMWU believe that
foreign debt is not a problem as long as foreigners are happy to hold Australian debt—which
they have been in recent years because of Australia’s AAA credit rating and high interest rates
relative to the rest of the world. However, we are concerned that this interest rate disparity may
not last if the US continue to raise their rates and any attempt by the Reserve Bank to meet such
a risk in Australia in order to keep foreign banks buying Australian debt could potentially spark a
recession or a housing collapse.

  In the past this practice has been identified as one of the major reasons for the economic
meltdown of developing countries that have previously enjoyed relatively high growth rates. No
credible economist or policy maker would support the notion that sustained borrowings can be
used to support consumption and expenditure, yet in Australia that is what has been happening
for a decade. The cost of this has to be lower long-term growth in the future.

   The growth in household debt has been the driver of Australia’s economic growth over the last
eight years and in particular the last two years. The AMWU submits that this is clearly
unsustainable. The level of debt and consequent higher debt servicing ratios make Australian
households incredibly vulnerable to extreme hardship should the economy decline or interest
rates increase markedly. The risk to the household of high debt levels is fairly obvious. A heavy
debt with consequent heavy debt servicing ratios makes these households incredibly vulnerable
to interest rate increases or reductions in household income.

   The vulnerability could precipitate the first of three risks to the economy from higher
household debt levels. The first is a recession induced by household demand evaporating to
service debts. The second comes from the large external imbalance caused by the debt-induced
current account deficit and spiralling foreign debt levels. The final risk to the economy originates
from a misallocation of resources caused by the housing bubble and the consumer debt explosion
reducing the long-term competitiveness of the Australian economy.

   The Australian economy is vulnerable not only to recession caused by a collapsing consumer
demand but also to a change in the international sentiment regarding the Australian economy.
The only reason that the 2004 and 2005 current account deficits have not attracted as much
concern as the ones in the mid-80s is due to the record high terms of trade. Had the terms of
trade stayed at their 1990s average, the external deficit would now be 10 per cent, not 6.75 per
cent, of GDP. Conversely, if the current terms of trade existed in 1986, when Paul Keating made
the banana republic remark, Australia would actually have had a current account surplus, not a
deficit. These historic terms of trade cannot last and serve to conceal the true nature of
Australia’s external imbalance.

  The reliance on capital inflow to fund consumer debt has adversely affected the manufacturing
sector in a variety of ways. Firstly, it has crowded out direct foreign investment in manufacturing
by forcing interest rates and exchange rates to be higher than would otherwise have been the
case. That is certainly the case currently, with Australia’s short-term interest rate being four
times the United States’s level. Secondly, it has allowed unsustainable growth in domestic
demand resources which would otherwise have been allocated for manufacturing expansion.

                                           ECONOMICS
E 14                                    Senate—References                     Monday, 16 May 2005


These have been relocated to support the construction and services sectors. This has resulted in a
permanent loss of capacity and exports. Thirdly, governments have begun to think it is all too
easy. Governments continue to believe that high and sustained economic growth can be achieved
by letting the finance sector drive the economy. Governments have cut export assistance and
industry assistance programs, and have become lazy in efforts to attract foreign direct capital
inflow. Governments no longer believe in the importance of manufacturing. They will learn the
folly of this position at substantial cost to the Australian economy, Australian workers and their
local communities.

   Australia must develop growth drivers that are more sustainable than consumer demand
financed by foreign debt. The most appropriate driver is the development of competitive export
industries, especially in the area of elaborately transformed manufactures. Australia is one of the
few countries in the world who deny the strategic role of manufacturing. For most other
countries, especially the fastest-growing countries of the last 20 years, the manufacturing sector
is seen as a strategic instrument for generating desired aggregate growth outcomes.

   How can we move over from a reliance on growth from household debt financing current
consumption to incremental increases in the contribution of innovative, export-driven,
knowledge-intensive manufacturing? The AMWU believes seven actions can assist its
transformation. These are prudent economic management and solid economic fundamentals;
acceleration of the growth of business investment in R&D; increased greenfield foreign direct
investment; greater import replacement; an increase into exporters and the extension of the
capacity of existing exporters; investment in supporting physical, social, R&D and
environmental expenditure and infrastructure; and increased levels of private equity investment,
especially venture capital. We believe that these actions, if they are taken, can transition the
economy from one that is financed and supported by short-term consumer debt to one that is
based on exports of knowledge-intensive manufactured goods. These are the considered views of
the AMWU. I thank the committee for the opportunity to present them.

   CHAIR—Thank you very much, Mr Conroy. Your submission is quite comprehensive and in
it you have addressed most of the terms of reference, so we have much to explore with you. One
of the issues that you raised was the monetary policy used by the European Central Bank.

  Mr Conroy—Yes.

  CHAIR—How would adopting those rules result in lower household debt levels?

   Mr Conroy—We believe that one of the reasons for the explosion in consumer debt has been
relatively loose lending policies by banks. We all know that, due to the deregulation of banks,
there is increased competition for finance, but we believe that the supervisory agencies of the
government have been lax in this area. The European Central Bank sets a target for lending
policies of the aggregate growth goal plus inflation, so it is something around four to five per
cent per annum. Australia has been running on average at a 13 per cent increase in lending by
banks per annum, and we believe this is unsustainable. This is the considered view of the
National Institute of Economic and Industry Research, which has put forward detailed proposals
on this area.




                                          ECONOMICS
Monday, 16 May 2005                      Senate—References                                       E 15


 CHAIR—Because of your constituency, of course, you touch on the issue of the
manufacturing sector. Can you just elaborate a little more on what you see as the impact on the
manufacturing sector of increased household debt?

  Mr Conroy—Basically it comes from the government point of view, in that the government
have abandoned any serious commitment to growing exports and exports in knowledge-intensive
manufacturing because they have been content for the economy to be driven by an increasing
consumption expenditure—driving the property sector, the retail sector and the wholesaling
sector. This means that resources that should have been dedicated to supporting manufacturing
have been lost, and this has led to a long-term decrease in our capacity to export to the rest of the
world and compete with the emerging countries in Asia.

  CHAIR—Are you familiar with Professor John Pitchford’s work?

  Mr Conroy—No.

   CHAIR—He argues that the current account deficit, particularly when it predominantly
comprises private sector debt, does not matter unless it is the symptom of an underlying
structural issue and that it is wrong to tighten monetary policy with the objective of reducing it.
You are arguing that the current account deficit does matter. Do you think that it is symptomatic
of underlying problems in the economy?

   Mr Conroy—Definitely. The explosion in the current account deficit in the last five years has
been driven by an increase in imports. It is not about borrowing more to fund capital expansion
here; it is about borrowing more and buying more consumer goods. If you look at the growth
rates in the last eight years, consumer goods have risen by about 140 per cent and capital good
imports only by 70 per cent, so what is happening is that Australians are buying more and more
consumer goods from overseas. This is part of an underlying structural problem here in that we
are not funding productive investment; we are borrowing now to purchase goods and we will
pay for it later—given the fact that the savings rate is now negative three per cent. It is
symptomatic of that.

   Senator CHAPMAN—Your concern seems to be the relative decline of the manufacturing
industry in Australia. You argue that that has been driven by consumer purchase of imports as the
main factor in the expansion of consumer debt. But is it not a fact that in virtually every
developed country around the world manufacturing’s share of the economy has declined,
reflecting the growth in other sectors of the economy such as services, information technology
and the like? Can you specify any particular differences in the Australian economy, in terms of
the share represented by the manufacturing industry, compared with other developed countries?

  Mr Conroy—Yes. First of all, the AMWU’s position is that manufacturing is not so much in
decline as there has been a change in methodology. For example, most of the growth in services
has been in things that are related to manufacturing that were previously defined as
manufacturing. The classic example is, say, General Motors Holden, where originally the design
department would have been considered part of manufacturing. When they outsourced that
function it then became part of the service sector.




                                           ECONOMICS
E 16                                    Senate—References                     Monday, 16 May 2005


  It should also be noted that manufacturing is still the largest employer of full-time jobs in the
economy, at around 1.1 million people. It is certainly the most significant sector of the economy.
Our concern is not so much about the relative decline of manufacturing, if that is the case; our
concern is the fact that governments have neglected export and industry policy because they
have been happy for consumer debt to finance growth in Australia. If you look at the rates of
exports of elaborately transformed manufactured goods between 1984 and 1994, you see that
growth in this sector was 17.7 per cent per annum. Between 1997 and 2003, the average was 1.8
per cent growth. In the last two years growth in ETM exports has declined. So that is our
concern. The action in the international economy is in the growth of elaborately transformed
manufactured goods. This is a knowledge-intensive area—it does not compete on price of labour
but on innovation. This is where the developed world can compete with the developing nations,
and Australia is failing because of the neglect of the Howard government.

  Senator CHAPMAN—I would have thought that initiatives like Backing Australia’s Ability
and the car industry plan, in terms of its focus on engineering skills and the like, were very
positive initiatives from the Howard government.

   Mr Conroy—Our submission is that Backing Australia’s Ability is a drop in the ocean. There
are huge problems with its implementation. For example, the Commercial Ready program was
announced in the finding and then a discussion paper was released asking for industry views on
how the money should be spent and the program structured. We believe that things like the
slashing of the R&D tax concession in 1996 from 150 per cent to 125 per cent had a massive
impact on business R&D. It was only last year that we recovered to the levels experienced in
1996. We believe that the Howard government has been making noises but has failed the real
test. Things like the action agenda process have not been implemented properly. The Backing
Australia’s Ability’s program is focused too much on headlines and not enough on innovation in
manufacturing, which is where the action is.

  Senator CHAPMAN—Industry has been very positive about these programs.

  Senator BRANDIS—So have the universities.

   Mr Conroy—I submit that the Howard government has been very effective in muzzling the
industry associations. There is common knowledge around the place that industry associations
have been told: ‘You can get access to government and you can make comments as long as you
keep them in-house. If you make public comments you will be cut off.’ We have the farcical
situation of Heather Ridout not making any comments on the atrocious neglect of skills in the
last budget, because she is keen to keep things in-house with the government. It is the same with
the Australia-China free trade agreement.

  Senator BRANDIS—Heather Ridout has told you that, has she?

  Mr Conroy—This is the AMWU’s view.

  Senator CHAPMAN—Where is the evidence?

  Senator BRANDIS—Answer my question: has Heather Ridout told you that?


                                          ECONOMICS
Monday, 16 May 2005                    Senate—References                                    E 17


  Mr Conroy—No, she has not.

  Senator BRANDIS—You are making a claim which is entirely unverified.

  Mr Conroy—I said it is the common view of the industry.

  Senator BRANDIS—I think in common parlance that is called a lie.

  Mr Conroy—No, it is not. It is our opinion.

  Senator CHAPMAN—Based on what?

  Senator BRANDIS—You are saying that somebody has a belief, yet you have no basis to
support it at all.

  Mr Conroy—I said it is the common view of the industry.

  Senator CHAPMAN—It is not a view that is being expressed to me, as chairman of the
industry committee.

   Senator WEBBER—I would like to return to the issue of R&D incentives. Mr Conroy, you
were saying earlier that you could track the demise of the R&D tax deduction from 150 per cent
to 125 per cent, and you said that one of the proposals the AMWU has is that we need to
accelerate the growth of R&D expenditure. I wonder whether you could expand on how you
think that will then impact on the current account deficit?

   Mr Conroy—We believe that if we increase innovation in the industry, and in manufacturing
in particular, it will increase our long-term competitiveness and our exports because we could
then compete with Asian countries not on the price of labour—which we can never win—but on
the price of our innovation and keeping ahead of the curve. That is where we are at. If you look
at the benefits of the last Hawke-Keating Labor government you will see that they had a serious
commitment to growing ETMs and, despite awful terms of trade, we were increasing our
exports. Our balance of trade was generally positive in the early nineties because of that
commitment. We think that if we increase innovation and increase skills we can keep ahead of
the curve with the rest of the world.

  Senator WEBBER—Do you have specific examples of the detriment of the decrease in the
incentive from 150 per cent to 125 per cent?

  Mr Conroy—The biggest indicator for us is the decline in growth in elaborately transformed
manufactured goods. These are the most knowledge-intensive parts of the economy and they
have fallen dramatically under the Howard government. That is directly linked to the fall in the
R&D tax concession, the end of R&D syndicalisation and the lack of commitment to industry
plans.

  Senator GEORGE CAMPBELL—I understand that one of your arguments is that the
explosion in household debt, in part, is fuelling the growth of consumer goods, particularly


                                         ECONOMICS
E 18                                               Senate—References                                Monday, 16 May 2005


imported consumer goods. What do you say about the impact of this process on the value of our
currency and its impact on our capacity to export?

   Mr Conroy—The impact has been in two parts and both have been negative to the long-term
growth prospects of Australia. First of all, to purchase imported goods we borrowed money from
overseas. Ironically, a part of creating the current account deficit is that we need a capital
account surplus to fund that. That means that we have had to keep interest rates artificially high
to fund it. We have reached the point where interest rates, in the short term, are four times higher
than those in America and are considerably higher than those in Europe and Japan. This high
interest rate differential has impacted upon Australian manufacturing and Australian exports and
this has led to an artificially high currency. I think that most industry players, especially in the
manufacturing sector, would say that the high currency rate is impacting on them and preventing
them from exporting effectively. The currency exchange rate is around, I think, US77c or US78c
and that is disastrous for Australian manufacturing and, coupled with things like the Chinese
currency being pegged and 40 per cent above its real value, these things are having huge impacts
on Australian exports.

  Senator GEORGE CAMPBELL—You made the comment in your opening address and you
just made it again about the relationship between interest rates in Australia and the rest of the
world. We hear the government continually telling us how wonderful our low interest rates are
and how they have driven them down. Can you explain the relativity between our interest rates
and the interest rates globally and what that means for the Australian economy?

   Mr Conroy—Interest rates in Australia are significantly above those of the rest of the world.
Part of the reason, some may argue, is that we have had relatively high growth rates compared
with the rest of the world. That is partly true, but it does not explain the whole story. It is about
underpinning the Australian currency and attracting foreign banks and letting them buy
Australian debt. That is what is happening, and we believe that it is unsustainable in the short
term and it cannot be kept up. As interest rates in America go up, the margin between our rates
and American rates decreases and that puts pressure on foreign banks and makes them more
reluctant to keep Australian debt. At the moment there is money for jam for foreign banks to buy
Australian debt and buy Australian currency because of the high interest rates but that cannot go
on forever.

  Senator GEORGE CAMPBELL—In your submission you refer to a speech by Professor
Ross Garnaut—I think it was the Sir Leslie Melville lecture 2004—in which he said:

The large, negative contributions of net exports were the main contributor to the increase in the current account deficit as a
share of GDP, to close to the highest levels on record in both episodes.

I presume he was talking about the period from the mid-eighties to the mid-nineties. He went on
to say:

This is a startling comparison, since the need to reduce this deficit was the main reason put forward for the extreme
monetary tightening that precipitated the recession of 1990-91, and today’s deficit brings forth neither policy response nor
substantial comment from the authorities.




                                                      ECONOMICS
Monday, 16 May 2005                       Senate—References                                       E 19


You would be aware of the comments made by the Prime Minister John Howard, then Leader of
the Opposition, and Peter Costello in 1995 when they said that our current account deficit then
would destroy the Australian economy, that there was gloom and doom and that we were all
headed down the pits. At that stage it was $5.542 billion, $193.2 billion in foreign debt and, as a
fraction of GDP, 4.2 per cent. It is currently sitting at $15.9 billion, 7.1 per cent of GDP and
$421.9 billion in net foreign debt. Why do you think the gloom and doom forecast in 1995 has
failed to materialise so far under this government, which has presided over an absolute explosion
in the current account deficit and foreign debt over that period?

  Mr Conroy—Simple political expediency. For example, the current account deficit figure you
mentioned, $15 billion, is per quarter. The annualised figure is over $50 billion now. We believe
that the Howard government was happy to point out these issues when in opposition but now it
has failed to implement effective policy solutions to these issues. I remember that in 1995 and
1996 we had the foreign debt truck. Peter Costello wheeled out this debt truck that said that
Australians owed $10,000 per man, woman and child in Australia. The current figure now is
over $20,000 per man, woman and child yet we have no comment from the government. It says:
‘Do not worry. The current account deficit does not matter any more. Foreign debt does not
matter any more. Consumers can make these choices. It will not undermine the Australian
economy.’ The AMWU’s point of view is that it does undermine the Australian economy. It
undermines the long-term growth drivers of the economy, and we will be paying for it in the
future of our country.

  Senator CHAPMAN—In your submission, at paragraphs 19(iii) and (iv), you say that the
rapid increase in housing prices is ‘allowing households to trade down in housing units and
spend the difference on consumption; and allowing households to maintain a sustained non-
taxable income flow by trading in houses’. What evidence have you got for that? I would have
thought that, overwhelmingly, most families have used the housing boom to trade up, not trade
down. Elderly people, when they get to retiring age and so on, may trade down but the great bulk
of the community, I would have thought, are trading up rather than trading down.

   Mr Conroy—These views are specifically those of the National Institute of Economic and
Industry Research based in Melbourne. Point (iii) is the empty nester syndrome of retired
couples trading in for inner-city apartments or what have you and spending the difference on
consumption. We do not assert that that is the majority of what is happening. That is part of the
story. We argue that the general wealth effects in point (i) and in point (ii), the ability to leverage
consumption loans off household loans, are more significant. Points (iii) and (iv) are happening
but we argue that points (i) and (ii) are more significant in the economy. But the empty nester
syndrome is happening and, while that is providing a short-term boost to the Australian
economy, we believe that in the long term it is undermining our competitiveness.

  Senator GEORGE CAMPBELL—This issue raised by Senator Chapman is not a
phenomenon that is unique to this country. It is a phenomenon that is happening in housing all
around the world.

  Mr Conroy—It is, Senator. We believe that in the short term, while housing prices are at such
a high level, that does maintain consumption at an artificially high level. But in the long term, by
suffocating resources from manufacturing and exports, it is undermining our long-term growth.
You will also note that this housing bubble has had a serious impact on housing affordability for

                                            ECONOMICS
E 20                                Senate—References                  Monday, 16 May 2005


younger Australians and lower income workers. The AMWU is deeply concerned about this and
the policies that have supported this bubble.

  CHAIR—Thank you very much, Mr Conroy, for your submission and for your evidence here
today. We appreciate your efforts and your contribution.

                    Proceedings suspended from 10.45 am to 11.06 am




                                      ECONOMICS
Monday, 16 May 2005                              Senate—References                                                 E 21




COX, Ms Karen, Coordinator, Consumer Credit Legal Centre (New South Wales) Inc.

LANE, Ms Katherine, Principal Solicitor, Consumer Credit Legal Centre (New South
Wales) Inc.

   CHAIR—Welcome. The committee prefers all evidence to be given in public, but should you
at any stage wish to give any part of your evidence in private you may ask to do so and the
committee will consider your request. I now invite you to make a short opening statement, after
which the committee members will ask some questions.

  Ms Cox—I would like to start by making a couple of very small corrections to our
submission. The first one is on page 5, where we have written:

•    35% of households are carrying 65% of the interest bearing debt
That is supposed to read ‘35 per cent of households are carrying all the interest bearing debt’. At
the time this study was done the interest bearing debt was around 75 per cent. The second
correction is on page 14, in the second paragraph. We have written:

With fringe lenders then one or more credit providers are used to distance the credit provider from all knowledge of the
transaction ...

That is supposed to say ‘one or more intermediaries’. It makes a lot more sense to say
‘intermediaries’—that is, brokers such as finance or mortgage brokers.

    CHAIR—So you are saying ‘with fringe lenders then one or more intermediaries are used’.

   Ms Cox—Yes—‘are used to distance the credit provider from all knowledge of the
transaction’.

   I would like to start by saying that we have very little knowledge of the impact on the current
account deficit. In fact, I think we have figured out that between us we would have trouble
defining the current account deficit. We do, however, know a lot about household debt—
certainly the human face of household debt and the numbers and types of problems we are
dealing with. We also know a fair bit about the legislative and regulatory regimes surrounding
the provision of credit and some of the things we think should be changed about that regime. Our
first main point is that there are a lot of households out there that are already hurting as a result
of debt levels. We receive thousands of calls at our centre from New South Wales alone. We took
over a hotline service in September last year that used to be run by Wesley Mission, and I think
we are running around 4,500 to 5,000 calls already since last September—about eight months.

  One other thing we are aware of is that as a nation we are living on borrowed time. Probably
not the majority of us but a very significant minority are using credit to mask an imbalance
between income and expenditure. There are probably people who are using that credit proportion
to buy luxury or imported goods and some who are using it to increase their capital wealth by
investing in their own house, but we see a lot of people who are using credit just to live—people


                                                    ECONOMICS
E 22                                     Senate—References                       Monday, 16 May 2005


on fairly low incomes who are using credit facilities to purchase necessaries such as groceries,
electricity, car registration and those sorts of things.

   We think that competition has had some very positive outcomes, as has deregulation in
financial markets, but there have also been some specific downsides. We think there has been a
deterioration in lending practices, and there are probably three particular aspects of that
deterioration. The first and most prominent is in credit card lending. At least a thousand people
in the last eight months have rung us up about credit card debt. There are others who have had
credit card debts whom we have simply referred onto financial counsellors and have not
obtained details about. But more than a thousand people have identified credit card debt, with or
without other forms of lending, as a problem.

   Credit card lending, specifically in relation to credit limit increases, is a major problem for our
client group. A lot of our clients have been offered increase after increase in their credit limit
with no reference to their income and liabilities. Some of these people have had a change in
income whereby they have a lower income than they had when they were first granted the credit
facility, but many of them have never had a change in income and the credit provider has been
well aware of their financial situation from the start.

  The other area where we have seen a deterioration is home lending. There has been a change
in attitude towards things like income ratios—what percentage of income is appropriate to
service a loan. There are higher loan to value ratios, greater use of things like deposit bonds and
widespread use of third party channels such as brokers. Our experience of brokers is that,
whereas many of them are probably extremely responsible and professional in the way they
provide their service, we see the results of a lot who are not. More and more people are coming
in who have a loan secured against housing, who have very little income and whose loan
applications have been seriously doctored—basically their loan application contains information
that is simply incorrect.

   One of the latest scams that we are seeing is where we have had people present suddenly with
large tax debts. We have yet to figure out how it works. They have somehow been incurred as a
result of some fraud where someone has applied for a loan, they have no more income than a
pension and somewhere along the way it has been put forward that they run a business. There is
an ABN and a whole range of stuff but they have never had the income and there never was any
business. The one thing these transactions tend to have in common is the involvement of
intermediaries, sometimes one and sometimes more. They are rarely banks; they are usually
other lenders. That is one of the extremes. There are also much lesser examples where it is
simply a matter of dependants being left off, income being slightly exaggerated, income being
expressed as permanent when it is really casual and that sort of thing.

  Having reviewed the other submissions to the inquiry, I note that many of our concerns have
been corroborated by other people who have submitted, so I am not going to dwell too much
longer on them. There are two points that I would really like to make that I do not think have
been made in the other submissions. One is that there is a higher reliance by industry and
government on low default rates as an indicator of a lack of financial stress. We think there are
three reasons why low default rates in this climate are not a good indicator of financial stress.
The first is fairly obvious—that is, we have had fairly solid economic conditions for some time



                                            ECONOMICS
Monday, 16 May 2005                       Senate—References                                       E 23


now so if default rates are going to be low then now is the time that they will be and any form of
economic downturn might have an effect on that.

   The second one is that we see clients making very creative use of the availability of other
credit in order to mask potential default situations. We have clients who refinance their credit
over and again, use balance transfers, roll their credit card debts over into their home loan—
perhaps once or perhaps twice—and, at the extreme, use one credit card to pay another. They get
a cash advance from one card and use that to pay off another card. We also have a lot of clients,
particularly people on very low incomes, who have their entire income paid onto their card and
then withdraw what they need in order to live. That is the only way they meet their minimum
payment. They really have no capacity to make the payment at all; they are using it as a
mechanism to mask their situation. That becomes very stressful over time because of the amount
of their income that instantly disappears to meet interest and charges each month.

   The final thing, which we think is perhaps the biggest problem when looking at the default
rate, is that in the last 10 or 20 years we have moved to a completely new scenario whereby,
instead of paying off loans, people are making minimum payments. This is not something which
happened in the past. Once upon a time, you obtained a loan and paid it off. You were
guaranteed to have paid it off in five, seven or 25 years, all things going well, depending on the
type of loan. What we have now are credit cards and store cards—the most obvious example of
continuing credit facilities—whereby people will sit for many years with their balance fully
drawn. They may be able to reduce it with a lump sum here and there—and then they run it up
again—but essentially they remain exposed to the full amount over time.

  When we look at defaults, we are not measuring people’s ability to meet that debt; what we
are measuring is their ability to meet the minimum payment only. This essentially leaves people
extremely vulnerable to the vicissitudes of life. We hear people say, ‘It is not borrowing that gets
people into trouble, it is the fact that they lose their job or it is family breakdown or it is because
they get sick.’ There is a relationship between these things. The longer that people are exposed
by having an amount outstanding the more likely it is that sooner or later something will go
wrong. I think that is something we have not really appreciated.

  We are seeing that not only with credit cards but also more and more with interest-only style
home loan lending; line-of-credit accounts; some home loans that are perhaps interest-only for a
few years—which is probably not as bad, but it does mask some problems; short-term lending
which is interest only; and line-of-credit facilities that may go on for years where people do not
reduce that home loan. At the end of the day, we all eventually retire. We are seeing more and
more of our clients falling into the older age group; they may once have been able to service
their debt, but they cannot any more because they do not have the income to do it.

   I would like to give a brief response to some of the things brought up in some of the other
submissions. In particular, I noticed that MasterCard, Dun and Bradstreet and perhaps another
submission have all talked about the need for positive credit reporting—that that will fix all our
problems in relation to household credit. First of all, it is very interesting to note that, when we
say there needs to be greater regulation of credit card lending, we are told that our default rates
are at historical lows and there are no problems; but when it comes to credit reporting we are
told all of a sudden that we have a problem we need to fix and that our default rates are
comparatively greater than default rates overseas.

                                            ECONOMICS
E 24                                     Senate—References                       Monday, 16 May 2005


   That aside, we have a couple of problems with that notion. Firstly, there are significant
problems with our current credit reporting system. We see it as one of the big issues for clients
that they are being penalised for either incorrect or inaccurate defaults on their credit card or that
there is a disproportionate response—for instance, where someone has moved out of a share
house when they were very young and thought that their flatmate had paid their last phone bill,
but the flatmate did not, and is now unable to get a home loan because that default has been on
their credit report. That situation is exacerbated by the fact that the phone company may have
done very little about that for up to nearly six years and then sold the debt, when the statute of
limitations was due to expire, to a debt collection company which then lists that default, perhaps
five years after it happened, and it stays on that person’s credit report for yet another five years.
So we have people being affected by fairly small and inadvertent acts 10 years after they
occurred.

  Our current credit reporting system is very much an honesty based system whereby the credit
providers list and it is up to you to do something about it if you are a consumer. Ironically, most
people do not even know what is on their credit report, so it is very difficult for them to take any
moves to address any inaccuracies. So, before we look to moving to a more comprehensive
credit reporting system, we would like to see a fairly comprehensive review of the safeguards
that exist in the current one without adding any further data to it.

  The only other response we would like to make is that we find it a little disingenuous that
there are industry members out there saying, ‘We could lend so much more responsibly if we
only had access to full file reporting.’ While default rates have decreased in some overseas
countries, lending usually increases so there is greater penetration into lower socioeconomic
groups, and in pure numbers there can in fact be greater defaults. The other thing that we see
over and over again is that they are not using the information they actually have. I think I heard a
representative from one of the banks the other day saying, ‘We have to lend blind because we
don’t know what other credit limits people have.’ And yet we see over and over again banks
offering credit limit increases to people who are banking with their own bank when, if the bank
were to review these people’s past behaviour properly, the bank would see that it was absolutely
obvious that the people were struggling to pay the debt that they already had. Do you have
anything to add, Katherine?

  Ms Lane—No.

  CHAIR—Thank you very much, Ms Cox, and thank you for your submission. Just so that we
understand your organisation, can you tell us about it? It is incorporated in New South Wales.

   Ms Cox—We are a community legal centre. We are incorporated. We have a management
committee. The majority of our funding comes from various government sources. Our largest
funder is now the New South Wales Office of Fair Trading, although the shift to them being the
largest is fairly recent. We also get money through the Commonwealth Community Legal
Services Program. We usually have a range of projects going at various times, which may have
been funded from government sources or may have been funded from benevolent, charitable
type funds and that sort of thing.

 We have two key core services. One is that we are like a call centre and we have a hotline
where we take calls from people having difficulties with their finances in New South Wales. The

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Monday, 16 May 2005                      Senate—References                                       E 25


key role of that hotline, I guess, is to do a little bit of triage, to figure out what people need and
to refer the vast bulk of them out to financial counselling services across New South Wales or to
their credit provider. We get a lot of calls from people saying simply, ‘I want to know how to
access my credit report,’ and that sort of thing. But at the same time we will pull out of those
calls people who perhaps need some sort of ongoing legal assistance. We will also look for
people who are in remote regional areas who cannot get access to a financial counsellor, and our
in-house financial counsellors will assist them to negotiate with creditors, using the phone and
the mail. If financial counselling services are under stress, we will say, ‘We can’t get you in right
now but we’ll do some advocacy while we’re waiting for an appointment, to make sure the
credit providers put things on hold. We’ll keep your electricity on and that sort of thing.’ That is
one part of our service.

   The other part of our service is essentially a legal practice. We give legal advice and we take
on cases and represent people in courts, tribunals and to the Banking and Financial Services
Ombudsman—in situations where people actually have some sort of legal case emerge from
their circumstances. That service also has a very big role in providing education to the
community, in commenting in the media and in drafting things like this submission. We spend a
fair bit of time doing submissions to government and often respond to questions from
government at both the state and Commonwealth level.

   Ms Lane—The only thing I would add to that is that we are a specialist service. I want to
stress that we only do credit and debt. That is it. We live and breathe it, basically. That is what
we think about all day long every day at work.

  CHAIR—What kind of numbers are you talking about? You mentioned that the hotline had
upwards of 4½ thousand calls in the last eight months. What other kind of client base do you
have?

  Ms Cox—That is just straight telephone calls. In addition to that we would usually give legal
advice over the phone to between 900 and 1,000 people each year. That is what we were doing
prior to taking over the hotline. Our actual case load has probably changed now, but in recent
years there have been around 100 to 120 cases a year where we actually act for a client—take
them on and are their solicitors. We are talking about fairly small numbers in terms of the case
load, but we can only assist a fairly small number so we try to choose our issues carefully.

   CHAIR—Have you seen an increase in calls that relate particularly to the circumstances of
farmers and farming families because of drought?

  Ms Cox—I do not know that we have picked up on that in particular.

   Ms Lane—I can explain why. We do get the occasional call, but what we tend to do is support
rural counsellors. So if there is a drought they tend to go to the rural counsellors first because
they have specialist knowledge about farm debt mediation and giving advice about what to do.
There are also financial counsellors, and we back those people up. I do a bit of that. I talk to
about 500 people a year, and out of those there would be quite a large number of rural people.
But the figure for people who are actually on the land would be one or two per cent—maybe a
bit more. I do talk to a lot of farming people.


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E 26                                     Senate—References                       Monday, 16 May 2005


  CHAIR—I was interested, given the current circumstances, in whether you had actually seen
an increase in the number of calls to the hotline.

  Ms Cox—One call recently was from someone who had been using their credit cards to pay
for feed for their stock for a little too long. That was a particularly rural problem that we were
not familiar with.

  Ms Lane—Destocking was required.

  CHAIR—Your submission is quite comprehensive. On page 10 you talk about the research
and policy project that you undertook in 2003. On that page you also make two key points about
the structural features of the finance mortgage broking industry. Would you like to elaborate on
the issues that you raise in those two points?

  Ms Cox—In relation to mortgage brokers?

  CHAIR—Yes.

  Ms Cox—That is an enormous topic. More and more of our clients are going to mortgage
brokers. Very few of them have actually made the choice to go to a mortgage broker. Most of
them simply want a loan, and they go to someone who advertises that they will give them a loan.
Invariably, they turn out to be some form of intermediary, and that is all the more true if they
have advertised something like ‘where to go when the banks say no’ or ‘we accept credit
impaired’—that sort of thing.

   We did a survey both of industry members and of case workers like ourselves—those in legal
aid and financial counsellors—which looked at the issue from both sides. A number of things
came out of that but probably the biggest single issue is that mortgage brokers have a huge
commercial incentive to sign people up. There is no limit on the amount of fees they can obtain
or the commissions they can obtain. They face very little credit risk, because once they have
passed people on, it is the credit provider who bears the credit risk, not the broker. They bear a
tiny little bit of risk: they may lose their trailing commission if the account does not perform or if
it is refinanced. But our understanding is that loans are refinanced more and more often, so the
reliance on trailing commission as a way of controlling that is probably fairly limited.

   There are, however, moves afoot to bring in comprehensive regulation of finance brokers
across all the states. I refer to SCOCA, the Standing Committee of Officials of Consumer
Affairs, and MCCA, the Ministerial Council on Consumer Affairs. There is a regulatory impact
statement out for comment and there are moves to bring in uniform legislation in an attempt to
address this matter, although it is taking a very long time. Probably the biggest impact that we
have seen is simply that credit providers are moving to distance themselves from transactions, so
whereas once you dealt directly with the credit provider, you are now dealing with a broker and
in some cases a second broker or a mortgage manager in the middle. Quite contrary to situations
where those people are seen as the agent of the credit provider, in Australia the law has
developed so that most of them are actually seen as the agent of the consumer. As a result, many
of the traditional remedies available to consumers when things go wrong are no longer available
because when they take it to the credit provider, the credit provider says, ‘No, nothing to do with
us.’

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Monday, 16 May 2005                    Senate—References                                     E 27


  Senator GEORGE CAMPBELL—I do not know what the position is with finance but with
respect to the mortgage broking industry I understood that in New South Wales, under consumer
protection laws, all fees and charges relating to mortgages had to be disclosed.

  Ms Lane—Yes, that is correct.

   Senator GEORGE CAMPBELL—Are you saying that that is not the position across all
states?

  Ms Cox—Disclosure varies across all states. I am not sure about the detail anymore.

  Ms Lane—I cannot recall all of them off the top of my head because we focus on New South
Wales, but generally speaking there are disclosure requirements in Victoria, Western Australia
and Queensland. I think Queensland is reviewing them at the moment. I am not sure about South
Australia. The ACT has disclosure requirements.

  Senator GEORGE CAMPBELL—In New South Wales they have had them for some time.

  Ms Cox—New South Wales put in new disclosure requirements last year. They are much
more stringent than those previously in existence. They only came in in August last year.
Obviously, disclosure is important, and I think that the moves to improve disclosure are
important. Many of our clients—by the time they came to us—had no idea they had even dealt
with a broker, let alone any understanding of the fee structure or anything else. The first they
knew about it was when the $4,000 or $5,000 was deducted from the balance when they got their
loan. You can say, ‘Well, they should have read their documentation properly’—and that is a fair
enough comment—but it seems to be a very widespread practice. More and more people are
being duped by it, and many of us can tell of the circumstances in which they were sold it. It is
usually under fairly high pressure and often those details were not filled in. If the fees were
disclosed at all, it was often as a percentage—which sounds fairly small until you realise how
much one per cent, two per cent, three per cent or four per cent can be over a fairly large loan.

   The biggest problem with disclosure is for the really vulnerable client group. It would not
matter what was in a disclosure document, the situation of some of our clients is such that they
would be very easily duped into signing things. People who are about to lose their home are
particularly vulnerable in that respect. We have seen more and more cases in the last few years.
With the rise of the non-bank sector, there are people who perhaps would have defaulted on their
home loan earlier but, rather than default now, they take up an option, usually offered through a
broker, whereby they refinance to the nonconforming sector. They may last a few months or they
may last a few years, but they inevitably default anyway. By then, the equity they have in their
home is usually significantly less than it was originally. Had they sold up at the time of the
original default they may have had something with which to start again but, by the time they
have gone through this process of refinancing, the fees have become larger and larger and the
interest rates have become higher and higher. If they were unable to pay their standard bank
interest home loan, the chances of their being able to pay the loan with the higher interest were
fairly slim. We are talking about significant charges here. We have seen clients paying $10,000
to $15,000 simply in set-up fees to get a relatively small loan. The current record was $20,000
on—


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E 28                                     Senate—References                      Monday, 16 May 2005


  Ms Lane—I think I may have had something higher than that.

  Ms Cox—Probably the record, in terms of the amount of the loan, was something like
$15,000 for a $30,000 loan—so they actually walked away with $15,000 of the $30,000 loan
secured against their home.

   Ms Lane—I would like to add to that. The key concern I have as a case worker and somebody
who is talking to the public all the time is that, because of the role of the finance broker, there
has been a rise in household debt. I will try to explain it. Basically, the finance brokers are a key
part of the chain in what I would call ‘imprudent lending’. Previously you had to front up to the
lender and speak to them. They would look you in the eye—that was a long time ago now—and
it was much harder to lie. They would check and look into things. With the finance broker, I
have found—and it should not follow: it should be that the lender should continue to be as
prudent as they always were—that that is not true.

   When you combine that with a very savvy finance broker, a whole spectrum of things can
happen. The first is outright lying. I have people ringing me up saying: ‘I had to lie because I
was going to lose my house. I can’t get access to my kids or whatever. I lied. The finance broker
told me what I would get if I lied.’ Then you have the people who are just vulnerable and
desperate. They say they are told: ‘If you say this, it will be okay. There is nothing wrong.’ Then
you have the people who frame it in a certain way so it is not even lying per se. They frame it in
a very savvy way so that the lender will approve it because they know about their guidelines for
approval. The finance broker is basically the intermediary that is leading to what I see as an
increase in household debt. It is a combination of both: the finance broker and the lender. You
put them together and they look at the loan. When I take on cases and look at the loan, I say, ‘If
the lender had known all of this they would not have lent,’ but they are still part of the problem.
You have a finance broker and a lender all combining to be a problem in lending in
circumstances where the person cannot afford to repay the loan.

  Ms Cox—Another thing that has happened is that the rise of finance broking per se has made
available a whole new range of funds to people who are ordinary suburban householders.
Whereas once upon a time individual investors were not directly investing in someone’s
mortgage in Western Sydney, they are now. The Supreme Court cases now are between Mr and
Mrs Bloggs and Mr and Mrs Smith. The whole thing has been made possible by the finance
broker in the middle. This is something that just did not happen before.

  Senator GEORGE CAMPBELL—You might be surprised at how long that has been
happening.

  Ms Lane—I would not be surprised. It is the scale we are talking about here. I have been
doing this for 4½ years, and over that time I have spoken to more than 2,000 consumers—and
that is personally, and it does not count all the advices I check and everything else. Over those
four years, the roles of finance brokers and asset lending have gone up astronomically. Asset
lending is where you lend against the property—and you will lose the property. When I first
went to the Consumer Credit Legal Centre, the amount of asset lending I would come across
would be negligible. Now I have one case a week coming through, where they are pensioners
and the house is going to be lost—it is finished. There is no way that the house can be sold,
because they have gone through a number of refinances or whatever, and they are going to lose

                                           ECONOMICS
Monday, 16 May 2005                     Senate—References                                     E 29


their house and be out on the street. That is the biggest concern. There is serious detriment
flowing from this sort of lending.

   Senator BRANDIS—Going back to an observation you made a couple of minutes ago that, in
your experience, there are instances of mortgage brokers encouraging applicants to falsify the
information on the application form: that would already, would it not, be a crime in New South
Wales?

  Ms Lane—Yes.

  Senator BRANDIS—It is not as if the law does not prohibit that practice. Nevertheless, you
have identified that as a fairly common practice?

  Ms Lane—Remember that we take the most vulnerable group—to put that in context—but I
do speak to a lot of middle-class people, mums and dads, as well, through the phone advice. It is
becoming increasingly common with the desperate group. It is a particular group of people, and
they have a particular profile. They are about to lose their house or something else significant.
They go to the broker and say, ‘I desperately need a loan,’ and then they are encouraged to lie.

  Senator BRANDIS—So the blame does not lie at the feet of the lender. The lender, in
approving the loan, acts on the basis of falsified information, for which the broker and the
applicant for the loan are responsible.

   Ms Lane—That is correct in that scenario, but there are other scenarios. You have got a whole
spectrum of things occurring here. In that scenario, of course the lender is innocent. But the
other spectrum of problems I am seeing is that there has been low doc, no doc and relaxation of
lending criteria, where they do not check things. That is also contributing to this, where they
have told the truth, but I would argue that a prudent lender would not have given a loan in those
circumstances if they had checked properly.

   Senator BRANDIS—Do you say there should be a statutory obligation on lenders, who are
relying upon documentation put before them by intermediaries, to check? I did not see that in
your submission.

  Ms Cox—When we first became concerned about finance brokers, our key concern was to
make the credit providers liable for the actions of their agents—to turn the law on its head and
say, ‘If you are going to take the benefit of expanding your market share by using intermediaries,
then you should also bear some of the risk.’

  Senator BRANDIS—What is the agency relationship?

  Ms Cox—At law it is absolutely uncertain and it varies from case to case.

  Senator BRANDIS—I am not at all familiar with the practices of finance brokers, but I dare
say that if a person walks in off the street to one of these shopfront brokers and engages their
assistance to prepare an application to a finance provider and the broker puts the application
forward, then the brokers would be acting as the customer’s agent, not as the lender’s agent.


                                          ECONOMICS
E 30                                     Senate—References                   Monday, 16 May 2005


   Ms Cox—It varies at law, but probably more often than not your interpretation would be
correct. Our concern was that the fact of that meant that lenders who were previously more
careful, who would take note of things such as the consumer credit code—that says in section
70, among other things, that you are not supposed to knowingly lend to people in a situation in a
situation where you know they would incur hardship to repay—are happy to be able to distance
themselves in that regard. That is what we have found. They are able to increase the market
share by—

  Senator BRANDIS—So they put a chinese wall between themselves—

  Ms Cox—They put a chinese wall between themselves and the borrower and say, ‘We have
done everything we possibly could.’ Without naming particular institutions, there are some
whose mortgage portfolios are growing enormously through using the broker channel.

  Senator BRANDIS—I make no comment on the extensiveness of that practice because I do
not know. You say, from anecdotal evidence, that it is a common practice.

  Ms Cox—That what is a common practice?

  Senator BRANDIS—What you have just described—the lender using a mortgage broker as a
chinese wall.

  Ms Cox—It depends by what you mean by ‘a common practice’.

  Senator BRANDIS—It is something that you see quite commonly—

  Ms Cox—Yes.

 Senator BRANDIS—in the sector of the market with which you are concerned, which is the
most distressed individuals.

  Ms Cox—Absolutely. But even in the mainstream if we allege that a broker, for instance, is
the agent of the lender, for one reason or another, they always say they are not. Obviously,
legally they are compelled to—they have to to pursue their own interests. But, at the end of the
day, it is working beyond even the vulnerable sector.

  Senator BRANDIS—Do you go so far as to suggest to this committee that, if the law were
changed so as to deem a broker to be the agent of the lender, that would solve the problem?

  Ms Lane—In a nutshell, we think that would be a very significant step forward in solving this
problem.

  Senator BRANDIS—I imagine in theory it would be. But the problem you would then face—
and this, if I may say so, is something that seems to be a bit of a subtext of your submission—is
that lenders are going to withdraw from that market, aren’t they?

  Ms Lane—I do not think that is true.


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Monday, 16 May 2005                      Senate—References                                      E 31


  Senator BRANDIS—Why not?

  Ms Lane—We have already tested this in the insurance market. The insurance brokers are the
agent of the insurer—people did not disappear, the whole world did not collapse; it just went on.

  Ms Cox—I think they would make some different choices.

   Ms Lane—I want to come back to one issue in relation to the lender. The lender, in my view,
has a duty of care to check the application form and to lend prudently under the law. The law is
already in place. They have a duty of care to look into these things and act prudently in lending.
That is already in place, and I already run cases on that basis.

  Senator BRANDIS—I want to pursue the point I made a moment ago. I know that we are
speaking in generalisations here, of course, but wouldn’t you agree that a lot of the people you
deal with, people in distressed circumstances—I have in mind particularly credit card lending
and what are alleged to be the abuses in the practice of credit card lenders—are people who in
years gone by would not be able to get a loan at all?

  Ms Lane—I would not say that is totally true.

  Ms Cox—I think there is some truth in that.

  Senator BRANDIS—I am not saying it is totally true—

  Ms Lane—There is some truth to it.

   Senator BRANDIS—but there is an element of that group of people. Let us put this into
perspective. We are dealing with people, the poorest people, people who do not have assets and
have low incomes. In years gone by, people like that, if they had gone to a bank, the bank would
not have wanted to know them because the bank would not have had a sufficient degree of
confidence that they could support the borrowing. It seems to me that what you are saying is
these people can now get financial accommodation through the use of credit cards but they
might get into trouble and, therefore, additional requirements ought to be imposed on the credit
provider before credit is provided to such people. That may or may not be a good idea, but isn’t
it going to produce the very situation that existed years ago where there would be a group of
people, the poorest people in the community, who had no capacity to get credit at all?

  Ms Cox—I understand exactly what you are saying, and it is a common response. That is
assuming we are going to throw the baby out with the bathwater. You are saying that we will
swing the pendulum completely back in the opposite direction. None of the things—

  Senator BRANDIS—I am really just posing the question because I do not think the issue has
really been addressed, so let us address it.

   Ms Cox—I do not think any of the things we are asking for require a swing that far back. All
we are asking for, in relation to credit cards in particular, is simply a return to looking at income
and liabilities. In fact, we have gotten beyond that. There has been a debate going on for some
time, particularly when the ACT introduced legislation in relation to this, about whether they

                                           ECONOMICS
E 32                                    Senate—References                     Monday, 16 May 2005


should look at income and liabilities in particular. They said that credit scoring is far more
effective. What we are now saying is that we are seeing that it is not working, over and over
again. The credit-scoring methods or whatever they are doing is not working.

  Ms Lane—Behavioural scoring.

   Ms Cox—Behavioural scoring is not working. People are getting themselves into more and
more difficulty. I am not saying that someone should not have a credit card—I think everyone
should have a credit card. I just think that the limit should have some relationship to people’s
capacity to pay. Whether that limit is $500 or $20,000 is going to vary from person to person,
but I do not think there is any need to go back to a situation where we say that those people
should not get credit at all. I do not think that is at all necessary. In fact, most of our clients
managed quite effectively over some time on fairly low credit limits before getting themselves
into difficulty. Indeed, in the consumer credit code the law exists already, but it exists in the
context of a whole shopping list of factors inside that unjust contracts provision. In order to get
any relief you often have to satisfy one or more of those factors and then what happens varies
greatly from case to case. In fact, the banking ombudsman recently introduced a guideline saying
that, even if you can establish maladministration of lending or a breach of section 70, often all
that will happen is that they will take the interest away from the loan. That is not going to help
anyone and it is certainly not going to stop people doing this, because it is still commercially
viable.

   Senator BRANDIS—I understand the point, but it must be the case, mustn’t it, that if you
impose these stricter requirements on credit providers—I am not saying that you should not; I
am just posing the issue—then there are going to be a group of people in the community who
can now get credit who will not be able to get credit? Indeed, the whole policy point of doing
that is to prevent people who cannot handle receiving credit therefore being exposed to a
situation in which they cannot keep their head above water.

  Ms Lane—I am not sure that would occur. The reason I believe that is that, as Karen was
saying, before this there was an explosion of unsolicited limit increases. I have run lots of cases
on this issue. In about 1999—although there were limit increases before then—there was an
obvious policy decision by most of the major banks to do unsolicited limit increases as a way of
generating business. When you go back to the period before then, when people had the $500 or
$1,000 limit, they were managing it and handling it. It only got out of control once the
unsolicited limit increases occurred. So I would conjecture that, basically, if we returned to that
type of environment then those people would still have a credit card—because they were able to
get the credit card then—they would only have a manageable limit and they would still have
credit.

  Senator BRANDIS—So do you think that the problem you have identified could be
sufficiently addressed by, firstly, mandating asset and income scoring as the basis upon which
applications are approved and ensuring that in respect of all initial applications such a test were
imposed—

  Ms Cox—It is not the initial application that is causing—

  Ms Lane—It is not the initial application.

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Monday, 16 May 2005                      Senate—References                                       E 33


   Senator BRANDIS—Let me finish; that was the first point—secondly, prohibiting automatic
limit increases without the process of income and asset scoring being engaged in on each
occasion when the limit is increased; and, thirdly, dealing with the issue of intermediaries. At
least from the credit card side of things, are those your issues?

  Ms Lane—We have a slightly different view of the solution.

   Ms Cox—What I would like to see in relation to the credit card problem is, firstly, that it be
made very clear to credit providers that, however they work it out, when they get it wrong there
will be a penalty if the error is significant. So we go to a position where we say, ‘You’re the
experts, so if you are telling us that behavioural scoring is actually superior to income and
liabilities tests, then fine. But at the end of the day, if you get it wrong, you pay a penalty or you
relieve the person of the debt or you do something that is actually significant—

  Senator BRANDIS—Isn’t that putting the responsibility onto the wrong shoulders? It may
well be that the credit providers are the experts, but if credit is not provided in the first instance
until there is an objectively demonstrable reason to believe that the borrower can meet the
obligation then shouldn’t that be enough to locate the responsibilities squarely on the shoulders
of the borrower?

  Ms Cox—In what way? You have lost me completely by saying that.

  Senator BRANDIS—I can perfectly understand your point that some players in the market—
and I imagine it is at the bottom end of this market—are behaving opportunistically and making
unrealistic advances to people who cannot cope. If they do that, there is a degree of fault on
them. If we have a system in which there has to be some objective reason to believe that the
borrower will be able to meet the obligation, and that credit will not be provided unless it can be
objectively determined that the borrower is able to make the obligation, and then there is a
default, does that not then lie at the feet of the borrower? Is it not then their responsibility?

  Ms Lane—If they have done their assessment correctly—is that what you are saying?

  Senator BRANDIS—Yes. You agree with that?

  Ms Cox—Absolutely. I just want to clarify two points. One is that, when it comes to credit
cards, we are not talking about bottom end; we are talking about mainstream.

  Ms Lane—We are talking about the banks.

  Ms Cox—Yes, we are talking about the banks, basically.

  Ms Lane—That is the main market.

 Ms Cox—In other forms of lending—often asset based lending security against the home,
where finance brokers are involved—we are often talking about the other.

  Ms Lane—The fringe.


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  Ms Cox—Yes, the fringe. With credit cards, it is all mainstream. My only response to what
you are saying is that we would have absolutely no problem with what you are proposing.

  Senator BRANDIS—I am not proposing anything; I am just engaging in a dialogue here.

   Ms Cox—But in relation to your hypothetical point, that is precisely what they have done in
the ACT—they have mandated that. However, it is industry that have come out and said, ‘No.
You’ve got it all wrong. That won’t work. We know better.’ All we are saying is that, if they
know better, that is fine. But let us mandate that they get it right. The test is already in the code.
It is just a matter of pulling it out from where it is hidden away and making it a significant
obligation. One other little thing, which is related to the minimum payment, is that, in addition to
what you are suggesting, you cannot have a situation whereby assessing whether someone can
repay simply means assessing whether they can repay the minimum payment.

  Ms Lane—It is over such a long period of time—they are 25-year loans.

  Senator BRANDIS—I notice that is the second dot point on page 13 of your
recommendation.

  Ms Cox—That is right.

  Ms Lane—You take a little limit, and it takes 25 years to repay it with a minimum repayment.

  Ms Cox—That is right, and that is a vital point.

 Senator GEORGE CAMPBELL—I might move beyond the academic into some specifics.
On page 5 of your submission, you say:

  35% of households are carrying 65% of the interest bearing debt.

Do you have the demographic of that 35 per cent?

   Ms Cox—No, indeed we do not. That statistic was a Visa statistic, only we turned it upside
down. Visa actually said that only 35 per cent of households are paying interest on their credit
card accounts, and then they went on to say that 25 per cent of the total credit card outstandings
is non-interest-bearing, according to the Reserve Bank. So if you turn that upside down, you
have 75 per cent that is interest bearing and 35 per cent of households carrying that debt. What
they did not do in their research at that time was to very carefully look at the make-up of that 35
per cent.

   Senator GEORGE CAMPBELL—The demographic of that 35 per cent could be quite
interesting.

  Ms Cox—It would be very interesting.

  Ms Lane—We would be interested too.



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Monday, 16 May 2005                      Senate—References                                     E 35


   Senator GEORGE CAMPBELL—We heard from Virgin Money this morning, and they
raised the question of having an honesty box, where up front they would tell you what all the
charges are et cetera. I pointed out to them that knowledge about what you are up for is not
necessarily the determining factor in this; it is the easily accessible money that is available to
people which is the temptation. It is not the knowledge about how you are going to pay it back or
how much interest you are going to pay, but the fact that it is easy to obtain.

  Ms Lane—People do not think about that at all, in my experience. The other thing that really
need stressing is that consumers generally rely on lenders to act prudently. Nobody I know,
including me, ever goes to the bank and says, ‘I want to borrow only such and such to buy a
house.’ They say, ‘How much will you lend me?’ We rely in every respect of our lives on lenders
and we expect them to act prudently.

  Ms Cox—I will also address that. I think there are a couple of different issues in what you are
saying. Knowledge would help if the knowledge were clearer than it is. Very few people
understand that borrowing $10,000 at 16 per cent means that it would take them 20-something
years—or however many years it works out to be—to pay out the debt if they made only the
minimum payment. I think that little piece of knowledge would help. But even that would not be
enough for some people. Some people are just eternally optimistic. They think that something
will come up and they will manage. They do not realise what a struggle it will be. We get a lot of
calls from people saying, ‘I’ve tried and tried. I’ve managed to pay off a little bit this month and
then the next month I end up using it up because a bill came up. I’m just not getting anywhere.’
The other issue is that some people are doing it with their eyes wide open but the alternative is
worse. The idea of losing their only car to go to their job, which would mean they could not pay
the card at all, is considered a worse option than accepting a limit increase to fix the car or
register it. Similarly, with things like large electricity bills, people who once would probably
have gone straight into hardship negotiations with their energy provider actually use their card to
pay their bill, which is not an irrational decision if you are faced with disconnection.

  Senator GEORGE CAMPBELL—I find some of these figures and the debts you are getting
before you quite startling. One of the areas which is of concern to me—and I do not know
whether you have any proposals to deal with it—is the availability of credit cards and the fact
that people have not only one but two, three or four. They simply transfer the debt from one
credit card to another and play russian roulette with them.

  Ms Lane—Karen mentioned that earlier. That is how they mask their inability to pay. They
just keep accumulating until they fall off the edge.

  Senator GEORGE CAMPBELL—Shouldn’t there be some way in which that can be
restricted or limited?

  Ms Lane—We think the key issue, again, is prudent lending. If you get prudent lending in all
of this, people can have credit but it is manageable credit.

  Senator GEORGE CAMPBELL—But if you simply make it easy for people to pick up
three, four or five cards and they transfer their debt from card to card on minimum payments,
they can quite quickly build up a considerable debt. It may look as though they are being
prudent, because they are borrowing only so much on each card. I am just wondering whether or

                                           ECONOMICS
E 36                                    Senate—References                     Monday, 16 May 2005


not that area should be regulated—the number of cards that are available to any person at any
given point in time.

   Ms Cox—Industry would obviously say that there is where the positive credit reporting comes
in. If you had somewhere where you could access what limits and cards people have already, you
could make a lending decision based on that. We obviously have our reservations about positive
credit reporting—and we have already talked about that. Our only other point is that, whilst we
see that, we see just as many cases where the problem is with one or two lenders. It is hard to say
how much of the problem is with the use of multiple cards and how much of it is with just
having increases on the one card, or facilities with the same lender. In one of the cases Katherine
dealt with, a person was using one card to pay the other. She had four cards, but in fact two—

  Ms Lane—Two lenders.

  Ms Cox—were with the same lending institution—two cards with this lender and two cards
with that lender.

  Ms Lane—She went backwards and forwards until it got to 70 grand—and she was a
pensioner.

  Senator GEORGE CAMPBELL—How would you make a judgment about the level of
credit that an individual should have access to, if you were able to do that? Would you base it on
the amount of credit that is available, the capacity to meet the minimum payment on a monthly
basis or the capacity to meet the credit without having to go into debt to meet it on a monthly
basis?

  Ms Lane—Possibly one way is to look at the limit and also to look at a reasonable time to
repay it. You do not work out the minimum repayment but you make an assessment based on an
amount that would repay the loan over five years. For example, if it were a personal loan instead
of a credit card, it would be over five to seven years. One possible change in the assessment
method would be to have it over five to seven years as an assessment of what can reasonably be
repaid, instead of a tiny, minimum repayment.

  Senator WEBBER—So you do not look at the minimum repayment at all?

  Ms Lane—In other words, stop people signing up for 25-year loans on credit cards, basically.

   Senator GEORGE CAMPBELL—On the issue of the brokers: these are not necessarily just
fly-by-night people who are on the margins of the industry, are they?

  Ms Lane—Some are.

  Senator GEORGE CAMPBELL—I presume that some would be.

  Ms Lane—Some players have been there for ever, as far as I can tell.




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Monday, 16 May 2005                      Senate—References                                      E 37


  Senator GEORGE CAMPBELL—I am not suggesting, for example, that Aussie Home
Loans are fly-by-night, but as I understand their operations at the moment, they are, essentially, a
broker.

  Ms Lane—They are mainly a broker, yes.

  Senator GEORGE CAMPBELL—They are brokering everybody else’s—lenders’—home
loans, whether it is RAMS, ME or what have you. They are now getting into the credit card
market.

  Ms Lane—Yes.

   Senator GEORGE CAMPBELL—As someone said to John Symond the other night on
television: ‘While it is only 9.9 per cent, if a person doesn’t have the 9.9 per cent it may as well
be 99.9 per cent.’ So the argument that if I have a lower rate it is a more competitive
environment is not necessarily a good thing to be promoting. Maybe if there were fewer cards
out there there would be greater competition for the available market, and that might drive down
the rates that are available.

  Ms Lane—We are not sure we are ever going to be able to get that. Working in this
environment we think it is going to happen. We are going to have a thriving credit card market
because it is so lucrative and there need to be limits on lending for people who cannot afford it.

   Senator GEORGE CAMPBELL—What do you say about this habit that is happening now
in the retail industry to do with interest-free periods?

  Ms Cox—It is deadly for our clients.

   Ms Lane—It is a serious problem. The big issue is that you go into a department store, you go
to buy a fridge, and you end up with a credit card. That is how it works.

  Senator GEORGE CAMPBELL—That is exactly the case.

   Ms Lane—I have been in this for a long time, but when these things came out—I used to see
Harvey Norman or whoever advertise them—I used to think, ‘That sounds good; you can get an
interest-free loan on your fridge.’ I was thinking it was a loan, but it is not a loan at all—it is a
credit card. It is a line of credit. We get tonnes and tonnes of people—

   Senator BRANDIS—It would be better if when you got a credit card they gave you a free
fridge.

  Senator WEBBER—Exactly.

   Ms Lane—If only! With these interest-free loans in a sense people just want some basic item
like a couch or a fridge or something like that and they end up with a credit card. What happens
then is that you have got the credit card and if you spend on it at all your interest-free period can
get mucked up and your payments get mucked up or you bought the fridge in a moment of


                                           ECONOMICS
E 38                                   Senate—References                     Monday, 16 May 2005


excitement over the fridge and then you cannot afford to repay it within the interest-free period
and you get hit with 25 per cent interest. It is extremely expensive.

  Ms Cox—There is no obligation to pay in that period; no-one says you have to.

  Senator GEORGE CAMPBELL—I am not sure what you could charge. I have just recently
done it with David Jones. I had to take out the credit card before I could get the interest-free
loan, but I did not want the credit card.

  Ms Lane—And you end up with a credit card.

  Senator GEORGE CAMPBELL—I just cut it up and put it in the bin.

  Ms Cox—That is what I advise people to do.

  Senator BRANDIS—It actually happened to him!

  Ms Lane—I use myself as a guinea pig too.

   Senator GEORGE CAMPBELL—I am in the fortunate position, Senator Brandis, of
actually being able to pay. There are people who buy things who cannot pay so they are stuck
with the interest payments. I will make one other point about it which I thought was extremely
sinister. I do not know if they all do it. But with David Jones you cannot direct debit your
payments and you cannot pay in advance. If I go on holidays for a couple of months I cannot
make two payments in one; I have to make one payment on a specific date each month,
otherwise I run foul of the arrangements.

  Ms Cox—The worst thing David Jones ever did was sell you a couch, obviously!

  Senator GEORGE CAMPBELL—And they probably will not sell me another one.

  Ms Cox—I bet they won’t!

  Senator GEORGE CAMPBELL—After the trouble I have had I certainly will not be buying
another one off them!

   Ms Lane—I have a similar story. I went into Myer to buy a TV and I decided to do the
interest-free deal because I am a consumer lawyer and I have to find out about these things. I
ended up getting the credit card with GE and I ended up dealing with an Indian call centre
because they have a call centre overseas. They put everything down completely correctly, of
course, and worked out my entire financial situation. The limit that they gave me on my credit
card was something like $14,000. Community legal centre lawyers are not paid that well—I
already had an existing credit card, which I had disclosed. Again, they had overcommitted me. I
am a sole parent and they had managed to overcommit me—a consumer lawyer. These things do
happen.

  Ms Cox—Statistically speaking, I have recently viewed the actual credit providers that we get
queries about. That does not necessarily mean that this credit provider is doing anything

                                          ECONOMICS
Monday, 16 May 2005                     Senate—References                                     E 39


wrong—it is just indicative of market share—but the top one was a major bank and the second
one was GE, who operate most of the interest-free store cards.

  Ms Lane—They have got 98 per cent of the market or something. Apart from, say, David
Jones, the rest is just GE.

  Ms Cox—You asked about multiple cards. Recently we had a client who had 12 accounts, all
with GE.

  Senator GEORGE CAMPBELL—Good lord!

  Ms Cox—So they did not need to go to any positive credit reporting association—they could
have simply looked at their own records and figured that one out.

  Ms Lane—The interest-free issue is a big one; it is a very difficult one to solve.

  Senator GEORGE CAMPBELL—A few years ago they had this problem in Britain and
they actually forced people to put a deposit down—I think it was 25 per cent of the value of the
goods—before they could have them.

  Ms Cox—ASIC did some research and one of the interesting things they found was that not
only did people not shop around about the credit aspect of the transaction; they also stopped
shopping around about the purchase. The fact that they did not have to hand over any cash at all
meant that they thought, ‘$3,000 or $4,000—what’s the difference?’, and said, ‘We’ll buy it from
you because you’re the first person we came to.’ I thought that was fairly interesting as to the
impact on competition and consumer prices.

   Senator BRANDIS—I want to open up another topic: non-English-speaking people. I invite
you to comment on the nature of the obligation to provide details of terms and conditions up
front in relation to non-English-speaking applicants. Is there any obligation under the law of
New South Wales, for instance, to provide that information in a foreign language?

  Ms Cox—There is no direct obligation at all. However, you can get caught out almost
indirectly under very general things such as the contracts review act or the consumer credit code,
whereby it may be found to be an unjust contract on the basis that obviously the person did not
understand a word.

  Senator BRANDIS—Is this a big problem with non-English-speaking applicants?

   Ms Lane—Yes. I know that from my casework. Why? Obviously I choose vulnerable people.
In terms of credit cards and fringe lending loans, these people tend to be of a non-English-
speaking background. They are very vulnerable groups when it comes to not understanding the
credit market, particularly those in the Arabic group, who, because of Islamic laws in relation to
credit, are not so savvy in understanding credit and whom to go to. They cannot work out
obvious things that some people can, like going to banks or reputable credit providers and things
like that for a loan. They have a very poor understanding of what they have actually entered into.
That is particularly so for recent immigrants.


                                          ECONOMICS
E 40                                    Senate—References                     Monday, 16 May 2005


  Ms Cox—One of the things that have grown recently, and this is a recent phenomenon, is
what is referred to as mortgage reduction schemes. You get cold-called quite often by someone
saying, ‘Would you like to save money on your mortgage?’ They come and talk to you in your
own home and they sit there and go through a whole lot of fancy graphs and things that convince
you that you are going to save so much money and you are going to pay off your mortgage so
much sooner. In fact, usually what they are selling is simply a refinancing to a line of credit
home loan. There are often significant fees, including $3,000 or $4,000 alone to the broker
involved in that transaction. For most people on limited incomes—and even some people who
are not—it is a disaster because they go from a situation where they are reducing their home loan
to a situation where they are not. Where there is often a credit card attached, they may run up
additional credit on the card at a much higher percentage rate. The home loan itself is at a higher
percentage rate and they already owe more from the fees that have been added to the loan. We
have come across quite a few non-English-speaking people who have been sucked into that
particular scenario.

   Senator BRANDIS—The reason that I wanted to open up this issue of non-English-speaking
people is this: while it is all very well to prohibit misleading conduct—which the law does—and
it is all very well to regulate what you might loosely call sharp practice, if you are dealing with
people who do not even understand linguistically what they are being told you do not even get to
that stage, do you?

  Ms Lane—That is right.

  Senator CHAPMAN—Doesn’t this whole issue really highlight financial literacy? A number
of research studies have shown that there are relatively low levels of financial literacy among
many people in Australia.

  Ms Cox—Ours was probably the only submission that was down on financial literacy.

  Ms Lane—This is because of long experience, given the fact that nobody reads their
contracts, because they are not negotiable.

  Senator BRANDIS—Or because they cannot?

   Ms Lane—Yes. I often use this with students. I say to them, ‘Have you actually read your
contracts?’ I say to them, ‘While I am the principal solicitor with the Consumer Credit Legal
Centre, I do not read them because there is no point. What am I going to negotiate? All I look at
is the price and the main terms, and that is it. I will look at the contract later when I am in
dispute.’

  Senator BRANDIS—But it can have the utility of making people aware of their obligation
just in terms of the rate, for example.

   Ms Cox—We are not against financial literacy per se. Obviously there are inherent positive
things that can come from improving financial literacy. I guess we do not want people to get too
excited about which problems financial literacy will solve.

  Ms Lane—There is no replacement for good regulation and good consumer protection laws.

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Monday, 16 May 2005                      Senate—References                                      E 41


  Senator CHAPMAN—Good regulation is obviously important. But if you have excessive
regulation the impact of that will be back on the consumer as an additional cost.

  Ms Cox—I do not think anything we are proposing could actually be termed as excessive
regulation, but that is my opinion. In fact, I think some of the changes we would like are fairly
small in the scheme of things.

  Senator CHAPMAN—When I am talking about financial literacy, I am not just talking about
being able to read contracts and so on; I am talking about being able to manage—

  Ms Cox—Yes, it is about general awareness.

  Senator CHAPMAN—Yes, and people being able to manage their financial position.

   Ms Lane—The big problem with financial literacy is when to do the education. If you do it at
schools, you have forgotten by the time you are actually getting the home loan or the car or
whatever. A lot of studies are saying that it is targeted financial literacy that really matters. The
Financial Literacy Task Force has not really gone into the financial counsellors, who in my view
are doing financial literacy with people with credit problems. That is targeted financial literacy.
It is when you actually go to do the thing that it matters. You want to do financial literacy
basically at the shopping around stage.

   Ms Cox—The only way financial literacy will have a significant impact on our client group is
if things are done that are way beyond the producing pamphlets and programs stage. To use an
example, we are able on occasion when we are very lucky to talk someone out of making what
would be a really bad move out of the frying pan into the fire—accepting a refinance that is
actually going to make them a lot worse off in the long run. The only reason we are able to do
that is because we get them at the point where that decision is about to be made, we are able to
give them the information they need to make the decision and we are able to support them by
saying, ‘We will help you deal with your existing problem.’ The problem with their current
credit provider is what is overwhelming them. We say, ‘We will help you negotiate and we will
hold your hand through that process.’ It is high impact—a huge amount of resources are required
to actually pull that off. It seems to me to be fairyland to think that producing nice glossy
brochures and having a sort of Slip! Slop! Slap! campaign will have any impact on that group of
people. That is not to say that there is no inherent value in doing it for other groups of people; I
am just saying that, if you really want to get to the point where some of these decisions are being
made, it is going to take significantly more than that.

   Ms Lane—The other point to make is that the amount that is spent on financial literacy is a
pittance compared to the marketing budget of those selling credit. All those messages about
credit are very difficult to compete with.

  Senator CHAPMAN—You say that, if they do it at school, by the time they come to buy
their car or whatever that they have forgotten. But if it was done at school surely it should
become part of a continuous process. If you are taught financial literacy and taught to do
budgets, why would you ever stop doing that? It should become a practice through your life.



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   Ms Lane—Whenever people come to me and say they are providing a credit-debt handbook,
I ask everybody in the room—and this is usually solicitors: ‘Those who do a budget regularly
put their hand up.’ I am lucky to get one. I certainly do not do a budget. It is a practical skill. I
agree that there is nothing wrong with being taught in school—obviously, we want targeted
learning and things like that. I question how much use it is in practice in later life, that is all.

  Senator BRANDIS—There is also the question of what financial literacy means. Let us say
you had somebody on a pretty modest income who had a fairly low limit on their credit card—
would $1,500 dollars be a relatively low limit?

  Ms Cox—These days that is a low limit.

   Senator BRANDIS—They get their statement every month and it says ‘Minimum monthly
repayment X dollars.’ The person is not in default—it is affordable—but they just pay the
minimum monthly amount, even if they could afford to pay off more if they thought about it. Is a
lack of awareness of things like the capacity to pay more than the minimum monthly limit,
which largely means they are just debt servicing, part of financial literacy?

  Ms Lane—Yes, it is.

  Ms Cox—I think it should be.

  Ms Lane—There is no doubt. There is a lot of education around this—money shows and
investment magazines all talk about paying extra. The banks also regularly advertise the idea of
paying extra. My understanding from talking to consumers is that that is reasonably well
understood. The big problem for the low-income group is that paying extra is just fairyland,
because it is not possible to find the extra money.

  Senator BRANDIS—Sure. I guess I am talking about people who could find a little bit more
and would be better off if they did. Probably because they are low-income earners they are
acculturated to paying what is on the bottom line and nothing more.

   Ms Lane—As I said, I think that is changing. I think people are generally becoming aware of
this. The truly vulnerable group are never going to understand that because of their non-English-
speaking background or whatever. In my talking to the mums and dads, they do understand that
concept; it is just that the cost of living is a serious issue—school camps and so forth.

  CHAIR—Your evidence this morning has been very stimulating and has raised many issues
for the committee to pursue throughout what remains of this inquiry. We appreciate your efforts.
Thank you.




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Monday, 16 May 2005                      Senate—References                                      E 43




[12.15 pm]

CHRISTIAN, Ms Christine, Chief Executive Officer, Dun and Bradstreet Australasia

  CHAIR—Welcome. The committee prefers evidence to be given in public but should you at
any stage wish to give part of your evidence in camera the committee will consider any such
request.

  Ms Christian—Thank you for affording me the opportunity to discuss Dun and Bradstreet’s
submission to this inquiry into household debt. The D and B submission responded to only three
paragraphs of the terms of reference—(b), (g) and (j). In essence, those terms of reference are
focused on the policies and practices of lenders that contribute to Australian household debt
levels, and on what measures could be introduced to assist in addressing levels of household
debt. It is not my intent today to address in full our submission; rather, I propose to make some
brief comments and then answer any questions that members of the committee may have.

  Dun and Bradstreet’s first point is that not all debt is bad. For most Australians debt is critical
to wealth creation. Primarily, wealth-creating debt comes in the form of financing the family
home. However, for an increasing number of households debt is financing investment properties
and shares. Consumer debt has driven the nation’s economy over the last decade and is critical to
the nation’s economic growth. Conversely, a drop in sustainable household debt will have an
impact on the ongoing strength of the Australian economy. Rather than simply looking at debt
levels, D and B believe that the critical issue for examination is the affordability and
sustainability of household debt. It is an important distinction.

  Attempting to assess whether general debt levels are too high is, in our view, extremely
subjective. What one person considers too much debt another regards as serviceable and
essential to their lifestyle. The level of individual and household debt is often a life choice and
individuals must accept some responsibility for the levels of credit they have sought and
accepted. It is for this reason that D and B believe that the focus must be on problematic debt—
that is, household debt that has become unaffordable and unsustainable for a particular
household. We believe that the best measure of problematic debt is default rates, as they provide
central, quantitative data on the number of households getting into financial trouble. While there
are some other measures, they tend to be more subjective and provide little scope for
comparative analysis with international experiences. It is within this framework that D and B
prepared its submission.

   In responding to paragraph (b) of the terms of reference, D and B argue that there are a
number of factors that have contributed to household debt levels. They include: monetary and
fiscal policy, wage and salary levels, consumer confidence, import competitiveness, credit
marketing, the cheap cost of asset linked debt, and consumer literacy. There is no doubt that
these factors have contributed to problematic debt.

  However, D and B believe that another significant issue, which is often overlooked, is the lack
of quality information available to lenders on which to make responsible and sustainable lending
decisions. In essence, D and B believe the quality of lending decisions can only be as good as the

                                           ECONOMICS
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information on which they are based. Critical to this is Australia’s consumer credit reporting
system. Australia has a negative consumer credit reporting system. This means that only very
limited and negative information can be collected and provided for credit assessment purposes.
The allowable data includes records of credit applications over the last five years, records of
accounts that have been in default for more than 60 days, court judgments, clear-out listings and
bankruptcy orders.

   Importantly, and it is not often understood, credit bureaus such as ours are not allowed to
collect information on whether credit applications have been approved and, if so, with what
limit. This means that a consumer struggling to make ends meet but still paying the minimum
amount on existing loans can continue to increase credit levels, because bureaus can advise only
on whether there have been defaults and not on the consumer’s capacity to meet further
commitments. It is this lack of information that in many cases has led to the use of credit to
finance other credit. It is an issue that other countries have noted. For example, earlier this year a
UK parliamentary report into credit card charges and marketing looked at the issue of ongoing
access to credit where assessment is based on the lack of defaults and not on the ongoing
capacity to pay. It noted:

Lenders may be unable to assess accurately a consumer’s ability to take on additional debt. A consumer making the
minimum repayment across a number of different credit cards may be struggling with debt but may be seen to have a good
credit record.

A system that does not allow for demonstration of capacity to pay can also prohibit some
people’s access to credit at reasonable rates. This is because there is no capacity at the moment
to demonstrate recent good payment history. We present a scenario on page 7 of our submission
that explains this process.

   Understanding that there is a lack of quality information available to lenders on which to make
lending decisions leads us to ask: what can be done about it? D and B address this issue by
responding to paragraph (g) of the terms of reference. D and B believe there needs to be reform
of Australia’s credit reporting system to allow some additional information to be collected on
credit bureaus. Specifically, D and B believe that the following additional information should be
permitted and included in a credit record: the name of each current credit provider, the type of
each current credit account, the date on which each credit account was opened and the limit of
each credit account. This change requires amendment of the Commonwealth Privacy Act. There
is some fear that this represents a shift to the USA-style, full-file, positive credit reporting
system. However, the additional data recommended by D and B does not allow the extensive
information that is currently available in the US on an individual’s credit file. We are not
proposing that. This reflects D and B’s view that the American model has characteristics that are
not appropriate for Australia.

  The D and B proposal also recommends no changes to the purpose for which the information
can be used. D and B believes a reformed credit reporting system should still exist for credit
assessment only and not for credit marketing—we are not proposing that at all. Australia is one
of only a few countries in the developed world that operates a negative credit reporting system
and the evidence for reform is very strong. I want to briefly draw your attention to some of the
evidence provided in the D and B submission. In the four years to 2002, for instance, Hong
Kong experienced growth in personal bankruptcy of 1,900 per cent. Around 12 per cent of all

                                                   ECONOMICS
Monday, 16 May 2005                              Senate—References                                                 E 45


personal bankruptcies were caused by credit card debt. Credit card write-off rates stood at 13.6
per cent by the end of 2002. This was significantly higher than comparable Asian nations such as
Singapore and Korea, which at the time had write-off rates of 5.5 per cent and 6.1 per cent
respectively. Defaulting customers in Hong Kong had acquired debts up to 55 times their
monthly income in 2000 and 42 times their monthly income in 2002.

   The Hong Kong Monetary Authority was clearly of the view at the time that the lack of
positive consumer credit data was the major reason for the debt and default explosions and, after
a series of circulars from the authority on the issue, reform to the Hong Kong system was
introduced in 2003, while at the same time very strict rules on privacy were maintained. In the
two years since that reform, the impact has been dramatic. Credit card write-off ratios declined
from 13.6 per cent down to 3.7 per cent and credit card delinquency ratios declined from 1.25
per cent to 0.44 per cent.

  A McKinsey quarterly report into credit bureaus in Asia confirmed the benefits of positive
credit reporting. It said:

... countries with bureaus that share both positive and negative data have lower write-off rates than might be expected
given those countries’ rates of credit card penetration.

It also said:

By sharing both positive and negative data, banks can make better lending decisions, use risk-based pricing methods more
effectively, actively manage credit lines, collect debt more successfully and reduce fraud.


The need for better quality data is also recognised by the previously mentioned UK
parliamentary inquiry. The chairman of that inquiry was reported as saying:

Sharing more data will stop people being allowed too much credit and will prevent unmanageable levels of debt from
building up.

There is also strong research in the US. Clearly, there is a link between the type of credit
reporting system used and default rates. There is also considerable evidence and argument to
support the position that access to better quality data is critical to ensuring debt levels are
affordable and sustainable. However, D and B notes that there are divergent views about reform
of Australia’s credit reporting system. Recognising this led to D and B responding to paragraph
(j) of the terms of reference by providing our sole recommendation to the committee. That
recommendation is for an inquiry into credit reporting in Australia. The D and B submission
proposes the terms of reference for such an inquiry.

   This current inquiry into household debt has provided a useful way for D and B to raise the
issue of consumer credit reporting. However, we understand it is a complex issue and there are
many strong views. D and B does not believe that reform should come without a proper debate
and an opportunity for all those views to be heard and tested. It is for this reason that we believe
an inquiry focused solely on consumer credit reporting is necessary and will be an integral
component of efforts to tackle household debt and default rates. Once again, I thank you for the
opportunity to speak with you. Obviously, I welcome any questions.


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   CHAIR—Just to begin, I am not too sure how early into the previous witnesses’ evidence you
arrived but we had quite a lengthy discussion about the role of intermediaries—agents, mortgage
brokers—and the distance that allows lending institutions to place between themselves and the
consumer, the credit applicant. You are advocating four additional pieces of data to be included
in credit reports but we heard from people who are there dealing with clients who have serious
debt and credit problems that the role of the broker as an intermediary actually allows that credit
reporting to be manipulated. This is in the sense that they provided some details of advice from
brokers that the way you frame the information in your loan application influences whether your
application is approved. How will your four additional pieces of information really make a
difference?

   Ms Christian—Let me just say that the current negative reporting relies very heavily on full
disclosure. There is no way that a lender is able to verify the information, as it exists today,
contained in an application. As a result of that, the lenders are not aware of any other
applications, and nor are they able to verify that data. The additional four pieces of information
that we are seeking go a long way towards being able to verify the data contained within an
application form. For instance—back to your point—if a person applying for credit decides not
to divulge all the credit cards they currently have in their possession, the banks have no way of
being able to confirm that. If we want banks to be more responsible, I think it is incumbent on
the system to provide them with better quality information so that they can verify that data. At
the moment, it is very easy for them to make the decisions that they are making in the absence of
verifiable information.

  CHAIR—So these four pieces of information are actually part of an initial application for
credit. The critical issue that you are arguing for is a change to the Privacy Act, isn’t it, to allow
the institutions to share the information among themselves? That is a very critical difference.

  Ms Christian—It is a very critical difference. I think a number of people in the community
are under the impression that this information is already contained within a credit file, and it is
not.

  Senator BRANDIS—I am interested in the same point. Were that change to be introduced,
then there would be nothing to stop the credit provider from requiring of the applicant as a
condition of their application that the applicant authorise the credit provider to make inquiries of
the applicant’s other credit providers as to the financial history and financial circumstances of
the applicant.

  Ms Christian—That is fine but the banks currently do not talk to each other—

  Senator BRANDIS—No, and the reason they do not talk to each other is that under the law
which governs the relations of bankers and customers there is owed by the bank to the customer
an obligation of confidentiality.

  Ms Christian—Correct.

  Senator BRANDIS—But that duty of confidentiality may be waived by the customer.

  Ms Christian—May be waived by the customer?

                                            ECONOMICS
Monday, 16 May 2005                     Senate—References                                     E 47


  Senator BRANDIS—May be waived by the customer, and if as a condition of a customer’s
application the new credit provider stipulated that the applicant must sign a form authorising the
credit provider to whom the application is made the ability to make inquiries of other credit
providers—other banks, for instance, that provide that customer with credit—that authorisation
could constitute a waiver of the other bank’s duty of confidentiality to that customer.

  Ms Christian—I am not quite sure I fully understand the question.

  Senator BRANDIS—Let me try and explain it a bit more simply. It is all very well to say that
the credit file should contain these additional things—what other credit cards you have and what
the limits on them are; that on its face sounds fairly innocuous—but if in addition to that the
credit provider to whom you are making an application for a new credit card can say to you,
‘We, the credit provider, have been authorised by you, the applicant, to make inquiries of any
other financial institution with which you have accounts about your credit history,’ then out the
window goes the confidentiality of banker and customer, don’t you see?

  Ms Christian—I do. But at the moment, whenever a person applies for credit they actually do
authorise the bank to make inquiries on their credit history.

  Senator BRANDIS—But only of the credit reporting bureau—

  Ms Christian—Correct.

  Senator BRANDIS—not of other financial institutions.

  Ms Christian—But the bureau is used as a central repository.

   Senator BRANDIS—But this is your very point, in fact. There is a very limited category of
information that the credit reporting bureau may retain. So that question now merely gives a new
potential credit provider access to a very limited range of information. You say there should be
more, but my point to you is that that may open the door to completely eliminating the banker
customer confidentiality that exists between the applicant and the other financial institutions
with whom he deals.

   Ms Christian—But we are not actually proposing that the information which we currently
have within our bureau be used for any other purpose than it is today—that is, for a credit
granter to make inquiries about an applicant. So we are not asking for that information to be used
in any other way.

   Senator BRANDIS—But by the mere fact that you are asking for that additional information
to be available to you—and I understand that it cannot be used by you for any other purpose—
from the moment you say that that information has to be available to you, that may mean, in
effect, that the right of a customer to have its bankers keep financial transactions confidential
does not exist so far as you are concerned, because that information could then be provided by
the bank to you.

  Ms Christian—We are not asking for balances or transactional information relating to the
individual. All we are suggesting is that when a new credit card is established the credit bureau

                                          ECONOMICS
E 48                                     Senate—References                      Monday, 16 May 2005


be notified of that so that when an individual applies for credit from a lender they have got
comprehensive information about that person’s current credit.

  Senator BRANDIS—I understand what you are saying, but my point is that if that additional
material were on the credit file then the new credit provider requiring as a condition of the
application a waiver by the applicant of its right of confidentiality with the other financial
institutions, of which the credit provider will now be made aware because they will be on the
credit file, means that the entire financial history of the applicant could be accessed by the credit
provider.

  Ms Christian—Firstly, the Privacy Act precludes that information from being used for any
other purpose than it is currently.

   Senator BRANDIS—Nobody is suggesting that you could use it for a collateral purpose. My
point is that, if the reforms you suggested were to be implemented and there was not a
prohibition on the credit provider asking the applicant to provide a waiver of its banker customer
confidentiality, the credit provider to whom the new application was made could then—because
it has now been told where all the other bank accounts are and who the other financial
institutions are with whom the customer deals—ring up the bank and say, ‘We want to know the
full financial history of this applicant,’ couldn’t it?

   Ms Christian—That is no different from the case now. The credit record today contains
information on every application that is made. It does not actually verify whether the account
was opened or not. So if I were to go to 10 banks today and apply for credit, that is recorded as
an inquiry on the current credit record. It is no different today. In other words, that information
can be used by other institutions to make inquiries. We are suggesting that what the current
credit record does not state is whether the account was opened—or whether the accounts were
opened—and how much credit or how many credit cards or other facilities an individual has at
present. So that information is currently available.

 Senator BRANDIS—But under what you are proposing much more extensive information
would be available.

  Ms Christian—We are proposing something in addition to the application, when the
application has been approved. It will reduce the number of instances where individuals are
using one credit card to pay off another. We are relying on full disclosure today, but there are
many people who—going back to an earlier question—do not disclose all of the facilities they
have available to them. They will go and get another credit card just to pay off the previous one.

   Senator BRANDIS—I understand that. I assume you have read the submission from Virgin
Money. You haven’t? Okay. They appeared before us this morning. They proposed that it should
be a requirement of all credit card statements and indeed advertisements soliciting new custom
that they display in a readily visible way what they call an honesty box—what in America is
called a Schumer box, apparently—in which the current rate of interest and other material
information about what this credit card is costing the customer is on display. What is your view
about that? Should that be a requirement?

  Ms Christian—I think it is fair. It is a very responsible thing to do, absolutely.

                                           ECONOMICS
Monday, 16 May 2005                     Senate—References                                      E 49


  Senator WEBBER—I wanted to follow up on the discussion you were having with Senator
Brandis because Senator Campbell and I were just having a conversation on the side about that.
Assuming that we do go down that path of requiring that full disclosure and giving financial
institutions access to all of your financial records before they make that decision to lend you
money, how much of the risk of default on that loan should the financial institution have to bear
in the interests of full disclosure? If they decide to engage in some risky lending practices
anyway with someone having fully disclosed their financial situation, should there be an
increased burden on them to bear some of the default?

   Ms Christian—Our proposal would mean that the banks became a lot more accountable. At
the moment, in the absence of information, it is very hard to blame the banks for offering credit
to an individual who is already overextended. They do not have all of the information available.
If the applicant says that they do not have a credit card or that they have one with a limit of
$500, there is no way of being able to verify that or otherwise. Our proposal will hold the banks
far more accountable for their lending practices, because we are proposing that they will have
more information, sufficient information: they will know whether someone is already
overextended or not. If they extend any further credit—

  Senator WEBBER—Should they then have to bear some of the risk, though?

  Ms Christian—I cannot speak for the banks but what I can say is that it is very difficult at the
moment, when there is a lack of information available to them, to blame banks and other lenders
for extending credit cards to people who are already overextended. We are suggesting that
having the four additional data elements will hold banks far more accountable than they
currently are.

  Senator WEBBER—Do you think that having the additional data elements would in any way
curb some of the unsolicited approaches that people get from institutions offering credit cards
and increased credit limits?

   Ms Christian—Yes, we do. Bad credit decisions are not good for anybody. They are not good
for the banks; banks do not want to have an increase in defaults. They are not good for the
economy and they are not good for the consumer, who ends up in hardship. We are talking about
responsible lending. We are talking about allowing these four additional data elements to be
included in a credit file, which then leads to better, more informed decisions being made. There
is a void at the moment.

  Senator GEORGE CAMPBELL—But that does not answer the question, with due respect.
Ms Christian, how would you hold the banks more accountable? In terms of providing them with
access to—

  Ms Christian—All the information they want.

  Senator GEORGE CAMPBELL—the full range of information on a person’s lending, it
may well be that you could look at a proposition where a person could tick a box and say, ‘You
only get what’s currently available,’ or, ‘Because I want additional lending, I am prepared to give
you access to those additional points.’ However, if the person does and you proceed to lend them


                                          ECONOMICS
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money, what liability falls on the bank if there is a default? Should all the liability for the default
fall on the borrower, or should at least a proportion of the liability fall on the lender?

  Ms Christian—I cannot speak for the banks. We are not a bank; we are not lending—

  Senator GEORGE CAMPBELL—I am not asking you to speak for the banks. I am asking
you: if that information is made available and the bank still says, ‘I’m going to go ahead and
lend them money anyway,’ and the person ends up defaulting in paying that, what liability falls
on the bank? If no liability falls on the bank, why should they have the information?

  Ms Christian—The opposite is even worse: currently there is no information, so you cannot
blame them—

  Senator BRANDIS—There is some. There is a little.

  Ms Christian—It is just default information; it only tells you if someone has actually
defaulted or not.

   Senator BRANDIS—That is the most important thing to know, isn’t it—whether someone
has defaulted in the past—so that you can eliminate at once all the people who are obviously bad
risks.

  Ms Christian—And they currently are, but there is a growing number of individuals who are
overextended at present and who just pay the minimum—

  Senator BRANDIS—But you said there was no information.

   Ms Christian—People can have up to four or five credit cards, and they pay the absolute
minimum. As we know, there is a growing number of banks who are offering products and
facilities where only the minimum is paid. The people just pay the minimum and they do not get
into default.

  Senator GEORGE CAMPBELL—That is a major issue of concern; I agree with you in that
area.

  Ms Christian—It is a major issue of concern.

   Senator GEORGE CAMPBELL—All I am asking you is: if we were to go down the path of
recommending what you are asking and banks still took the option of lending in those
circumstances, what liability should fall on them? You cannot surely still have them in a
protected environment where they can still lend while the borrower bears all of the burden for
any default.

  Ms Christian—I understand your point.

  Senator GEORGE CAMPBELL—Is there a trade-off between the two?



                                            ECONOMICS
Monday, 16 May 2005                      Senate—References                                      E 51


  Ms Christian—There may be. The problem today is that we cannot hold them accountable.
At least in the model that we are proposing it would be very difficult for banks to support or
justify why they have extended credit to an individual, having seen—

  Senator GEORGE CAMPBELL—But unless you penalise them, how do you hold them
unaccountable?

  Ms Christian—That is something that could be considered down the track, but my point is
that it is very easy at the moment—

  Senator GEORGE CAMPBELL—But surely it has to be a central part of any consideration
of what you are talking about.

  Ms Christian—We are a credit bureau, so that is our area of expertise. We are trying to
provide a much more comprehensive service to our customers and we are seeing the number of
defaults rising year on year. It is for that reason that we are proposing the reform.

  Senator GEORGE CAMPBELL—It is a fairly significant step that you are proposing.
Maybe there is a halfway point in the sense that people could choose to allow that information to
be made available in certain circumstances. If there were and information was disclosed to the
banks, and the banks proceeded to lend anyway, then there has to be some accountability on the
part of the banks.

  Senator WEBBER—That is right.

  Senator GEORGE CAMPBELL—Otherwise why would anybody in their right mind tick a
box?

   Ms Christian—It would be very difficult for a lender to justify why they have extended
further credit to an individual, having received the credit report indicating that the person is
already completely up to their limit.

  Senator GEORGE CAMPBELL—Banks do not seem to worry too much about justifying
anything these days.

  Ms Christian—No, but—

  Senator GEORGE CAMPBELL—So why would they be particularly worried about
justifying that, unless there is a penalty on them?

   Ms Christian—At the moment they are lending on the basis that they believe that the
individual has told them or their credit record indicates that they can support further credit. That
is how the decisions are being made today.

  Senator GEORGE CAMPBELL—But in a lot of situations they are canvassing it. I
regularly get letters from my bank saying, ‘Do you want to increase your credit?’



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E 52                                     Senate—References                      Monday, 16 May 2005


  Ms Christian—Yes, I suppose that is because there is an absence of information. As far as
they are concerned, they are relying—

  Senator GEORGE CAMPBELL—But they are out touting for business.

  Ms Christian—They are relying on their own internal information and information from the
bureau.

  Senator GEORGE CAMPBELL—They are still out there touting for business; they are still
prepared to take a risk. They do not know what other credit cards I have, presumably.

  Ms Christian—No, precisely. If they knew—

  Senator BRANDIS—Isn’t that the whole point? You say they have insufficient information,
but they still increase the credit limits. So don’t they bear the responsibility where the lending is
imprudent?

  Ms Christian—Yes, of course they do.

  Senator BRANDIS—So doesn’t it follow, as Senator Campbell is pointing out, that,
conversely, the more information they have the more responsibility they ought to shoulder?

   Ms Christian—Yes. I totally agree on that point and I think that is why we are proposing the
reform that we are.

  Senator CHAPMAN—Since this issue of positive credit reporting was first raised I have
done a little bit of work on it. From what I understand about where it operates overseas, what can
happen is that, where a consumer has a number of loans or financial commitments already in
existence—this is not in relation to getting additional credit—and they perchance default on one
of those, that information goes to all of their other existing credit providers. There are instances
where one of those other credit providers then says, ‘You have defaulted on this transaction;
we’re going to increase your interest rate.’

   Ms Christian—That is a full positive reporting system that currently exists in the US. We are
not proposing that at all. We are proposing what we call the ‘fair credit reporting model’, which
is limited to the four data elements that I have already conveyed, and we propose that the
information within the credit file is not to be used for any purpose other than to assess a new
application as it exists today. We are really not looking to adopt the full-blown system that exists
in the US. Australia, New Zealand and France are the only countries left in the developed world
that use a negative-only credit reporting system. There are many other countries that have
adopted what we are proposing, which is the fair credit reporting model, or the abridged version.
They are precluded from being able to use that information in any other way. We just do not
believe that the US system is appropriate in Australia.

  Senator CHAPMAN—Your business is in the provision of this information, so presumably it
will enhance your business to be able to provide additional information.



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Monday, 16 May 2005                    Senate—References                                     E 53


  Ms Christian—No, it will not, actually. There is no financial gain for us. One transaction is
one transaction. We are just looking to provide a much more comprehensive, better quality
service to our customers.

  Senator CHAPMAN—So you will not charge higher fees? There is no personal advantage to
your business from this change?

  Ms Christian—No. In fact, there would need to be investment on our part to incorporate the
additional data elements.

  Senator BRANDIS—Are you aware that another committee of the Senate is currently
engaged in hearings into the Privacy Act?

  Ms Christian—No, I was not.

  Senator BRANDIS—It is. I suggest that some of the submissions you have made to us could
just as well be made to that committee.

  Ms Christian—Thank you.

  CHAIR—Thank you very much for your evidence today and for your submission. You have
given us a lot to think about, and we will certainly be taking it into account as we proceed with
the hearing.

                      Proceedings suspended from 12.55 pm to 1.46 pm




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E 54                                     Senate—References                      Monday, 16 May 2005




NAFFAH, Mr Albert, Director, Strategic Business Development and Regulatory Affairs,
MasterCard International Inc.

   CHAIR—Welcome. We are here taking evidence on the committee’s inquiry into possible
links between household debt, demand for imported goods and Australia’s current account
deficit. Do you have any comments to make on the capacity in which you appear?

  Mr Naffah—I am the director of regulatory affairs for MasterCard International Australasia.

   CHAIR—The committee prefers all evidence to be given in public, but should you at any
stage wish to give part of your evidence in private you may ask to do so and the committee will
consider your request. If you like, you may make a short opening statement before we go to
some questions.

  Mr Naffah—Firstly, I would like to thank the committee for giving us the opportunity to
make this additional submission. I am sure you have seen the written submission that we made a
few weeks ago. I do not propose to go through that in too much detail in my address but I have a
couple of things I would like to say.

  Firstly—and I think this is quite topical—members of the committee will probably be aware
of some of the new low-rate credit card programs that have been hitting the market over the last
12 months or so. Brands like Virgin, Aussie MasterCard and the ANZ low-rate card have been
marketed very strongly and have almost become household names over the last 12 months.
Some commentators have condemned these programs and the attractiveness of these low rates as
potentially contributing to household debt levels in this country. Such a fear might be well
founded but it would only be well founded if the new programs do lead to a growth in the debt
and credit market in Australia. Evidence to date suggests that that is not the case.

   In the last two years the Reserve Bank has recorded a net increase in credit card accounts of
approximately one million. In that time, MasterCard’s research reveals that there have been
approximately 750,000 new low-rate credit card accounts issued in the market, suggesting that
many consumers are using the low-rate cards as a vehicle for reducing their interest outgoings
and better managing their secured debt. I might add that the research also suggests that those
people taking up the low-rate cards are substituting them for existing products and closing those
other normally higher rate accounts as opposed to having them in addition. The average rate of
interest paid on a credit card has also fallen over the last two years, from approximately 17 per
cent to 15 per cent. And that is in an environment of slightly rising official cash rates and also in
an environment in which the Reserve Bank has introduced credit card reforms that are designed
to increase the overall cost of a credit card to the consumer.

  Consumers are astutely taking advantage of this trend of new low-rate cards by shifting their
evolving balances—that is, those balances on which interest accrues—to lower rate cards rather
than fuelling their perceived addiction to consumer goods. These cards are actually helping
reduce the cost of card debt. Our data suggests that the low-rate accounts make up about 10 per
cent of the credit card market in Australia. This compares to about 20 per cent to 25 per cent in
most other countries with the same level of financial sophistication as Australia. One of the

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Monday, 16 May 2005                       Senate—References                                       E 55


major reasons for this differential between Australia and other markets is the lack of quality
credit data available in Australia.

   It would come as no surprise to the committee that MasterCard believes that well-managed
credit is of benefit to the economy and to consumers in particular. The key to well-managed
credit is good information on both sides of the ledger. Consumers must have a reasonable level
of literacy about how to manage their own finances and the products that help them do that,
while on the flip side the lender must also at its disposal good data about things like the
prospects of the economy, asset prices, and the peculiarities of the customers it is lending money
to. Without good data the incidence of poor credit is higher than it should be. Poor credit quality
means higher debt defaults. The social consequences of credit overcommitment have been well
documented and obviously the breakdown of a family and other similar tragedies cannot be
measured in monetary terms. What can be measured is the volume of credit that is never repaid.
Let us be honest: credit losses are not good business for lenders and they are not good for
consumers. One of the major reasons for debt defaults, as has been reported by a lot of research,
is catastrophic life events such as ill health, divorce or the death of the primary breadwinner in a
family. Almost always these life events are unforeseeable and, unfortunately, they are also
usually totally unavoidable.

   Another significant reason is credit overcommitment arising from the imperfect information at
the hands of the lender when assessing a credit application. This situation can be avoided
through simple legislative change. As noted in our submission, on many occasions the lender has
to rely almost exclusively on the applicant to provide the information vital to the risk assessment
process. The integrity of such information is sometimes highly questionable, particularly in
circumstances where the applicant is in a desperate situation but has not yet defaulted on any
credit.

  ‘Why is MasterCard interested in this issue?’ is a question we often receive. There are a
number of reasons, some of which are selfish and some of which are otherwise. The quality of
credit in Australian households is of primary importance to us. MasterCard sees one of its roles
as delivering best practices in the payments industry. In Australia we have done this through
building a state-of-the-art transaction processing centre that handles millions of transactions
every day, by putting together a team of payments experts unmatched in the industry and making
them available to lenders throughout the country, and by promoting the debate of issues
important to the industry and to consumers. Better data will also help grow the market. We
acknowledge that one of the potential consequences of positive data is a small increase in the
overall level of credit. However, what is certain is that the quality of that credit and overall credit
will be extremely high and defaults will fall dramatically under positive credit reporting.

  Finally, debt default is bad PR. This is certainly one way we can address the reputational risk
we are exposed to. I understand that Dun and Bradstreet presented earlier today and shared with
you some of the research results that are available in this market. That research, in our view, is
conclusive. A World Bank-sponsored report found that debt defaults could be reduced by up to
63 per cent in Australia if full positive credit reporting were introduced, and we understand that
some research as yet unreleased suggests that the results would be very similar if only partial
positive credit data were available. ACIL Tasman, the highly respected macroeconomic
modeller, also found that positive credit reporting can contribute up to 0.1 per cent to capital
productivity, representing a $5.3 billion increase in real GDP over the first 10 years of positive

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credit reporting. Compare this number to the US free trade agreement, which is expected to
deliver about $22 billion over the next 20 years. I am confident that most would agree that
moving to positive credit reporting would require significantly less effort and pain than that
undertaken to reach a free trade agreement with the US.

   Furthermore, as members of the committee will be aware, Wallis recommended that the
government should be reviewing the law as it relates to credit reporting. The UK experience
should also encourage a review. After much toing-and-froing in the UK several years ago the
market moved to positive credit reporting. Consumer groups and lenders alike have hailed the
move as a wonderful success. I stated in our submission that MasterCard believe that a robust
financial services industry which serves the needs of its consumers requires three essential
pillars: one, a level playing field to promote competition; two, bankruptcy laws to deal with
moral hazard; and, three, access to positive credit reporting information. The Australian financial
sector more or less provides the first two of these pillars. However, an antiquated privacy regime
has held back the provision of the third essential pillar. We agree that a full and proper debate of
the merits of positive credit reporting is necessary before any decision on amending the law is
taken. My appeal to this committee is that it considers sponsoring such a debate through a Senate
inquiry. Thank you.

  CHAIR—Thank you very much, Mr Naffah. Can I just go to some of your remarks before I
open the discussion to questions by Senator Brandis. First of all, I think you said that you believe
that positive reporting would actually lead to an increase in credit.

  Mr Naffah—Yes. Research has demonstrated that, by having more information available
about consumers, some consumers that are today unfairly denied will get credit. We are not
running away from that; there potentially will be more credit made available, but overall it will
be better quality credit.

  CHAIR—You also made a point about a positive reporting system—even, perhaps, with
partial data—and you mentioned an unpublished report.

   Mr Naffah—I understand that the Australian Finance Conference—who have been running
with this issue for a long time and initially worked with the researchers that undertook the World
Bank study several years ago—have commissioned Professor Stanton, who was part of that
study, to do some further research into what they call an ‘abridged’ positive model, without the
full level of positive information that is, for example, available in the US. I have been told that
that research has indicated some significant reductions in debt defaults, even under the abridged
model.

  CHAIR—And, finally, are you supporting calls for the Wallis inquiry recommendations to be
implemented?

  Mr Naffah—Absolutely. We are supporting calls for a public debate of the issue and perhaps
a Senate inquiry. Our view is that this is obviously in the interests of the economy and
consumers, but we are more than happy to submit that argument to further scrutiny.

  CHAIR—Thank you very much.


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 Senator BRANDIS—Mr Naffah, have you read the submission to this inquiry from Virgin
Money?

  Mr Naffah—I only received a summary of that earlier today.

  Senator BRANDIS—One of the recommendations that they make to us is that Australia
adopt the practice which is known in the United States as a Schumer box, whereby, in a clear and
understandable fashion, the rate of interest and, perhaps, movements in the rate of interest are
displayed on statements and advertising materials. What is your view about that?

   Mr Naffah—We do not have an issue with the Schumer box; we have supported it in other
jurisdictions. Our research does not reveal that it has had a great impact one way or the other, but
MasterCard’s view is that, if a Schumer box were considered to be an advantage to Australian
consumers, we would be supportive of that.

  Senator BRANDIS—Presumably, if this committee were to recommend that course and that
recommendation were to be followed, there would be no significant additional cost to the
industry in changing the structure of credit card statements in that manner.

   Mr Naffah—It depends on what the legislative requirements are. If there were a provision in
the requirements that it could be done over a period of time then—and banks are continually
reviewing the structure of their statements and their terms and conditions, so it could be
integrated into that existing natural process—I think there would be an additional cost but I do
not think it would be prohibitive.

   Senator BRANDIS—Thank you. On another topic, I want to address this issue of positive
credit reporting. The model which I think you would call ‘partial positive credit reporting’,
which we heard about from Dun and Bradstreet, proposed that only certain additional
information be available to the credit-reporting bureaus—including the number, identity and
limits of other credit accounts held by consumers. Do you adopt their position or do you want a
more comprehensive positive credit reporting regime?

  Mr Naffah—In a perfect world, a more comprehensive regime would be more desirable, on
economic grounds alone, but we are open-minded as to the model. We are happy to work with
the industry.

  Senator BRANDIS—Do you take seriously the concerns of critics of that model based on
privacy?

  Mr Naffah—Absolutely.

  Senator BRANDIS—How do you think the privacy concerns are best addressed?

   Mr Naffah—I think the privacy protections around how data can be used today in the
negative model provide enough protection, but we have put on the public record that we would
support looking at strengthening those protections. One thing that we have proposed—and I have
met previously with Senator Chapman on a one-on-one basis, so this would not be new to him—
is an industry ombudsman for credit reporting that would have not only powers to review

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disputes with respect to incorrect data, which is obviously an issue that has been raised by some
consumer groups, but also power to sanction penalties either in a code or in law against breaches
of the privacy provisions around that data.

  Senator BRANDIS—I suppose the problem with ombudsmen in every sector—at the end of
the day, if in doubt ask for an ombudsman—is that they always operate post facto, don’t they?

  Mr Naffah—They do, but if they have a stick you would think that would be significant
enough to ensure that they do not need to act post facto too often.

  Senator BRANDIS—Would you accept that one limitation, were Australia to move to
positive credit reporting, should be a prohibition on credit providers as a condition of an
application asking applicants to waive banker-customer confidentiality?

  Mr Naffah—That is something that has been raised before. The issue there is: where does the
lender go once the customer has agreed to waive that confidentiality to find out what credit that
customer has?

  Senator BRANDIS—It is interesting you say that, because it sounds to me as if you are
saying—I do not want to put words in your mouth, so tell me if I am mischaracterising this—
‘The utility to us of positive credit reporting is only going to be available if the banker-customer
confidentiality is waived or is unavailable to the applicant.’

   Mr Naffah—When an applicant applies for credit today, they do give permission to the lender
to seek certain information.

  Senator BRANDIS—But that is only information maintained by credit reporting agencies.

  Mr Naffah—That is right.

  Senator BRANDIS—They do not authorise the provider to go beyond the credit reporting
agencies and ask for information about that applicant from their bank or other financial
institution, do they?

  Mr Naffah—No, they do not.

  Senator BRANDIS—Do you envisage, under the regime that you are recommending, that
they would?

  Mr Naffah—I am not sure. I think that detail is something that will have to be discussed and
debated.

  Senator BRANDIS—Let me re-put the question: are you envisaging, under the system you
are proposing, that they might?

  Mr Naffah—To be totally honest, it is not something we have anticipated or thought about,
but I think it is a valid question.


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   Senator BRANDIS—It seems to me that that is the pith and substance of what you are
saying—the utility to the credit provider of having positive credit reporting largely lies, doesn’t
it, in making accessible to the credit provider the sort of information about the applicant’s credit
history that would only be available if the banker-customer confidentiality between the applicant
and other bankers or financial institutions were accessible to the credit provider?

   Mr Naffah—When you go down to that question, there should be no difference between the
provision of negative-only information, which is today available in the bureau, and the provision
of more positive information. All the information that is stored in the bureau today, even under
the restricted regime, is normally covered under the confidentiality provisions between a banker
and his customer. We are not asking for that to change. What we are asking is that the amount of
information, the type of information, be broadened.

  Senator BRANDIS—To put a hypothetical case, let us say that I have account and credit card
facilities with both bank X and bank Y and I make an application for another credit card from a
new credit provider. Under the positive credit reporting regime that is being suggested, one of
the facts about my financial circumstances that would be available to the new credit provider
would be the existence of my accounts with bank X and bank Y, and the credit limits of those
accounts. Is that correct?

  Mr Naffah—That is right. To extend that illustration, most—and in fact probably all—
applications ask the applicant to list what other credit arrangements they have, the limits and
current balances of those accounts and what institutions they are with. That information, if it is
accurate, is as good if not better than information available from a positive credit bureau. But
there is no way today for a lender to verify the accuracy of that information.

  Senator BRANDIS—The lender is unable to verify the accuracy of that information because,
under the present system, the banker-customer confidentiality is not impinged upon by the
application. Is that correct?

   Mr Naffah—That is correct. But I do not think that is where the issue lies. The information
provided by people is usually fairly, if not totally, accurate. It is when they do not provide
information that is the problem. Even if there were an agreed waiver of the confidentiality right,
where is the lender to go if an applicant has provided no information about a particular line of
credit with a lender they have not disclosed? Other than having a central depository, they cannot
practically call every lender in the market and ask them, ‘Does Joe Blow have a line of credit
with you?’

   Senator BRANDIS—Doesn’t that come with the territory, though? Credit card providers
ordinarily provide unsecured loans for which they charge premium interest. The best loans you
can get in the market these days—fully secured housing loans—might charge interest of six per
cent or seven per cent. Credit card providers provide unsecured loans at the highest level of
interest available in an ordinary commercial interest rate market. Aren’t the higher interest rates
you charge the premium the customer pays for lack of security in the transaction?

  Mr Naffah—That is definitely a reason. But, as I have mentioned, that interest rate is now
declining. A lot of that decline, may I suggest, has been due to the fact that, relatively speaking,
Australia, up until five or six years ago, was still a developing credit card market. We have had a

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number of new entrants over the last few years. That has introduced greater competition and that
is why you are seeing credit card interest rates at 10 per cent, which is competitive by any
standard.

Senator BRANDIS—You will not hear any argument against competition from me. On a
different topic, the committee has heard evidence this morning from the Consumer Law Centre,
who deal with—if I can call it this—the distressed end of the market. What practices, if any, are
observed by the mainstream credit card companies to bring to the attention of non-English-
speaking people the terms and conditions and the character of their obligations when they obtain
a credit facility? Are no special steps taken to identify and make provision for non-English-
speaking people?

   Mr Naffah—That suggestion has great merit. I have not seen anything attempt to do that yet.
I think things like a Schumer box or summary, if it were available in a number of languages,
would definitely help with that approach. I know that some banks with branches in areas where
there is a concentration of one ethnic group or another provide banking services in those
languages and staff who can interpret terms and conditions. But I agree that it is not widespread.

  Senator GEORGE CAMPBELL—Returning to a couple of your previous statements, could
you explain to us in a little more detail what you meant by ‘better managing their secured debt’.

  Mr Naffah—I think I may have said ‘unsecured’ debt.

  Senator GEORGE CAMPBELL—I thought you said ‘secured’ debt.

  Mr Naffah—If I said ‘secured’ I meant to say ‘unsecured’.

  Senator GEORGE CAMPBELL—Perhaps you might explain what you meant by that.

  Mr Naffah—By ‘unsecured’ I was referring to the fact that a credit card is unsecured. That
explains one of the reasons that you have higher interest rates on those programs.

  Senator BRANDIS—Incidentally, on this very point about whether it is secured or unsecured,
that is not always so, is it? For example, if I have a house mortgage with a bank and I get my
credit card through that bank, under the all moneys clause in the mortgage that secures that
credit card debt too, doesn’t it?

   Mr Naffah—It depends on whether the credit card is part of the package with the mortgage. If
it is not, if they are two separate loans and you default only on your credit card, and your home
loan is in good order, the practice is that there be no right of access to those secure assets.

  Senator BRANDIS—That might be the practice, but every house mortgage contains an all
moneys clause. The law would be, would it not, that every debt owed by the borrower to that
bank on all accounts, including credit card accounts provided by the bank, is covered by the
mortgage?

  Mr Naffah—I cannot comment on the interpretation of the law because I am not qualified to
do it. What you will find is that over the last few years, credit card holders tend to have different

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relationships with banks for different types of financial services, so they have their home loan or
their deposit account with a different bank, normally.

  Senator GEORGE CAMPBELL—But the point I was making, Mr Naffah, was that when
you made that statement I thought you said ‘secured debt’ but you said ‘unsecured debt’.

  Mr Naffah—I do apologise for—

  Senator GEORGE CAMPBELL—You made that statement in the context of saying that if
you had better information it would enable people who are borrowing to better manage their
unsecured debt.

   Mr Naffah—The statement I was making was relating to the fact that with these low rate
cards now available in the marketplace, what consumers are doing is where they have an existing
credit card debt—say at 16, 17, 18 or even up to 24 per cent that some of the programs that are
available out there are charging—and if they qualify and taking out a lower rate card, they are
transferring the balance to the lower rate card and paying a substantially lower interest rate on
that debt. So I think that is the context of better managing their debt.

   Senator GEORGE CAMPBELL—But how does MasterCard getting access to more
information about my credit ratings help me to better manage my debt?

   Mr Naffah—Firstly, MasterCard will never have access to information. We are not a lender;
we do not provide credit. We license lenders to use our brand and they are the ones who enter
into the contract with the consumer and use the information to assess the application. But as far
as the lender is concerned, when they have access to better information they are able to remove
some of that risk associated with lending unsecured debt and therefore they would be more
willing to lend to some consumers who would like to have a low rate card to better manage their
debts. That is the example I was trying to draw.

   Some consumers are paying 24 and 25 per cent because of the perceived risks that they
provide. If a lender had access to better information that showed that in fact they were a smaller
risk than the current level of information suggests they are, they may be eligible for a lower rate
card that today they are not eligible for. John Symond, when launching the Aussie card, said,
‘Our mantra is “we will save you” but we cannot save everyone.’ By offering a 9.99 per cent
credit card and by guaranteeing to keep it at that level for at least the medium term, they cannot
be extending credit to everyone. That is because some consumers offer a higher risk, and some
consumers appear to be a higher risk with the limited amount of information available.

  Senator GEORGE CAMPBELL—The other term that you used was ‘better quality credit’.

  Mr Naffah—Yes.

  Senator GEORGE CAMPBELL—What did you mean by that term? Is that just another way
of saying—

  Mr Naffah—As in a lower risk of defaulting—the credit has a better chance of being repaid.
By ‘bad debt’ we mean debt that is not being repaid—write-offs. The belief is that with better

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quality information at the hands of the lender, they can make better decisions and therefore the
quality of that debt, or the chances of it being repaid, are much higher.

  Senator GEORGE CAMPBELL—Are you inadvertently saying that would limit a
proportion of the community’s access to credit?

  Mr Naffah—As I admitted up-front, I think it will probably mean there will be more credit
available. I think what will happen with positive credit reporting if we move down that path is
that you are going to shrink certain ends of the credit market because people who should not be
lent money under any circumstances or at any interest rate but are being lent money today will
not be, because the lender will be better able to assess the risk.

  Senator GEORGE CAMPBELL—So a proportion of the community is going to be denied
access to credit?

  Mr Naffah—Some consumers will have less credit available to them; some will have more. It
will not be dependent on income or wealth levels; it will be dependent on how much credit they
have today.

   Senator BRANDIS—What about people at that level of the market who are assessed by you
to be a high risk? Risk is always a proportionate judgment. Most people who are high risk do in
fact pay their debts. They just belong to a category in which there is a higher percentage chance
of there being a default. Isn’t the effect of what you are saying going to be—and I am just
pulling figures out of the air—that the 25 per cent of people who are going to default and should
not have been given credit in the first place, in your view, are not going to get it but the 75 per
cent of people who are in fact not going to default—nevertheless, because they are unlucky
enough to belong to that high-risk category they will pay the price of a higher interest rate—are
going to be denied credit too?

 Senator GEORGE CAMPBELL—Thank you, Senator Brandis, because you have helped
me to get where I was going.

   Mr Naffah—I think what will happen is that with better quality data that group will become
much more defined and will be split into more definable segments. So that 25 per cent will be in
its own category and that 75 per cent will probably be in three, four or five different categories
because of the availability of better information. That is what we mean when we say there will
be a better assessment of the risk. It will not be putting people into classes as broad as they are
today because of the limited information that lenders have access to today.

   Senator GEORGE CAMPBELL—But isn’t what you are saying—which is the bottom
line—really that those people in the community that least need the money will have the easiest
access to it, so those people in the community who most need the money will pay a premium to
get it?

  Mr Naffah—No.

  Senator GEORGE CAMPBELL—But that is exactly what you have been saying to us for
the past 10 minutes.

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  Mr Naffah—No, I don’t think I said that. What I was saying is that those people who are just
going to get into dire straits if you lend more money to them will not get that money and those
that do have the capacity to have more debt and service that debt will get that money. What we
are suggesting is that people who are being lent money today and should not have been lent
money because they are getting into trouble will have a safety net that is not there today.

   Senator GEORGE CAMPBELL—But I thought you were also saying that there will be a
category that will get access to loans at a cheaper rate because they demonstrate a capacity to
pay and service that and that those that demonstrate a lack of capacity to service a loan will have
to pay a premium to get access to credit. While they may have a limit on the credit that they get
access to, they are still going to have to pay a higher premium to get access to credit.

  Mr Naffah—That is a correct interpretation for some people that will offer a much higher risk
than what a 10 per cent interest rate allows you to lend to. Yes, they will not be able to access
that credit.

  Senator GEORGE CAMPBELL—So those with the least amount will pay the most?

  Mr Naffah—No, I do not think that is a logical conclusion at a general level. I think that a
very small sector of the economy will not be able to have access to cheap credit, but that is
acknowledged everywhere, as is—

  Senator GEORGE CAMPBELL—They are hardly likely to be people who are earning more
than $100,000 a year. They are more likely to be people in the category of earning less than
$20,000 a year. Is that not true?

  Mr Naffah—Risk is not linked to income or wealth levels.

  Senator BRANDIS—Surely they are variables.

  Mr Naffah—It is a component, but that is not the main determinant.

  Senator GEORGE CAMPBELL—Is it a large component or a small component?

  Mr Naffah—It is one of the determinants. The other side of the balance sheet is just as
important.

  Senator GEORGE CAMPBELL—What is on the other side of the balance sheet?

  Mr Naffah—Your liabilities—things like your age, your prospects. All these things are
thrown into the mix of a very sophisticated model that would probably take me a week to
explain. No-one is running away from the argument that some people will not have access to
cheaper credit, but that is the case today. Under positive credit reporting, that will not become
worse; in fact it will improve. It will make cheaper credit available to more people. But there
will always be people who will not be able to get access to cheap credit.

  Senator BRANDIS—But you are saying that there will be some people who cannot get
access to dear credit. That is the point. The high-risk people are the people who are paying the

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highest interest rates. Your argument is not that those people are not going to be able to get
access to cheap credit; your argument is that they will not be able to get access to credit at all,
even credit in which the risk premium is factored in by the higher interest rate.

  Mr Naffah—That is right. If the positive data suggests that by giving a person more credit,
even at 24 per cent, it is going to put them in a position where they cannot service that debt, they
will not be given that credit. But I do not think that is a bad thing. That is what consumer groups
and governments have been calling on banks to do for many years—to ensure that people are not
put in over their heads.

  Senator BRANDIS—So the argument really comes down to your capacity to accurately
identify who those people are as opposed to the people who are statistically in the high-risk
group who are, in fact, not a risk because you can lend against the integrity of the borrower.

  Mr Naffah—I think that is an accurate description.

  Senator GEORGE CAMPBELL—If we go to a positive credit reporting regime and banks
or lenders lend to people in that high-risk category who subsequently default, what proportion of
the burden should the banks or the lenders bear as part of that default?

  Mr Naffah—We currently have a consumer credit code in this country that legislates along
those lines. If a bank has been negligent in the provision of credit, then the credit contract is null
and void and they bear the entire risk. I think people, including consumer groups, agree that the
credit code works well. I know that there is a current review of that credit code and there are
suggestions to strengthen it in certain regards, which the industry is working through. But
currently there is law that deals with that situation.

  Senator GEORGE CAMPBELL—So if we were to recommend going the route that you are
advocating, and that was in conjunction with strengthening those provisions, you would be
supportive of that.

  Mr Naffah—I think if it is reasonable strengthening—it would depend, obviously, on the
detail. I do not know if you are aware of UCCCMC, the Uniform Consumer Credit Code
Management Committee—it is a strange acronym. They been working through some suggested
changes to the consumer credit code. The industry and consumer representatives are doing a
good job in strengthening some of those provisions.

 Senator GEORGE CAMPBELL—Finally, you used the term ‘antiquated privacy regime’.
Were you only referring to—

  Mr Naffah—I was referring to the provisions around credit reporting.

  Senator CHAPMAN—I have one question. It is the same question I asked the Dun and
Bradstreet representative. I do not know whether you were here to hear that.

  Mr Naffah—No, I was not.



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   Senator CHAPMAN—It is in relation to the positive credit reporting regime. When I
examined this I found that, in some overseas jurisdictions where this has been introduced, it
applies also to current lending arrangements or current debt that people have. I cited the example
whereby a person defaulted on one loan or one credit arrangement and that immediately resulted
in one of their other credit arrangements attracting a higher rate of interest. The response was
that that was not the regime that is planned for here—that it is only partial positive reporting. Is
it your understanding that that sort of scenario would not transpire in Australia?

   Mr Naffah—I believe that the bulk, if not all, of the people seeking positive credit reporting
in this market are looking to use that data only at the application stage and not through the life
cycle of a credit contract.

   Senator WEBBER—I have just one brief question, and I do not know whether you can help
me with this. One of the other issues that has arisen and that we have discussed today is the pre-
approval of credit applications or letters offering an increase. At the moment, as we have been
told today, credit agencies only have records of what you have applied for and they do not
actually have access to whether you took up that credit card or not.

  Mr Naffah—That is right.

   Senator WEBBER—What actually happens when you get sent a letter like that? Does that
ever appear on someone’s credit—because they did not actually apply for it; this has been sent
out by organisations that you licence and others. It is unsolicited. If they sign on the dotted line,
is there any record of that anywhere?

   Mr Naffah—It depends on what the solicitation is, what it is offering you and what response
is required. If it is, for example, a credit limit increase on your credit card where you already
have an existing credit card account and they are offering you an extra $1,000 or $2,000 on your
limit then if you accept that I do not believe that is listed on the bureau. Most solicitations from
lenders relate to applying for their card. They may say that you have been approved, but that is
not necessarily the case—usually you have been approved for them to send you one of these
applications. If you complete the details and send that back then that is seen as an application
and that is on the bureau.

  CHAIR—Thank you very much for your submission and for your attendance today. We have
had a useful discussion.

  Mr Naffah—Thank you all for your time.




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[2.26 pm]

BELL, Mr David Peter, Chief Executive Officer, Australian Bankers Association

HOSSACK, Mr Nicholas, Director, Prudential Payments and Competition Policy,
Australian Bankers Association

  CHAIR—Welcome. Thank you for your submission. As you have appeared before
committees lots of times, I am sure you understand that the committee prefers all evidence to be
given in public. But if you would like at any stage to give evidence in private you can ask to do
that. Would you like to make an opening statement?

   Mr Bell—Yes, we would like to make a very brief opening statement on the basis that
everyone has had a chance to read our submission. Thank you for the invitation to provide input
to this committee on the issue of household debt and the current account deficit. I would like to
introduce my colleague Nick Hossack. He is the team leader on issues at the ABA on prudential
matters and also matters relating to debt. So he is much more the subject expert than me. I would
like to start by giving an overall picture of household debt.

   The data that we have shows that, while household debt is high, it is still very small compared
to the assets which people hold. The ratio has been estimated to be about 18 per cent. That ratio
has been fairly stable for a number of years, though it is twice the level of the 1980s. If you look
at the whole pie, if you like, of bank lending, you see that home borrowings account for about 85
per cent, personal credit for about 10 per cent and the remaining five per cent is credit cards. If
you break up home borrowings to the next level, you see that borrowings for the principal
residence are 60 per cent and borrowings for investment property are about 25 per cent. That
adds up to the 85 per cent I talked about. At the end of 2004, nine per cent of household after-tax
income was used to repay interest on debt, which is the same level as the peak in the late 1980s.
However, over last three years there has been high credit growth driven by the jump in housing
prices. As a result, debt-to-income ratios for individual balance sheets have gone up from 65 per
cent in 1980 to 140 per cent today. Having said all that, the evidence that we have seen shows
that households are managing their debts well and that housing defaults are at a historically low
level.

   On the credit supply and demand side, it is important, as I am sure you are aware, to make the
clear point that, as financial intermediaries, banks are not the suppliers of credit—they do not
determine the demand side at all. The demand side is essentially the primary driver of increased
household debt. The demand side is influenced by many factors: firstly, the price of debt, which
is primarily set by monetary policy; secondly, tax incentives and disincentives; and, finally,
consumer taste—in particular, expectations about asset price changes. Financial deregulation has
been an important driver, and that has really set the tone over the last couple of decades where
there has been a removal of credit rationing.

  In terms of regulations which impact on bank lending, the banking sector is quite properly one
of the most regulated sectors in Australia, and we have a number of government and self-
regulatory rules which apply to us. Firstly, there is the uniform consumer credit code—and you

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all know about that, so I will not explain any further. Secondly, we have our own code of
banking practice—the current version was introduced in May 2004—which sets out standards of
conduct for banks in their dealings with individuals and small business customers and has the
effect of a contract between the bank and their customer. Thirdly, we have the Banking and
Financial Services Ombudsman, which is an independent organisation that settles disputes
between banks and their customers—and it is interesting to note that in recent years the levels of
those disputes have been coming down. Finally, we have APRA, our primary regulator. APRA is
focused on protecting the interests of depositors. It focuses on bank lending because the lending
side of the banking ledger is traditionally where the largest risk to banks’ solvency resides. In
this context, APRA essentially does two things: firstly, it publishes prudential standards and
enforces them with strong legislative powers—and in the last 12 months it is interesting to note
that APRA has announced a number of new changes which will reduce the risk in housing
lending—and, secondly, it has a very important authority to determine the level of capital the
banks must hold.

   On the issue of competitive neutrality, it is interesting to note that APRA is the key regulatory
difference between banks, building societies and credit unions and the non-regulated lenders. We
are not subject to APRA’s rules. Banks provide some 85 per cent of lending, 15 per cent is
provided by credit unions, building societies and other lenders who do not take deposits from
customers and around four per cent of current lending is done by non-conforming lenders. This
means that those non-conforming lenders can actually influence the market to the extent that
banks have to follow. You often have the case where four per cent of the market, which is non-
conforming lenders not regulated by APRA, introduce new products and, in turn, that forces
banks and other regulated lenders, like building societies and credit unions, to follow in their
wake. In conclusion, there are very few bank customers who are facing a default scenario
currently. Defaults are currently at a record low and this is the result of favourable employment
conditions, economic circumstances and low interest rates. It probably also indicates that banks
are being responsible with their lending decisions.

  CHAIR—If we could go back to some of those opening remarks, Mr Bell, first of all you say
that the non-conforming lenders constitute about four per cent. Can you give us some examples
of the non-conforming lenders?

  Mr Bell—Some names—for example, GE Capital, Bluestone? Essentially, they are lenders
who have the right to lend in the market but do not take deposits. That means they are not
regulated by APRA.

  CHAIR—Taking the deposits is the only issue.

   Mr Bell—Correct—and being regulated by APRA. I glossed over in my opening remarks the
enormous impact that APRA have upon regulated lenders. They have lots of rules—quite
properly—and they set very high standards for us. The non-regulated lenders do not have APRA
to contend with.

  CHAIR—So superannuation funds who operate in association with credit unions would come
under the credit union regulations. These are lenders but they do not hold moneys—

  Mr Bell—Correct.

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  CHAIR—or take deposits from individuals. How do they fund their lending?

  Mr Bell—They fund it by securitisation. They bundle up loan products and sell them on the
market. In other words, they get them off their balance sheets. Banks do that as well but,
depending on which bank you are talking about, the majority of the lending is on balance sheets.

  CHAIR—We had a conversation this morning with some witnesses about their concerns with
respect to the role of mortgage brokers in standing between borrowers and the banks, and the
banks then being able to distance themselves from poor credit customers. Do you have a view
about the role of mortgage brokers in this area?

  Mr Bell—I might get my colleague to help you, but I understand that mortgage brokers
constitute about 30 per cent of the market.

  Mr Hossack—That is roughly right.

  Mr Bell—As a result of financial deregulation initiated by various governments, mortgage
brokers are a fact of life. They have certainly assisted in the downward pressure on interest rates
and, I guess from a customer viewpoint, they have proven to be a good thing.

  Mr Hossack—And they have assisted people looking for home loans to find the best loan for
them. They can do a lot of the search work for a customer looking for a home loan, so there is
certainly a very positive aspect to brokers—there is no doubt about that.

  CHAIR—Going to your submission, I take your argument that housing defaults are at a
historically low rate and am quite interested in the issues that you raise. Are there limits on how
much financial institutions can borrow from overseas?

  Mr Bell—I cannot give you an exact figure. Financial institutions obviously have to fund their
own lendings. They would do it from depositors and from debt raisings both in Australia and
overseas, but I am not sure whether there are any rules that apply to that.

  Mr Hossack—I do not think there are strict limits, but banks are certainly required to ensure
they mitigate any risks associated with overseas borrowing, such as changes in exchange rates.
So, to the extent to which a bank is borrowing from overseas as a funding source, it would need
to identify what risk that entails, particularly exchange rate risk, and to adequately manage that
with capital.

  CHAIR—That is exactly the issue I was thinking through—the issue of risk. The Reserve
Bank has told us that virtually all overseas borrowing is either in Australian dollars or hedged in
Australian dollars. Your submission states that a one or two per cent interest rate buffer is
factored into the income test. This morning we have heard a lot of the expression ‘behavioural
scoring’, used to describe assessments of credit. Could you elaborate a little more on the credit
assessment, because others were a bit vague about that.

  Mr Bell—When any bank customer or prospective bank customer applies for a loan, they go
through a process called ‘credit assessment’, where as much information as is allowed under the
Privacy Act is collected on that customer and an assessment is done based on their capacity to

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repay the loan. During the life of a loan, particularly with revolving lines of credit like credit
cards, there is another technique, called ‘behavioural scoring’, in place, where banks collect
information on people’s repayment history, how much they repay when they repay it and
whether they draw down the full amount of their credit limit, and they also use that information
to help manage that customer.

   One of the interesting things to note about making initial assessments on a customer’s capacity
to repay a loan is that, under the current privacy laws, banks in many cases have to rely on the
information which customers provide them. For example, if a customer is filling out an
application for a credit card for the first time, they are asked to declare how many credit cards
they have and what other credit facilities they have in place. We have no real means of checking
whether or not that is the case, because of privacy rules. So a customer could have 20 credit
cards. I am exaggerating, but a customer could have a number of credit cards which they do not
necessarily disclose to us, which we do not know about and which, if we did know about them,
would affect our decision to lend.

  CHAIR—Does that one or two per cent buffer change if the interest rates change?

   Mr Hossack—The buffer is not regulated or mandated by government, but we know that all
of our banks derive a figure which they will factor into their home loan assessment. Typically,
we understand that—it is anecdotal; we have not formally surveyed our banks on this point—it
is around one to two per cent, and, yes, that can change, depending on the formula or the inputs
that the bank uses to derive the figure. One of those may be an interest rate input itself, or there
may be some sort of estimate of where the economy is going that may influence what the buffer
ultimately is. But the incentive for the bank is to ensure that when they extend a loan to
somebody they have dealt as adequately as they can with the various risks to the changes in the
circumstances of the loan, such as the interest rate.

  Senator CHAPMAN—In your submission you say:

As financial intermediaries, banks should be viewed as suppliers of credit; they do not determine the demand-side of the
debt market.

Isn’t that a bit cute?

  Mr Bell—No, we—

  Senator CHAPMAN—I mean, banks are suppliers of a product, which is finance.

  Mr Bell—Correct, yes.

  Senator CHAPMAN—Any supplier of a product seeks to increase demand for its product by
advertising, marketing incentives and the like. Banks advertise pretty extensively.

  Mr Bell—They certainly do. Banks are, like any business, involved in marketing practices.
We were not trying to be cute. I think we have been precise in our language; maybe we have not.
The point we are trying to make is that the primary driver of the demand side is not banks; it is


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the things I made reference to in my opening remarks. It is monetary policy, consumer taste,
taxation and things like that. Those are the things that really drive the demand side.

  Mr Hossack—Banks are financiers. An individual who wants to buy something will come to
a bank, and the process is that they ask the bank: ‘Will you give me the money to buy that?’ But
the decision as to what that consumer wants to buy is with the consumer rather than with the
bank.

  Senator CHAPMAN—Have you read the submissions or heard the evidence in relation to
positive credit reporting?

  Mr Bell—Yes. We thought we might be asked about this.

  Senator CHAPMAN—Dun and Bradstreet and MasterCard have both presented to the
committee and advocated a change to positive credit reporting. What are the banks’ views,
generally, of that proposal?

  Mr Bell—We are in the fortunate or unfortunate position of being able to give both sides of
the argument, because at this stage—

  Senator CHAPMAN—It is pretty good to hear that.

   Mr Bell—as an industry we have not yet made our mind up whether we support or otherwise
the concept of a positive credit bureau. In fact, we recently posted a media release on our web
site to that effect. It would also be fair to say that there are a range of views amongst our banks
and within our banks as well. At this stage we would say that we certainly think that before any
decision is made there needs to be more information in the public domain to make sure that there
is a sound policy outcome. On the positive side, we support the notion that there is more
information out there. On the basis of more information you can make better lending decisions.
To us that is a fairly compelling case. On the other side, we recognise that there are clear privacy
issues. Consumer and community groups have made those feelings loud and clear. We are also
aware that if you can better target lending it may end up that people get lent more money. We
understand both sides to the argument. We have not yet come to a view ourselves.

  Senator CHAPMAN—Do you think that positive credit reporting is likely to impinge on the
confidentiality relationship between a bank and their client?

  Mr Bell—I certainly know that, from the various proposals I have seen so far for a positive
credit bureau, there will need to be an amendment to the Commonwealth privacy legislation. I
do not think it will impinge on a bank-client relationship so long as the customer in question is
happy for that information to be collected about them.

    Senator GEORGE CAMPBELL—Mr Bell, I return to the issue that Senator Chapman
raised before—and it may be a chicken and egg question, and that is the difficulty of answering
it. You said that the demand for your product—that is, cash or money—is driven by a variety of
issues, including consumer taste, consumer expectation, taxation incentives and so forth. It is
also true that people’s capacity to satisfy those tastes is driven by their access to easy money,
easy resources, to be able to purchase those goods. A part of that is what is available through

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Monday, 16 May 2005                     Senate—References                                      E 71


credit cards at the moment and the ease of obtaining credit cards, and that is a concern about that
aspect of the issue. There is also the ease of borrowing money in a range of areas, apart from
credit cards; the prevalence now in the retail sector of interest-free terms, which are being
funded by non-bank lenders—and you talked about GE and others; and the access to substantial
pieces of retail or purchases interest-free for defined periods of time. In terms of all of those
things, do the banks not have some corporate citizenship responsibility, if I can put it way, to
alert consumers to the dangers of some of these schemes that are out in the marketplace? You
may well put out briefings on these issues.

  Mr Bell—We certainly do.

  Senator GEORGE CAMPBELL—If you put out briefings, how widespread are they? We do
not see too much of them.

   Mr Bell—You have raised a number of things here, but I will answer the end part of your
question first. Yes, we certainly do provide information to the community and to our customers
about the best way to borrow and manage money. We do have a fairly comprehensive financial
literacy program in place for both the industry and our individual banks. In fact, I have taken the
liberty of bringing along one of our brochures, called Make credit work for you, which we have
distributed far and wide. Your office may have received some of these publications.

  Senator GEORGE CAMPBELL—Yes, we have.

   Mr Bell—We certainly feel that we have a responsibility to do that, and we are certainly
spending time and resources to do it. In fact, as head of the ABA one my key priorities is
financial literacy, which my council or board which comprises bank CEOs have told me to do.
So, yes, we do have a responsibility and we are discharging it as best we can.

  Senator GEORGE CAMPBELL—How far does that penetrate the community?

  Mr Bell—In terms of this material here?

  Senator GEORGE CAMPBELL—Yes.

  Mr Bell—Because of what the ABA is, we do not have customers. We have, if you like, a
limited ability to penetrate the community. We do as much as we can, but our banks have their
own financial literacy programs and—

  Senator GEORGE CAMPBELL—You distribute that through them?

   Mr Bell—Yes. We particularly like to distribute this material through community leaders like
you and hope that word gets through. We are firm believers that the best borrowers are the best
informed borrowers. It makes sense for us to lend money to people who understand what they
are getting themselves into and can pay it back. Financial literacy is a very big issue for us.

   To go back to the first part of your question, I think banks are quite often placed in an
interesting situation. They are criticised for not lending enough and for lending too much. If you
look at those two differences of opinion, we are probably doing something right because there

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are very low levels of default, and if we are copping it from both sides it means that we are
probably doing something right. I was interested to see in today’s paper that the New South
Wales Farmers Association made reference to the fact that a recent survey of their farmers
indicated that banks were not extending credit to some farmers. That is just one example of
where we cop it sometimes. I also note that in a newspaper article in April Richard Branson
talked about the fact that he was going to issue a new Virgin credit card which would target those
customers who were not able to get their standard credit card which is backed by Westpac.
Banks do walk that line. We like to lend money to people who can pay it back, and we make no
apologies for that.

  Senator GEORGE CAMPBELL—Just as an aside, I thought that one of the big issues with
the farmers particularly in drought situations is that the banks will not lend—other than against
bricks and mortar—against the next year’s crop, and that is a problem for them.

   Mr Bell—That is often said. All of you should be getting letters from me very shortly
explaining the good news—that this year we are going to lend against crops. The serious point is
that a lot of farmers are facing drought conditions. Their credit situation is very tight and in the
lead-up to the planting of winter crops banks have extended lines of credit to viable farmers so
that they can plant their winter crops this season. In addition to that we have had in place for at
least a couple of years now various emergency measures to help our farmers out so that if they
do have cash flow difficulties we are prepared to help them. We are prepared to help them
rearrange their finances and, in contrast to previous years when we could probably have done
things better, we are actively out there in the community speaking to all of our farmers, making
sure that we are helping them as much as we can.

   Senator GEORGE CAMPBELL—You said earlier that there were low default rates,
indicating that households are managing their debts, and that may be one interpretation you can
put upon it. Another interpretation you can put upon it is that many people are being innovative
and creative, because of the range of products that are on the market, and they are not managing
their debts terribly well but in fact are shifting debts from one location to the other and in the
process are amassing greater debt as part of that, and at some stage the bubble is going to burst.
That would tend to be reinforced by the fact that client loads at financial counselling services all
indicate a high level of financial stress that may not necessarily be visible through the figures on
defaults that are coming through at the moment. Do the banks do any research or analysis into
this area? Are you out there trying to assess what the real state of the market is, looking beyond
the statistics?

   Mr Bell—It is worth restating the statistics—and these are from the Reserve Bank’s recent
financial stability review. They have information to suggest that in terms of loans past due—that
is, loans 90-plus days in arrears—the proportion of borrowers is 0.2 of one per cent. For credit
cards the proportion is 0.8 of one per cent. Interestingly, for those who borrow from non-
conforming lenders, the proportions are 3.7 to 3.8 per cent. There is no doubt that at a macro
level the figures are good; they are at historic lows. But there is also no doubt that people like
you do hear stories and circumstances of people who have for various reasons got themselves
into trouble. That is unfortunate and it is best that it does not happen.

  The response from banks is that they could tighten up their risk parameters so much to prevent
that sort of thing from happening. But if you do that you end up denying money to people who

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should get it. So from our point of view, we do acknowledge that there are people who on
occasions get too much money. We try everything possible to militate against that. We have got
financial literacy programs in place and we try to actively manage people’s accounts to make
sure that that does not happen.

   Mr Hossack—Finding the right indicator of households’ financial stress is a very difficult
exercise, and it is something that we have given thought to. We never make the claim that
because defaults are at record lows there is no financial stress out there at all. It is a good
indicator that overall things are looking pretty good for the economy and for households in
general. But when you move away from defaults and look for some other measure, you then get
into a debate about judgment and that is an awkward debate, something which we have not seen
any definitive research on or answer to. It is something we are engaged in and we are looking at
it and we are interested in seeing whether there is something useful we can do.

  Mr Bell—The ABA has had set up for the last couple of years a community and consumer
consultative forum, which comprises representatives from the Consumers Association, the
various credit cards and legal services. The meetings have typically been attended by a
chairman, who in this case is the head of the ANZ Bank, John McFarlane. As much as possible
we listen to the people who face the customers and we try and fix up the problems they raise
with us.

   Senator GEORGE CAMPBELL—The reason I asked the question is that we had evidence
this morning from a community group, the Consumer Credit Legal Centre.

  Mr Bell—They are in our group. We know them quite well.

   Senator GEORGE CAMPBELL—They gave us some evidence about people having up to
$40,000 credit, which is quite unserviceable. It seems to me incredible that they can get to that
stage in the first place. A number of economists have been arguing for some time that the
circumstances in the economy at the moment in terms of housing and consumer debt are very
similar to what they were in 1987 with company debt, and that we are reaching the stage where
it will not take much of a prick to burst the bubble. That is why I asked a question about the level
of assessment you are putting into it.

   Mr Bell—I will go to the micro first and then ask Nick to answer the macro. I go back to the
point I made a few minutes ago, when I talked about the applications people make for credit.
Because of the privacy laws, we sometimes literally do not know what other credit products they
might have in place. So it is conceivable that someone could not tell the complete truth on their
credit application document. With the best will in the world, we could research their
circumstances and not know they have, say, three other credit products.

  Mr Hossack—We did not cover that issue specifically in our submission. It is not something
the ABA feels it has expertise in predicting. It is ultimately a prediction about what is going to
happen to the economy, unemployment, inflation and interest rates. We have not made a
submission on that, and we do not really have a view on the macro dynamics going forward.

   Mr Bell—In the middle of last year the Reserve Bank conducted an exercise in which they
stress-tested all the banks’ lending portfolios on the basis of a catastrophic economic

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downturn—I think they used a 30 per cent slump in the housing market, which would be quite
catastrophic. On the basis of that, they were able to model and predict that Australia’s banking
system would still be in pretty fair shape after that. That is probably an indicator that our lending
practices are still conservative and appropriate.

   Mr Hossack—That is right. That was a worst-case scenario which attempted to assess the
strength of the banks in the wake of a major economic deterioration such as a 3.5 per cent
default rate, which is very high by historical standards. In fact, on a national basis I do not think
we would ever have been anywhere near that. Even under the scenario of a 30 per cent decrease
in house prices I think the finding was that 90 per cent of institutions would not even breach
their minimum capital levels and that none of them would find themselves in an insolvency
situation.

  Senator GEORGE CAMPBELL—Did they model the state the economy would be in?

  Mr Hossack—It would have had a high level of unemployment. The financial institutions are
very well provisioned, they are very strong and they have high levels of capital. So I think
everyone can be comfortable that the broad parameters are good.

   Senator WEBBER—I want to raise a couple of points. You said earlier that about four per
cent of the market was provided by nonconforming lenders. Does your organisation have a view
about the lack of regulation of those nonconforming lenders and whether they should be brought
into the mainstream regulatory framework?

  Mr Bell—Our view would be that there should be a level playing field. If we have levels of
regulation that apply to us and that imposes costs and various standards upon us then perhaps
those same levels should apply to nonconforming lenders as well.

  Mr Hossack—It is a difficult issue. What we desperately want is a level playing field. We are
just not quite sure how to get there.

  Senator WEBBER—Whether we reduce the regulation on the banking sector or whether we
bring nonconforming lenders in.

  Mr Hossack—There are fundamental differences between banks and, say, nonconforming
lenders, which are a component of the nonbank sector. Banks have balance sheets and hold loans
on balance sheets, whereas nonconforming lenders I think securitise all of their loans.

  Mr Bell—They sell them off, basically.

   Mr Hossack—Because banks take deposits, that automatically means they are going to be
regulated by APRA. The nonconforming lenders do not take deposits, so they are not regulated
by APRA—although they are regulated to the extent to which they are raising debt in capital
markets. Before AMP or whoever it is buys one of these securitised products originated by a
nonconforming lender, the provider of the money for that nonconforming loan is still going to be
interested that that loan at least has met some quality assurance standards. So the market does
regulate the nonconforming lenders. I think that is an important point to remember.


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 Senator GEORGE CAMPBELL—Just for clarification, does that four per cent include
mortgage originators and others who are providing backup?

   Mr Hossack—It is four per cent of nonconforming loans. There would be some nonbanks
issuing home loans which are not part of that four per cent that are issuing them perfectly
responsibly and still securitising them into the market.

   Mr Bell—There is no suggestion, by the way, that nonconforming lenders are not doing the
right thing.

  Senator GEORGE CAMPBELL—No, I understand—I was just interested in the ranges that
you included within that four per cent.

   Senator CHAPMAN—It does not include mortgage brokers and those sorts of people, does
it?

  Mr Hossack—A mortgage broker could originate a nonconforming loan.

  Senator CHAPMAN—Or a conforming loan—it could be either.

  Mr Hossack—Yes.

  Mr Bell—That is right.

  Senator WEBBER—In your submission, in relation to the performance of banks, you say:

The profit motive is the strongest commercial incentive for banks to ensure their lending practices are sound.


One of the things I have noticed these days is an increasing trend by banks—and my bank in
particular in Western Australia—to require or offer insurance to customers when they take out
either personal loans or mortgages. Isn’t that the bank deferring the risk onto an insurer and not
actually taking on the full risk? Is it not a way of perhaps getting out of having to cop the default
if they have made a bad lending decision?

  Mr Bell—You could take that view or you could take our view that it affords the opportunity
for the borrower to borrow. If lenders mortgage insurance was not there they could not borrow.

   Senator WEBBER—Is the offering of insurance an identification by the bank that this is a
risky customer or is this just becoming common practice?

  Mr Bell—It is a more risky customer, literally, because typically lenders mortgage insurance
cuts in if the borrower has less than 20 per cent equity in the home.

  Senator GEORGE CAMPBELL—It is an automatic thing, isn’t it, over 80 per cent?

  Mr Bell—Yes. The banks have different approaches.



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  Senator WEBBER—Some banks also offer this when you take out a personal loan.

  Mr Bell—Banks are required to lend soundly and prudentially. The alternative if we did not
have that lenders mortgage insurance in place is that those people who are starting off with
perhaps less than 20 per cent equity in the home—or less than 20 per cent of the collateral—
would not get a loan. I guess you have to weigh up what is desirable.

  Senator CHAPMAN—The Consumer Credit Legal Centre in their evidence this morning
suggested that—and this gets back to the issue of privacy, which you mentioned a few moments
ago, Mr Bell—some mortgage brokers and loan originators encouraged clients either not to fully
disclose or to frame their applications in a certain way, such that they would enhance their
capacity to obtain a loan. Are you aware of that ? Do the banks have experience of that
occurring? If so, how widespread might it be?

  Mr Bell—I must admit that I have heard Karen Cox say the same thing. I do not have any
evidence from the banks on that particular matter.

  Mr Hossack—I have seen the allegation as well. The ABA’s viewpoint would be that if the
customer were misled—or ‘coached’, which is a word I have seen used before—into taking an
inappropriately large loan then that would be particularly bad practice.

  Mr Bell—But we do not have any data or evidence from our banks. We have not asked.

  Senator CHAPMAN—Would positive credit reporting militate against that occurring?

  Mr Bell—It would certainly help, on the basis that the more information you have about a
customer the better your lending decision is going to be. So, yes, it would certainly militate
against that in some circumstances.

  CHAIR—Thank you very much for your evidence this afternoon and, in particular, your
submission. It has been a very valuable discussion.

                             Committee adjourned at 3.06 pm




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