Submission to the Report of the Consumer Credit Review

28 April 2006 Consumer Credit Review Consumer Affairs Victoria GPO Box 123A Melbourne VIC 3001 Dear Sir/Madam, RE Report of the Consumer Credit Review (CCR) Liberty Financial (Liberty) is pleased to provide the following comments in response to the Report of the Consumer Credit Review (CCR). Liberty Financial is a leading specialty finance group offering innovative products to serve the widest possible range of customers in both Australia and New Zealand. Liberty Financial was responsible for introducing specialty lending in Australia in January 1997. Prior to Liberty’s arrival, tens of thousands of people who did not meet the lending criteria of traditional lenders, were simply deprived of access to finance or had to resort to expensive high-cost alternatives such as private lenders and personal loans. Since creating the specialty sector in the Australasian finance market, Liberty has used its technologically advanced lending platform to offer a diversified product range. Liberty now provides finance for housing, investment, business, commercial and motor vehicles. Further, Liberty’s interest rates span from some of the most competitive in the industry to specialty rates that are well below those of consumer finance companies and alternative products such as credit cards and personal loans. Underpinning Liberty’s rapid growth is the core philosophy of providing finance solely for the benefit to customers. Liberty’s objective is to provide alternatives to customers who are not currently being serviced by finance providers, who are being serviced poorly by conventional lenders or who can be serviced better by new innovative products. Liberty innovation and growth is built on the foundation of core competencies being risk management skills, servicing capabilities and proprietary technology. Through innovation and new products Liberty will continue to provide thousands of customers each year with the freedom to manage their own financial future. Liberty supports the key principles of Consumer Credit Code, and specifically the application of truth in lending to aid inexperienced or unsophisticated borrowers make informed choices when purchasing credit. L IBERTY F INANCIAL PTY LTD ABN 55 077 248 983 L IBERTY F UNDING PTY LTD ABN 25 081 982 872 ALL ACCOUNT INQUIRIES: L27, 9 C ASTLEREAGH S TREET S YDNEY NSW 2000 T ELEPHONE (02) 9239 8888 F ACSIMILE (02) 9239 8999 P.O. B OX 154 S URREY D OWNS SA 5126 T ELEPHONE (08) 8251 7833 F ACSIMILE (08) 8251 7866 P.O. B OX 235 H AMILTON QLD 4007 T ELEPHONE (07) 3630 5388 F ACSIMILE (07) 3359 2877 P.O. B OX 547 S UBIACO WA 6904 T ELEPHONE (08) 6380 1811 F ACSIMILE (08) 6380 1822 L EVEL 16 , 535 B OURKE S TREET M ELBOURNE V ICTORIA 3000 T ELEPHONE (03) 8635 8888 F ACSIMILE (03) 8635 9999 DX 383 M ELBOURNE www.libfin.com.au Report of the Consumer Credit Review Uniform Consumer Credit Code -2- April 2006 Liberty supports the principles of the Uniform Consumer Credit Code (UCCC) and the advantages of consistent national application. Liberty also recognises the importance of Melbourne as a national centre of financial services and the leadership of the Victorian Government in reviewing the national legislation. Underpinning Liberty’s expansion has been the core philosophy of only providing credit where there is borrower benefit. This means that Liberty’s approach is to verify consumers can afford the credit they are being provided, but also they are benefiting from the provision of such credit. For example, Liberty helps many customers ease their financial burden by assisting them to consolidate other forms of credit provided at significantly higher interest rates. Liberty has one of the most advanced credit management system in the specialty finance sector. In those cases where customers experience difficulty meeting their financial obligations under a credit contract, Liberty works quickly and closely with customers to resolve these situations amicably and in everyone’s best interest where ever possible. Discussion of Specific Options Liberty offers the following comments on discussions and options provided in the Report of the Consumer Credit Review. The grouping and numbering of comments refers to the same in the Report. 5 Small Amount Lending 5.1 Government should further investigate options for providing funding for No Interest Loan Schemes (NILS) run by community agencies in Victoria. 5.2 Bank and non-bank credit providers operating in Victoria should provide vulnerable and disadvantaged consumers with more access to low cost, small amount short term credit. Accordingly, a summit should be convened to explore ways to promote and encourage bank and non-bank lenders to provide more access to low cost, small amount short term credit. 5.3 To address the cost of credit, all fees and charges should be reviewable on the ground of ‘unreasonableness’, which would include reference to the underlying costs of service provision as the principal criterion for assessment and a direction that in the case of default fees or charges, prima facie, unreasonableness occurs where they exceed cost recovery. Government Consumer Agencies should be able to bring proceedings to challenge unjust transactions, ‘unconscionable’ interest and unreasonable fees and charges. 5.4 Prohibit credit providers from accepting household goods as security for consumer credit. 5.5 Consumer credit resulting from the use of promissory notes (and other bill facilities) should be regulated by the Consumer Credit Code. Report of the Consumer Credit Review -3- April 2006 5.6 The conclusive presumption accorded to ‘business purpose declarations’ should no longer be available. Liberty would be willing to participate in any summit the Minister for Consumer Affairs and the Victorian Government may convene to explore and promote access to low cost, small amount credit – as defined by the Report as under $1000 that require payment within a fixed term. At present Liberty does not offer small amount credit products in Victoria or elsewhere in Australia. 6 Responsible Lending and Advertising Practices 6.1 Amend section 23 of the Fair Trading Act 1999 (Vic.) so it applies to unsolicited credit card limit increases – not just unsolicited credit cards. Credit providers should be permitted to make provisional offers to their customers but the customer would have to positively elect the credit limit or increased credit limit they require. 6.2 Victoria should request the Ministerial Council on Consumer Affairs to develop as a priority an amendment to the Consumer Credit Code that would: • place a positive obligation on credit providers to adequately assess consumers’ capacity to repay credit, and to assess the consumer’s capacity to pay any increase in the amount of credit or in the credit limit by the same method it uses for new applicants for credit (and for the avoidance of doubt, behavioural scoring alone would not be sufficient) provide explicitly for a remedy that the credit contract is unenforceable to the extent it imposes a liability on the consumer beyond that which is appropriate • In the event of undue delay, Victoria should proceed by amending the Fair Trading Act 1999 6.3 To better inform consumers about credit card limit increases, Victoria should request the Ministerial Council on Consumer Affairs to develop as a priority an amendment to the Consumer Credit Code that would require credit providers, in making provisional offers to increase credit limits on continuing credit contracts, to give customers details of: • • • • the minimum repayment on the current limit if it is fully draw the minimum repayment if the limit is increased to the amount in the provisional offer the time it would take to repay the current limit if it is fully drawn the time it would take to repay the proposed limit if it is fully drawn, based on the amount in the provisional offer. In the event of undue delay and where practicable, Victoria should proceed by amending the Fair Trading Act 1999 6.4 To better inform consumers about a new credit card, Victoria should request Report of the Consumer Credit Review -4- April 2006 the Ministerial Council on Consumer Affairs to add to its proposals on mandated pre-contractual disclosure on continuing credit contracts, details of the time it would take to repay the credit limit if it is fully drawn based on minimum repayments. 6.5 To improve meaningful ongoing disclosure, Victoria should request the Ministerial Council on Consumer Affairs to amend the Consumer Credit Code to provide for credit card health warnings on all credit card account statements, including how long it will take to repay the current limit if it is fully drawn and only the minimum payments are made. 6.6 Further research into credit advertising practices and standards should be commissioned and the Ministerial Council on Consumer Affairs should use this research to examine the effectiveness of the current Consumer Credit Code provisions regarding advertising. Liberty commends the principle that credit providers should not be able to provide unsolicited credit cards or increases in credit limits unless the consumer makes a positive choice to accept the card or increased limit. Liberty also agrees that consumer need to be informed regarding cost and risks of unsecured credit. In fact, research commissioned by Liberty and released in December 2004 revealed that 33% of credit card holders were currently finding it difficult to make repayments. Using a sample of over 1,500 credit card holders from across Australia, the Liberty survey asked Australian credit card holders to indicate if they are having difficulty paying off credit card debt, if they intend to make specific sacrifices over the next six months to maintain or increase credit card repayments, and how they consider any further interest rate rise would affect their financial position. With one in three respondents finding it difficult, it is concerning that too many consumers are either signing up for credit cards or accepting credit limits without giving serious consideration to the consequences. One of the major causes of home loan default is consumers obtaining additional finance from credit card providers that they can not afford. However, any disclosure designed to address these issues (options 6.3 and 6.4) needs to be simple and easily consumed by borrowers in order to be successful. Voluminous disclosure tends to confuse rather than enlighten consumers. 7 Alternative housing finance 7.1 The Sale of Land Act 1962 (Vic.) should be simplified to make the vendor finance protections it offers more accessible. 7.2 Extend the unfair contract terms provisions in Part 2B of the Fair Trading Act 1999 (Vic.) to apply to vendor finance. 7.3 Extend specific residential tenancies protections to consumers who enter into ‘rent-to-buy’ contracts. 7.4 The Ministerial Council on Consumer Affairs should use this Review and the Report of the Consumer Credit Review -5- April 2006 Australian Securities and Investments Commission’s report ‘Equity Release Products’ as the starting point for an analysis of the need for, and nature of, additional consumer protection in relation to reverse mortgages. At a minimum this should include a prohibition on negative equity and a requirement that consumers receive a comprehensive information statement covering distinctive features of reverse mortgages such as interest capitalisation. Liberty does not currently offer any form of vendor financing or reverse mortgage products. Liberty has no further comment to offer on options 7.1 to 7.4. 8 Finance and mortgage brokers 8.1 There should be nationally consistent regulation of finance and mortgage broking. 8.2 Brokers should be required to tell consumers what type of service they provide: • • • transaction-only broking information about the credit products the broker deals in advice about competing credit products and credit providers Liberty is an active member of both the Mortgage Industry Association of Australia and the Finance Brokers Association. Liberty supports these bodies and believes that there efforts to self regulate has delivered significant benefits to the provision of credit products and services in Australia. More broadly, Liberty absolutely supports national consistency and clear disclosure to consumers and encourages an active dialogue between legislators and industry bodies to ensure this is achieved efficiently. PART C CRITICAL CREDIT ISSUES 9 Unfair contract terms 9.1 Victoria should work through the Ministerial Council on Consumer Affairs to achieve a national legislative framework dealing with unfair contract terms in consumer contracts, including consumer credit contracts. In the event of undue delay, Victoria should proceed to apply Part 2B of the Fair Trading Act 1999 to consumer credit contracts. To minimise the costs to business, and therefore to consumers of credit, Liberty strong supports a national legislative framework dealing with unfair contract terms in consumer credit contracts. The Company urges caution to achieve the right balance between ensuring consumers are protected and stifling innovation in the provision of credit products that will ultimately benefit consumers. Report of the Consumer Credit Review -6- April 2006 10 Information and education 10.1 Consumer Affairs Victoria should develop targeted information and education strategies, using social marketing principles where appropriate, for: • • • seniors – targeting alternative housing finance products (including equity release products) consumers from disadvantaged households – targeting safe and affordable small amount credit young persons – targeting rights and responsibilities when using credit, including continued support for the Consumer Education in Schools program. Liberty supports efforts to improve the financial literacy of consumers including seniors, young people and consumers from disadvantaged households. 11 Registration 11.1 Require information to be reported to the Business Licensing Authority at the time of registration and be updated in annual statements. This could include information on the products and services that the credit provider offers, whether providers take security, the size of their business, whether they operate in other Australian jurisdictions, their use of finance brokers and details of the alternative dispute resolution scheme to which they belong. 11.2 There should be public access to the data collected from any expanded reporting requirements, to assist consumers in their selection of credit provider. Information on registered credit providers should be available online in a searchable database. 11.3 Victoria should enhance the registration scheme for credit providers, with the following features: • • • • credit providers must be registered and affirm that they meet the eligibility criteria when they first register and in subsequent annual statements eligibility criteria similar to those applying to second hand dealers and pawnbrokers, to be administered on a negative licensing basis credit providers that do not meet the eligibility criteria are not entitled to be registered where it is ascertained that a registered credit provider misled the Business Licensing Authority about eligibility or there is a subsequent event that triggers ineligibility, the registration should be revoked, with a right of review to the Victorian Civil and Administrative Tribunal the Business Licensing Authority should be empowered to impose conditions on a registration • 11.4 Introduce registration fees to cover the costs of administering, monitoring and Report of the Consumer Credit Review -7- April 2006 enforcing the regulation affecting credit providers. Liberty agrees that consumers place emphasis on the credibility and reputation of a company providing credit when selecting between alternatives. In non main-stream credit provision, such as small balance lending, this information may at times be difficult to obtain. However, the Company cautions against further administration and costs associated with licensing and information capture. The Company questions the practical benefits of collecting this information. 12 Counselling and alternative dispute resolution 12.1 Financial counselling services should include early intervention counselling as well as counselling for consumers in financial crisis. 12.2 Financial counsellors should meet benchmarked quality standards to ensure optimum outcomes for consumers are achieved. 12.3 Require credit providers in Victoria to subscribe to an approved alternative dispute resolution scheme. 12.4 Credit providers in Victoria should establish a dispute resolution mechanism which provides that: • • a written policy and procedure for dispute resolution is in place consumers are fully informed of the dispute resolution mechanism and the Policy and Procedure document is readily available to all consumers at all times records are maintained of disputes with details of actions and resolutions. • Liberty supports the options in regard to alternative dispute resolution mechanisms, but strongly suggests that there be consistency between the Victorian proposals and any national initiatives including those being undertaken by ASIC. The administratively simplest way to achieve this would be for all credit providers in Victoria to comply with the requirement of all holders of an Australian Financial Services Licence to establishing a dispute resolution mechanism this would avoid unnecessary duplication. Liberty has a published Internal Dispute Resolution and External Dispute Resolution policy and process. Liberty publishes the contact details of its Internal Dispute Resolution officer on the web and in a welcome letter sent to every client. If a dispute is not resolved by way of the Internal Dispute Resolution process, customers are encouraged to utilise the Credit Ombudsman Service as Liberty is a member of Credit Ombudsman Service Limited (COSL). The Credit Ombudsman Service is an ASIC approved External Dispute Resolution Scheme established by COSL. The Credit Ombudsman Service provides consumers with an alternative to legal proceedings for resolving disputes with COSL Members. Report of the Consumer Credit Review -8- April 2006 13 Credit reporting 13.1 Repeal the Credit Reporting Act 1978. 13.2 There should be no move to implement a positive credit reporting scheme while substantial questions remain about whether the benefits outweigh the costs. Further research and analysis to be commissioned by the Review will promote informed and balanced policy decisions. Liberty agrees that the benefits of positive credit reporting have not been fully considered in light of the costs of implementation and that implementation at this point would be premature. The Company does not believe the benefits of the claimed efficiencies outweigh the privacy issues for consumers. Further the Company is unaware of any Australian research that might be relied upon to provide evidence on the possible impact of positive credit reporting. 14 Compliance and enforcement 281 14.1 Consumers should be able to bring group proceedings for matters under sections 70 (unjust contracts) and 72 (unconscionable conduct) of the Consumer Credit Code. 14.2 The Director of Consumer Affairs Victoria should be able to institute and defend actions on behalf of consumers in all proceedings under the Consumer Credit Code, whether in the Victorian Civil and Administrative Tribunal or the courts. 14.3 The Director of Consumer Affairs Victoria should have the ability to bring proceedings in his or her own right involving multiple contracts or a class of contracts under sections 70 and 72 of the Consumer Credit Code. 14.4 The Ministerial Council on Consumer Affairs should be asked to examine whether under the Consumer Credit Code: • courts and tribunals should be able to consider ordering a reduction of loan principal in cases where lending practices are inappropriate and unfairness has resulted there should be specific statutory consequences for certain breaches - for example, specific right to return of a vehicle that has been illegally repossessed courts and tribunals should be able to direct that some or all of the penalty awarded against a credit provider should be payable to consumers, in civil penalty cases where the consumer is not the applicant further general provisions should apply setting out the range of orders which may be made against persons found to have contravened the Consumer Credit Code, including damages, compensation and other remedial orders. • • • 14.5 The powers in the Fair Trading Act relating to injunctions, enforceable undertakings and publicity orders should be extended and applied to the Report of the Consumer Credit Review -9- April 2006 Consumer Credit (Victoria) Act and the Consumer Credit Code. 14.6 Victoria should ask the Ministerial Council on Consumer Affairs to amend the Consumer Credit Code to allow interim orders to be obtained in all Consumer Credit Code proceedings to prohibit payment of money or transfer of other property and to consider other interim orders. 14.7 Allow the Director of Consumer Affairs Victoria to choose to bring proceedings under the Consumer Credit Code in either the courts or the Victorian Civil and Administrative Tribunal. 14.8 Increase the size of the criminal penalties in the Consumer Credit Code. Liberty supports the principle of fair and accessible recourse for consumers. The cost of taking an action to ensure compliance with the UCCC should not mean that consumers are deprived of the protections granted to them under the Code. However, the Company does believe that the options calling for the penalties and orders available in the UCC are extreme. As a basic premise of any credit system, all of the principal provided to the consumer must be returned. Facts about Liberty Financial As a relatively new organisation, Liberty has established a significant presence in the financial services sector in both Australia and New Zealand. In 2006 Liberty surpassed a number of key milestones that illustrate the demand for its products and the quality of its customer service. For example, Liberty has now advanced more than $8 billion in funds and has assisted well over 30,000 customers across Australia and New Zealand. Further, Liberty recently completed a $1.45 billion capital raising, the biggest ever single securitisation of non-conforming mortgages in the history of the Australian capital markets. Liberty is backed by global investment banks such as Credit Suisse, Deutsche Bank and Macquarie Bank. Liberty is the only company in the southern hemisphere to have received favourable ratings for servicing specialty assets by both Moody’s Investor Services and Standard and Poor’s. Liberty has been further recognised by receiving the Insto award for “Innovative Deal of the Year” and Finance Asia’s “Best Securitisation Deal” for its motor finance securitisation and $1.2 billion nonconforming mortgage securitisation, respectively, in 2005. Liberty makes its products available through a network of over 12,000 business partners and accredited finance brokers located around Australia and New Zealand. Today, Liberty is comprised of approximately 350 professionals having more than doubled its staffing levels over the past four years. Since its inception in Melbourne, Liberty has opened offices in Sydney and Auckland and also has representation in Brisbane, Perth, Adelaide, Wellington and Christchurch. Report of the Consumer Credit Review Community partnerships - 10 - April 2006 Liberty believes in contributing to the communities in which it operates and partners with organisations it believes are providing opportunities to people who are disadvantaged in some way. Its objective is to work with community programs that provide an opportunity for Liberty staff involvement whilst developing enduring relationships which have a lasting and beneficial impact. Should you wish to discuss any part of our response or broader issues any further please don’t hesitate to contact me directly. Yours sincerely, James Boyle Liberty Financial