Confidential

Confidential UNIFORM CONSUMER CREDIT CODE National Competition Policy Review Submission by Consumer Credit Legal Service (Vic) Consumer Credit Legal Centre (NSW) Consumer Credit Legal Service (WA) Introduction This Submission comprises two parts. Part 1 seeks to provide some general comments on both the issue of competition and the consumer credit market and the impact of both the Consumer Credit Code and credit legislation in general, upon competition in that market. Part 2 responds to the issues raised in the discussion paper. Part 1 - The operation of the credit market since the introduction of the Consumer Credit Code. 1. A short analysis of competition policy In reviewing the operation of the Consumer Credit Code, and indeed in considering its very objectives, the issue of Competition Policy remains fundamental. As the Issue Papers rightly points out, it was the development of Competition Policy principles that provided the major catalyst for the replacement of the prior Credit Acts with the Consumer Credit Code. Indeed the current review of the Consumer Credit Code has as its basis a general regulatory review to ensure that regulation conforms to Competition Policy principles. It is therefore important when assessing both the operation of the Code, and indeed the operation of the credit market place, to have a clearly defined view of the objectives and goals of competition policy. The starting point for any such analysis in the Australian context is Prime Minister Hawke‟s „Building a Competitive Australia‟ statement released in March 1991. In addition to dismantling barriers to international competition, the government expressed a determination to reform the domestic economy to achieve higher productivity and efficiency. It was the government‟s view that competition was crucial for future economic success and would produce beneficial effects for consumers and society as a whole. It was said that: „For the consumer, competition means lower prices and a broader range of better quality goods and services; for producers it provides a spirit of better performance - at home and abroad. We want to see the whole domestic economy open up to this kind of positive structural change.‟ From this, two important goals of competition policy can be seen to emerge. First, a quest for greater „efficiency‟ within the Australian economy. And second, that this efficiency was to produce a beneficial result for Australian consumers and society as a whole. This approach was consistent with the views of leading economists and commentators in the field. As an example, Professors Trebilcock, McQueen and Dunlop in their discussion of competition policy principles took an almost identical approach. They viewed the ultimate goal of competition policy as the maximisation of consumer welfare. However, the intermediate objective had to do with the means of reaching out towards that goal, and that intermediate objective was efficiency. As they pointed out, efficiency is a somewhat elusive and complex concept. They saw efficiency as falling into three categories, allocative efficiency, productive efficiency and dynamic efficiency. Allocative efficiency refers to the economy-wide allocation of resources and the impact on this of particular structures and practices in particular industries. Productive efficiency is a narrower concept than allocative efficiency, and focuses on a particular firm or perhaps industry. It addresses the question of whether any given level of output is being produced at least cost, or alternatively, whether any given quantum of inputs is producing the maximum possible output. Productive efficiency obviously benefits consumers by maximising the cost benefits of producing and supplying desired goals or services. Dynamic efficiency is concerned not with the performance of an economy, industry or firm at a given point in time, but whether appropriate incentives exist to increase productivity and engage in innovative activity over time that may yield cheaper or better goods for consumers or new products that afford consumers more satisfaction than previous consumption choices. It is our view that such an analysis holds true in the Australian context and is entirely consistent with the Federal Government objectives of competition policy. Indeed, it is manifest that the objective of competition policy cannot simply be the maximisation of competition. This is merely a process that will achieve an end. Similarly, it should be noticed that not all forms of deregulation lead to the maximisation of competition. It has been long held that governments need to put regulatory methods in place in order to assist in the development of competitive pressures. For this reason, governments regulate cartels and mergers. As Trebilcock, McQueen and Dunlop state: „The basic paradox in the motivation of businessmen is that while a market economy depends on the self-interest of competitors, firms also face incentives to indulge their selfinterest in behaviours that are not likely to increase consumer welfare or improve resource allocation. How can such negative behaviours be readily distinguished from normally advantageous, competitive behaviour?‟ In reviewing the operation of the current consumer credit market, the Consumer Credit Code, and assessing any future changes, the question is whether those changes have, or will result in the provision of better products to consumers. The provision of a surfeit of product choices is only advantageous to consumers if some of those choices are beneficial to those consumers, and the consumer is reasonably able to select a beneficial choice. 2. A “Health Assessment” of the state of the consumer credit market in Australia. It is our view that serious question marks arise as to the competitive operation of the consumer credit market, and so whether the deregulation of the credit market through the lessening of prescriptive regulation in the Consumer Credit Code will result in positive outcomes for consumers. This is an important issue in this review as any assessment of the legislation regulating a market and its impact on competition can only be properly considered if the operation and competitiveness of that market is assessed. In coming to this conclusion we are influenced by the following factors. 2.1. The price of credit It is beyond the scope of our resources to make any definitive comment on the question of whether consumers are obtaining the benefits of competition via a reduced price for credit. However, a rudimentary analysis of material produced within the sector over the last 10 years leads to considerable disquiet on this issue. Two examples will suffice. Credit Cards The issue of credit card pricing has been the subject of two extensive reviews. Let us first consider the Prices Surveillance Authority inquiry. The authority came to the conclusion that there had indeed been a problem with interest rates on credit cards remaining at a higher rate than might otherwise have been expected. In this context, it talked about a phenomenon known as the „stickiness of credit card interest rates‟. The Authority came to the view that the credit card market needed to be deregulated in order to promote competition in the marketplace which should place pressure on institutions to move rates more in accordance with market forces. Table 1 below is taken from the Pricing Surveillance Authority report and summarises the interest rates charged by major banks on credit cards, the cost of funds as reflected in the 90 day bank bill rate, and the margin between the two. 1987/88 S D 21.0 21.0 23.0 22.2 1988/89 S D 1989/90 S D 24.84 23.8 23.4 24.6 M J ANZ CBA NAB Westpac M 22.0 J 23.25 23.0 M 24.6 J 24.6 Average 90 day BBR Margin 21.8 12.05 9.75 21.8 12.0 9.8 21.8 11.0 10.8 21.8 12.5 9.3 21.8 13.45 8.35 21.8 14.35 7.45 22.05 16.65 5.4 23.17 17.9 5.27 23.17 18.1 5.07 23.76 18.1 5.66 24.46 16.1 8.36 24.66 15.05 9.61 1990/91 S D ANZ CBA NAB Westpac Average 90 day BBR Margin 24.66 14.0 10.66 24.66 12.45 12.21 M 23.88 J 1991/92 S D 22.88 23.0 23.5 22.8 24.02 9.95 14.07 23.05 8.2 14.85 M J 1992/93 S D 21.39 20.5 20.25 21.0 19.75 21.0 19.8 21.6 20.08 M J 24.42 11.7 12.72 24.42 10.7 13.72 23.05 7.55 15.5 23.05 6.60 16.45 The Authority did note that margins had increased significantly between 1990 and 1993 and in part, concluded that the effects of the recession had led to a significant increase in bad debts on credit cards which had placed something of a temporary "blip" in the figures. In any event, the principal conclusion of the Authority was that the advent of a significant number of consumers being „free-riders‟, ie. those that took advantage of the interest-free period and never paid interest on their credit card, had the effect that those consumer who paid interest did so at a higher rate to cross subsidise those who did not. The PSA estimated that the cost of cross-subsidisation ie. the extra interest paid by those consumers who did not obtain an interest-free period was between $20-$38 per year according to the calculation methodology adopted. Prior to the release of this report, Westpac Banking Corporation indicated that the abolition of the restrictions on upfront fees and credit cards would have the result that a $30 upfront fee would reduce credit card interest rates by 4%. This proposal was discussed by Domania in his report, and he came to the conclusion that the Westpac proposal would in fact increase bank profitability as it did not take into account the rationalisation of the number of cards per consumer caused by an upfront fee. The PSA agreed on this issue of card rationalisation due to an upfront fee. This data in summary suggested that the effect of a credit card fee of about $25 would result in a 4% fall in interest rate. If one were to also take into effect an improved economic environment, the end of the early 1990‟s recession, then one would expect to see a reduction in credit card margins of greater than 4%. In fact, if we examine two common products in the marketplace, the Commonwealth Bank Bankcard and the ANZ Bankcard, we find that the interest rate margin is 9.35% and 9.95% respectively, which, given that each has an upfront annual fee of $22, equates to a margin of at least 13.35% and 13.95%. When one further considers that the improved economic conditions contrasted to the early 1990‟s, the fact that there is no longer a requirement to individually notify interest rate changes to consumers, and the fact that the 25 day interest-free period has been reduced to 14 days on the ANZ product, it is difficult to come to the conclusion that consumers have benefited from competition in the area of credit card pricing. Personal Loans Again, a rudimentary analysis of interest rates on bank and finance company personal loans leads to a similar conclusion. We are able to consider the margin cost of one major lender, the ANZ Bank, over a similar period to that considered above for credit cards. 1988/89 D 17.77 14.35 3.42 1989/90 S 18.1 Rate 90 BBR Margin J 17.2 12.5 4.7 S 18.44 13.45 4.99 M 18.8 16.65 2.15 J 19.57 17.9 1.67 D 21.08 18.1 2.98 Rate 90 BBR Margin M 20.7 16.1 4.6 J 19.58 15.05 4.53 S 19.2 14 5.2 1990/91 D 18.33 12.45 5.97 M 18.4 11.7 6.7 J 17.29 10.7 6.59 1991/92 S 16.24 9.95 6.29 Some 18 months ago ANZ personal loans were on offer at 9.5%. However, an establishment fee of $100 applied, as did a quarterly account-keeping fee of $25. If one takes the example of a $10,000 loan repayable over three years, then this translates to a comparison rate of 12%. At that time the 90 day Bank Bill Rate was 4.8% - a margin of 7.2%. Currently the ANZ personal loan rate is 11.75% and the $100 has increased to $125 resulting in a comparison rate of 14.37%. The Bank Bill rate is currently 6.0% - a margin of 8.37%. Perhaps more significantly, if we look at finance company lending, it is difficult to see how competition in the market place has had any real effect on the rate being written. Attached to this submission are sample contracts written by Australian Guarantee Corporation and Avco Financial Services since the inception of the Code. The respective annual percentage rates are 23.8% and 29% respectively. 2.2 Relevant research as to competition in the consumer credit market in Australia. As discussed earlier, the fundamental issue in determining whether competition policy has benefited consumers in the consumer credit market is to consider whether the impact of competition has resulted in lower priced credit to consumers. From the figures seen earlier, it is clear that a strong case can be put that market failure exists in the credit card market. Nonetheless, conversely, a strong case can be put for the fact that in recent years the advent of competition in the housing loan market has resulted in significant benefits to consumers ie. the overall price of housing lending has reduced. It seems clear that this is a result of strong competition in that market, eg. the arrival of competitors such as Aussie Home Loans, and increased consumer price sensitivity. These issues will be discussed further below. Two important issues arise from this. First, it is noteworthy that increased competition appears to have occurred in that segment of the market, housing loans, where there has been a significant increase in the level of regulation since the introduction of the Consumer Credit Code. Prior to the introduction of the Code, housing loans were the least regulated consumer credit product. Conversely, despite significant decreases in the degree of regulation of credit cards (the Code allows credit providers to include a variety of annual and other types of fees which were prohibited under the previous Credit Act). This market has not responded in a competitive fashion and would appear to be less competitive than at any other point in time. Second, the above illustrates the fact that it is easy to think of the consumer credit market as one market. In fact, the market is made up of a series of different segments, which operate, to a degree, independently and may exhibit different market features and respond in a different way to competition. As stated earlier, this in turn raises the question as to how does one assess the operation of the consumer credit market. This is an important issue in the context of this review as any assessment of legislation regulating that market and its impact on competition can only be properly considered if the competitiveness of that market is assessed. It is only on the basis of that assessment that one can determine the reasons for competitiveness or the lack thereof in any market. This issue has been a subject of considerable work in the United Kingdom by the Office of Fair Trading as part of its competition policy process. In late 1997 the Office of Fair Trading (UK) released a research paper entitled “Consumer Detriment under Conditions of Imperfect Information”. That paper identified six factors, which signalled potentially problematic markets. Those factors were: · the existence of price dispersion for seemingly similar products or services: · the existence of focal points of competition; · the bundling of primary and secondary purchases or the existence of after markets; ·the existence of commission payments, particularly from upstream suppliers to retailers or advisers; · “complex” goods or services; and ·goods and services which are either purchased infrequently, or which possess credence characteristics. It is worth considering each of these items in a little detail, both with regard to what London Economics meant by each of these points and its application to the Australian market. Price Dispersion Perhaps the most important factor is a significant price dispersion for relatively homogeneous goods. This in itself suggests that consumers do not engage in sufficient search or “shopping around” for the best product and do not effectively compare prices. Two important points arise here in the context of credit. First, the quality of credit does not vary between providers. In spite of the various bells and whistles placed upon various credit products, the essential quality of credit does not vary between providers. A $3000 loan from Provider A is equally beneficial as a $3000 loan from Provider B. Of course, the terms and conditions which attach to the provision of that credit may vary and this may have an effect, ie. the terms of early repayment. But unlike the purchase of the television set, the quality of the product is not an issue - what is an issue is the cost of that credit and the terms of the loan that impact on that cost. Second, and related to the first point is that it would be misleading to suggest that the credit market should be made up of loan products at an identical price. Clearly, significant price dispersion will occur due to risk. However, this does not mean that price dispersion is not significant, it simply means that in considering such dispersion one needs to ensure that one is comparing like with like, and one isn‟t comparing high-risk lending products with low-risk lending products. Also, the degree of price dispersion may be far greater than that warranted on risk considerations alone. And it is this latter point that is particularly evident in the credit market at the present time. Three examples of price dispersion in the market should suffice. The first, annexure 1, is a loan contract entered into with AVCO Financial Services at the rate of 32.95%. It is conceded that AVCO is a high interest rate lender, but what is significant is that in recent times despite falling interest rates and deregulation of consumer credit there has been no sign of a fall in the pricing of products by lenders such as AVCO. Indeed, if anything, the reverse has been the case in the segment of the market in which AVCO competes. Ten years ago AVCO competed for consumers (in so far that competition took place) with other companies such as Household Financial Services and Customer Credit Corporation. Both these organisations have now been taken left the market place and so competition in that segment of the market has lowered. Annexure 2 contains a contract with car pawnbrokers. The transaction is notable for three reasons. First, the interest rate is 25% per month. Second, under the terms of the transaction the consumer loses their entitlement to the vehicle if they default, and the full amount received from the sale of the vehicle will be kept by the pawnbroker. In this case the “pawned” vehicle was a recent model Lancer conservatively valued at $14,000. Third, the transaction involves absolutely no risk to the lender whatsoever as the security will far exceed the actual amount lent and/or enforcement expenses. What the transaction signifies is that the consumer‟s choice is not always rational. Consumers who are in desperate situations or otherwise at a disadvantage are at risk of exploitation in the market. The third example is a loan entered into with Bailey O‟Neill Pty Ltd for $10,000, annexure 3. As with the previous transaction, this transaction involved little risk to the lender as it was fully secured over the debtor‟s home and so although there was some degree of risk of default, the lender‟s risk of failing to recover the debt and enforcement expenses was virtually nil. At first glance the transaction does not appear to be particularly poor. The interest rate is 12% which is somewhat higher than one would expect for a secured personal loan, but not extraordinary. However, when one recalculates the interest rate to include the various fees and charges associated with this loan, most significantly a $1000 procuration fee payable to Bailey O‟Neill Pty Ltd, the comparison rate is 35% per annum. This case study is also illustrative of two further facts. The first, an uneducated and vulnerable consumer who did not shop around for the best product available, and second, the way in which the price structure of the product avoided transparency of cost, and so allowed significant overpricing. Focal Points of Competition Focal points of competition indicate that the respective market is characterised by informational problems for which the creation of focal points is a solution. The focal point is a point of comparison that arises in relation to the purchase of a product, which is not a rational or accurate area of comparison. A classic example of the use of focal points has arisen in relation to the use of credit cards by consumers. Here the focal point of competition has been the secondary features of credit cards such as bonus reward points and the level of upfront fee, rather than the interest rate charged with respect to the card. Bundling of primary and secondary purchases in after markets The issue of focal points of competition will be of particular importance where a consumer decides upon bundles of primary and secondary purchases, or the initial purchase decision creates a demand for an after market. This is an important issue in relation to point of sale lending which was identified as a problem area in the Justin Malbon study which is discussed in more detail later. The experience of consumer advocates for many years has been that point of sale lending remains the area where abuse is at its highest and competition is at its lowest. This has particularly been the case with regard to the secondary purchases and third purchases made at that time. Consumers who take credit with respect to the purchase of goods at a retail outlet, be it a used car or furniture, continue to do so at high interest rates and on poor financial terms. In this regard we note that products such as AGC Creditline, traditionally sold at point of sale to assist the purchase of goods, remain at an interest rate of approximately 25%. We also note that companies such as FAI Finance Corporation, who provide finance as the adjunct to the sale of home security alarms, provide finance at approximately 25%. This latter example is significant as virtually all borrowers are homeowners who are in current employment and so the level of risk is relatively low. As the Malbon study shows, such consumers do not tend to either shop around for credit, nor do they consider the taking of the credit in any depth beforehand. The reason it is not considered is because it is an adjunct to the primary purchase decision, being that of the goods or services purchased. It is therefore of no surprise that these loan products are often those which contain the worst examples of third purchases usually being consumer credit insurance policies, which are at a high premium in comparison to the potential benefits offered to the insured. For an example, see the case example referred to below and at annexure 4. Commission Payments London Economics noted the use of commission incentives, by any player in the value chain, may force a divergence between the incentives of sales people and consumers. The resulting problems include: ·consumers purchasing products or services which are not appropriate, given their needs; ·consumers paying more than necessary for a given product or service; and ·products being of lower quality than the consumer had been led to believe This remains the classic instance of the sale of credit related products in the Australian credit market. Again, two examples should suffice. The first example is a credit contract written to finance the purchase of a used car. This will be a point of sale contract in which the credit contract was a secondary purchase to the purchase of the used motor vehicle. As is the norm with such arrangements the car dealer will obtain a commission for introducing the debtor to the financier and so had a financial interest in ensuring that the borrower did not shop around for credit but took the linked credit transaction. As such the borrower entered into a credit contract at a significantly higher rate than would have been able to be obtained literally around the corner from either the same financier or another financier. Indeed, the anti-competitive nature of such commission is seen from the fact that financiers such as AGC and Esanda provide credit at a higher rate through dealers. There are two reasons for this. First, the rate is higher to include, in part, the additional cost of a commission payable to the supplier. Second, the fact that consumers who buy at point of sale are less price sensitive and so there is an opportunity to maximise profits by increasing the rate. The second example is consumer credit insurance. Annexure 4 contains an example of an consumer credit insurance contract taken out with Westpac General Insurance Limited. The amount of the loan was $11,630 repayable over six years by monthly instalments of $227.76. The premium for the consumer credit insurance policy was $1530. The reason for the purchase of the policy by the consumer was to protect them against unemployment. However, the maximum benefit for any period of unemployment payable to the consumer was $683.28 as the policy limited payment for unemployment to no single period longer than three months. The existence of a commission/management fee payable with respect to this product means that the lender has a benefit in not fully explaining the cost of benefits of the product to the consumer, who is of course making a secondary purchase and so not likely to be particularly price sensitive. Complex Products It is noted that the London Economics report made particular mention of the fact that traditionally, financial services products were complex and so presented potential information problems for consumers. Infrequent purchases of credence goods Again, London Economics noted that consumers rarely took out credit contracts, or not sufficiently regularly so as to become well equated with the informational issues associated with such purchases. In summary therefore, if we take the approach suggested by the Office of Fair Trading in the United Kingdom then there are a variety of factors of the Australian consumer credit market that continue to indicate that at the very least, significant segments of the consumer credit market are not operating in a fully competitive way. This summation is supported by the material contained in the report prepared for the Post-Implementation Review Committee by Justin Malbon entitled “Taking Credit”, which we believe is important in the current context. From that report we would argue the following conclusions can be drawn: ·That the housing loan market exhibits good features of competition and that consumer are shopping around and making informational choices. The Malbon report goes on to state that in this area the role of the Code has not been insignificant: “The requirement, for example that interest rates be stated in pre-contractual information and advertising in a standard way as an „annualised contract rate‟ means that consumers can readily compare the interest rates of different loan products on offer. This is important in enabling consumers to readily compare prices when shopping around for the best housing deal. Comparing interest rates was not always so easy. There was a time when interest rates were quoted as flat, reducing or effective rates, which meant that interest rate figures were often misleading and making product comparisons was difficult.” The report also noted that 58% of housing loan borrowers took four weeks to consider taking up their loan. Also, the report referred to the fact that many consumers took away housing loan pre-contractual disclosure information to consider prior to loan entry. The Malbon report indicated that 90% of respondents said they read the information on housing loans and found it helpful because “it made clear what the loan involved (55%)”. This indicated that the structure of the Code means that the contractual information being provided to consumers is now provided with respect to housing loans in a way which makes shopping around easier. It was submitted by Malbon that this evidence had shown that the Code has been extremely positive in promoting competition on the principal focal point of lending being price. As the Malbon Report indicates it was not also so. Prior to the regulation of housing lending by the Code, it was difficult to get detailed information as to the cost of a housing loan. In particular, the fees and charges applicable to such loans were usually disclosed in a generalised way and the consumer could not easily obtain exact costings of fees and charges relevant to their housing loan prior to entering into a housing loan contract negotiation. The type of generalised information provided to consumers is seen in Annexure 5 which contains a copy of a Westpac brochure setting out general fees and charges. The brochure was introduced as part of the bank‟s compliance with the Banking Code of Conduct. ·The Malbon Report also clearly demonstrates that competition is not playing an important role in the credit card market. As previously noted it is interesting that the housing loan market, which has been recently regulated for the first time has increased in competition whilst this market has continued to operate in a way exhibiting market failure despite a level of deregulation. The Malbon report indicates that part of the reason for this has been the way in which the focal point of competition has been on issues such as reward points. We would also suggest that the reason for market failure here has been that the structure of the Code has allowed credit providers to shift the focal point of competition away from pricing. We note that the Malbon study found that 78% of those entering into a credit card contract read the pre-contractual information. Again, we note that 57% said they read it at least a week before signing up. We must express some surprise at this aspect of the report. As we understand it, consumers don‟t as a matter of standard bank procedure get the credit card pre-contractual statement material prior to signing for the card. The process is that the consumer often signs an application form and at this point the credit provider will then normally either send or provide the pre-contractual information to the consumer with the card and the contract will be completed upon the consumer using the card. This is in stark contrast to the normal sign up procedure for a housing loan. We would certainly agree that 78% of consumers may well have read the pre-contractual information before using their card and so entering into the credit contract. But by this time the consumer has effectively locked himself or herself into a card choice and inertia means that they will stay with the product. Competition in the credit card market would be significantly improved if the pricing information required to be disclosed by the Code was disclosed at the time of application for a credit card by a consumer. This would then have some ability to move the focal point of competition towards pricing and away from advertising-related matters such as reward points. ·The Malbon report clearly indicates that linked credit remains an area where competition failure occurs within the market. The report stated that some 26% of consumers shopped around for the credit product in this market. Such a figure was below the 33% level that Schwartz and Wild suggested was the minimum critical mass of shoppers required to indicate a competitive market. As stated earlier, this lack of competition is borne out by higher pricing. Again, these markets are dominated, as the Malbon Report recognises, by both commission arrangements and the fact that credit is usually taken as a secondary purchase. ·The operation of the credit market with respect to personal loans is perhaps the most difficult to gauge. The Malbon Report indicates that some 41% of consumers said they read the information just before signing the contract, while some 15% said that they read the information at least a week before signing up. It is our suggestion that this market is particularly segmented and from consumer advocate‟s experience, it would appear that bank customers tend to get information at an earlier point in time, whilst finance company clients, especially those related to linked credit transactions consider the loan documentation just prior to signing, if at all. Although the 41% figure of consumers who read information just before signing up is above the 33% threshold set by Schwartz & Wild, it tends to suggest that this market is also not working in its most competitive fashion. Indeed, the earlier study of pricing of personal loans is consistent with this as it shows that although pricing and personal loans is not as poor as that associated with credit cards, it is still significantly behind the competitive market of housing loans - even in the area of bank personal loans. One area where we have some difficulty with the Malbon report is with respect to the view that there is no real differentiation between socio-economic groups with respect to the taking of the credit. Indeed, the material within the report itself tends to suggest otherwise. The report concluded for example that respondents on higher incomes were more likely to obtain personal loans from a credit union than those on lower incomes. It also concluded the respondents on lower incomes were more likely to obtain a credit card from a department store than those on higher incomes. Traditionally, department store credit cards are at a noticeably higher rate than those offered by major banks. Other conclusions of the Malbon study also require careful consideration. The conclusion that interest rate was more influential in helping those on higher incomes to decide to obtain a linked credit loan that those on lower incomes, seems very strange. Linked credit loans are invariably at far higher interest rates than normally offered and so the interest rate should, on the basis of rational choice, be a matter that would make a consumer disinclined to take a link credit loan. Perhaps the most interesting conclusion was that the respondents on higher incomes were more likely to find it difficult to prepare fees and charges relating to housing loans than those on lower incomes. It is suggested that this conclusion is more indicative of the fact that consumers on lower incomes are less aware of the fees and charges as an issue in comparing the price of credit. Indeed, a fundamental issue with respect to the survey is that the survey work concerning the price of credit was targeted at interest rates rather than the total cost of credit as exhibited by the combination of fees and charges and interest rates. As wil be discussed later, the effect of fees and charges is increasingly making price comparison more difficult, notably in the less comp the less competitive area of personal loans and credit cards. 2.3 Other indicators as to the operation of the credit market One way in which to consider the effects of the Consumer Credit Code on competition is to consider those segments of the consumer credit market where the Code currently does not apply, and the way in which those unregulated markets operate. Essentially there are two such markets, fringe lenders such as pawnbrokers, “interest free” lenders and “pay day” lenders, and solicitor nominee lending. It is noteworthy that each of these unregulated markets do not appear to operate in a competitive way. Indeed, in our view the Code would assist in making these markets operate both fairly and competitively. It is worth briefly considering the operation of each market. Solicitor nominee lending/Blind Brokers Annexure 6 contains a copy of a first mortgage loan entered into through a firm of solicitors. It is noteworthy that in this example, the documents used are standard Law Institute of Victoria documentation. This transaction illustrates the anti-competitive features which would be dealt with if the transaction were regulated by the Code: ·The consumer has no right of early repayment at all, and in this particular example, where the consumer endeavoured to repay the loan earlier, was informed that they would have to pay the entire loan amount including the interest for the full term of the contract. ·The default rate of interest applies once a payment is four days overdue. What is noteworthy is that the default rate, which is 4% higher than the contract rate, applies to the entire outstanding balance of the loan, not just the amount in arrears. Further, once payment is overdue, the solicitor immediately sends a notice of late payment (standard form letter) for which a $100 fee is charged. Additionally there are other nominee lenders, who are not solicitors, where the same regulatory issues arise. An example is the loan contract with Bailey O‟Neill Pty Ltd which is at annexure 3 and has been referred to previously. A noteworthy feature in that regard is that the credit is overpriced, but this has not occurred in a transparent way. It has arisen due to the use of fees and charges. Such a practice inhibits competition as a consumer‟s ability to shop around on rate is dramatically impaired by such a practice. The consumer detriment from these two practices is obvious, but the anti-competitive aspect is that these features add effective hidden costs to the transaction, which effectively prevent the consumer from abandoning the transaction and refinancing with another lender on more competitive terms. An approach proposed overseas is to treat the nominee as the credit provider. The Canadian Cost of Credit Disclosure Act 1998 provides: 12(1) This section applies where a broker arranges a credit arrangement involving a credit grantor who does not enter into the credit agreement in the course of carrying on a business. (2) Any provision of this Act or the regulations that imposes a duty on a credit grantor is to be read as imposing the duty on the broker, rather than the credit grantor. Pawnbroking Significant deregulation of pawnbroking in Victoria occurred in 1987. Part of the argument for that deregulation was that the applicable consumer protection principles forced pawnbrokers to overly document and prevented product flexibility in this market. The theory was that deregulation would assist competition with resultant benefits to consumers. It would be difficult for any commentator on pawnbroking in Victoria to argue that any of these benefits have occurred. Indeed, the opposite has been the case. The costs associated with pawnbroking have increased and previously illegal practices legitimised and now are widespread. Annexure 2, which has been referred to earlier, is an example of such a transaction and it is now noteworthy that the contract now entitles the pawnbroker to not have to account to the proceeds for the sale of the secured vehicle and to retain those proceeds as part of the transaction. Notably, the amount financed by way of pawnbroking transactions has significantly increased and the amount lent is often in the thousands of dollars rather than the hundreds of dollars. The second case study Annexure 7 relates to a consumer who pawned family jewelry for $200 at Cash Converters and was then paying $60 per month in interest, and the interest rate was 360%. These case studies are consistent with the analysis conducted on pawnbroking in Victoria by the University of Melbourne which showed that the cost of pawnbroking (usually the transaction is documented as a buy back arrangement to supposedly avoid pawnbroking legislation) was typically in the range of 10% to 20% per month. However, the real rate of return on such pawnbroking arrangements, when costs arising from default are factored in, equates to 23.47% per month. It is conceded the pawnbroking market is the bottom end credit market where consumers are, for various reasons, particularly vulnerable and often in desperate need of credit. But nonetheless it should be borne in mind that these transactions are secured and as in the case of Annexure 2, the value of the security is often far in excess of the amount lent. 2.4 The effect of deregulation to the existing personal loan market The fourth area which is an indicator as to how the market is operating is the way in which the personal loan market has responded to the lessening of regulations by the Credit Code compared to the Credit Act.  Termination Fees - the basic government policy on termination fee was that such a fee should be allowed to be charged where there was a loss to a credit provider due to an early termination of a credit contract. This involved an assumption that such fees were really only legitimate where there is a fixed rate contract and the debtor terminated the contract at a time when interest rates were lower than at the time of contract entry. Indeed, in discussions regarding this issue government pointed to the fact that some credit providers were discussing implementing termination clauses whereby the debtor would be paid a benefit if, at the point of termination, interest rates had increased. Sadly, the market has not been quite as sensitive as this. First, the vast majority of contracts do not provide for a termination fee which pays a benefit in the event of termination occurring at a time when interest rates have increased. Second, some financiers such as Capital Finance (see annexure 8) provide for a termination fee to be payable on variable rate contracts. Further, a number of credit providers provide for a termination fee, which is not simply a loan closing fee, irrespective of whether rates have increased or decreased. Often as not, such termination fees are in fact the rule of 78 rebate method which is dealt with later as a separate issue. Therefore, it would seem that many financiers are using the termination fees to impose a penalty on a debtor who terminates early.  The continued use of the rule 78- This is of particularly concern in the context of this review. A number of finance companies are continuing to use the rule 78 when calculating payouts on Consumer Credit Code contracts. The legal method by which they do this is that they simply use the rule 78 now as a termination fee. Apart from the fact that this practice is noteworthy in terms of its abuse of the termination fee provisions, it also has a broader significance. Again, one of the much-heralded features of the Code was that consumers would now obtain the right under credit contracts, to have interest calculated on a daily balance method, and so obtain the benefits (and burdens) of paying interest off daily without the penalty of antiquated interest rate calculation methods such as the rule of 78. In fact, many finance companies have simply avoided the whole daily balance methodology and continue to effectively calculate interest rebates on credit contracts in absolutely identical fashion to the prescribed method under the Moneylenders Act 1900. In fact, the system is now such that consumers on early termination are worse off than they were under the Credit Act, in an area where it was represented that a consumer benefit would occur. The financial effect of the use of the 'Rule of 78' is able to be seen in the following example: Compare the payout on a loan for $20,000 repayable by 72 monthly installments of $422.90. The estimated credit charge is $10,448.80 and the interest rate is 15%. Payout at: 12 months 24 " 48 "  Actuarial 17,776.44 15,195.43 8,721.99 Rule of 78 18,098.01 15,623.48 8,956.82 Difference 321.57 428.05 234.83 Default Rates - The operation of default rates under the Code has been yet another example of how competition policy has failed in this area as the finance industry has readopted previously outlawed practices from the past which imposed penalties on consumers that do not appear to have any economic basis. It now seems to be the general practice of lenders to impose a default rate of at least 2% (in some occasions, higher) above the contract rate on amounts in default, irrespective of whether the loan is secured over land. Bearing in mind that interest has been calculated on a daily basis, and so any amount unpaid is incurring interest under the contract, there seems no justification for a higher rate being charged upon the default amount. If there is an additional cost in late payment, then this can be collected by some fee, and indeed, under most contracts there is an ability where any collection action is taken, for this to be separately billed as well. There appears to be simply a view taken by lenders that „as this fee can be charged, we should now charge it‟. An example of this is the AVCO contract in annexure 9 which was entered into in April 1997 with an interest rate of 28.9% and a default rate of 31.9%.  Gap Insurance - This product is an example of an unfair market practice that has arisen in a more deregulated market. The product is being inappropriately sold in circumstances where there is no realistic possibility of there being any "gap" between the sale of security and the likely outstanding balance of the loan. Indeed, in our view this will often be the case as is illustrated by the following example: 'A' borrows $20,000 to purchase a vehicle priced at $23,000. The loan is repayable over 6 years by repayments of $422.90 per month. The interest rate is 15%. Let us presume the vehicles value depreciates by 10% per year, and contrast vehicle value against the outstanding balance of the loan at various points in time. Month 12 24 48 60 Balance 17,776.44 15,195.43 8,721.99 4,685.44 Vehicle Value 20,700.00 18,630.00 15,091.00 13,582.00 Difference 2,923 3,343 6,369 8,896 There has been some speculation that the reason for development of this product is that the commission cap on consumer credit insurance resulted in the need for a further insurance product on which dealers could obtain commission.  Leases - It would appear that the level of disclosure on leases is even less than consumer groups feared and effectively avoids the policy premise of the Code as to information disclosure. Annexure 10 contains an example of a standard form lease. Perhaps the most concerning feature about the above summary has been that in the case of finance companies, the effect of deregulation has not been product development but in fact product regression. Indeed, many finance company contracts bear striking resemblance to old-fashioned moneylenders‟ contracts, as they include an establishment fee, a termination fee based around the Rule of 78, which is payable irrespective of whether interest rates increased or decreased during the life of the loan, and a default rate payable on any amount paid late. The revival of the Rule of 78 and default rates is particularly irksome. Indeed, it is arguable that these consumers are worse off than they were under moneylending legislation as at least under that legislation, the finance company could not vary the interest rate and was limited to a default rate of no higher than 2% above the contract rate. And this rate could only be charged if the loan was secured on real estate. In any event, what remains is that deregulation has not resulted in the benefits of competition flowing through to consumers. In the area of personal loans, it would appear that the comparative costs of bank personal lending and finance company personal lending is no less than prior to the abolition of the Credit Act. While in the case of credit cards, there may even be a prima facie case that the cost of credit has increased. As such care should be taken in removing consumer protection on the basis of increasing competition, as past history does not suggest that this market will respond positively. Part 2 - Response to the issues raised in the discussion paper Questions for Response 2.3.1 Are the objectives in the Consumer Credit Code still valid in today’s marketplace? 2.3.2 What should be the objective of government regulation in relation to the Consumer Credit Providers? 2.3.3 Can these objectives be met by other means? Unlike the Credit Act 1984, the Consumer Credit Code did evolve in the period when competition policy was at the forefront of government policy and it is our view that the policy objectives of that Code remain valid and are consistent with competition policy. The objective of coverage of all forms of credit in an equal fashion accords with competition policy and with common sense. Those areas where the Code has gaps in its coverage have already been exploited by unscrupulous lenders as seen with regard to both pawnbroking, solicitor nominee lending and interest free lending (see pages 14-16 & 4648). To restrict coverage of the Code by way of institution or by way of some form of monetary ceiling will only have the effect of either causing some lenders to restructure their product or style of lending so as to take advantage of an exception or distort the availability of credit between regulated and unregulated markets. For example, prior to the introduction of the Consumer Credit Code, the Credit Act had a $20,000 monetary ceiling. Some unscrupulous lenders endeavoured to take advantage of this ceiling by requiring borrowers to borrow in excess of $20,000 and to then repay the amount lent in excess of the required amount immediately. ie. a borrower requires $10,000 and borrows $20,000 and pays $10,100. The objective of truth in lending is one which cannot be seriously questioned. This issue will be discussed at length later in our submission, however, as we have already illustrated, the Code‟s provisions in requiring truth in lending foster competition so as to ensure that consumers make informed choices. Our criticism in this area is that those objectives have not been completely fulfilled by the terms of the legislation as disclosure currently occurs in a way which allows credit providers to avoid proper truth and lending requirements. Accordingly, the objective of the legislation is to rely on competitive forces to provide price restraint, while also providing significant redress mechanism for borrowers in the event that credit providers fail to comply with the legislation. This objective is one which, in the current context, appears appropriate - with the single exception that some redress mechanisms of the Code require alteration if they are to achieve their purpose. The complex nature of credit transactions is such that unless detailed regulation is provided then the net effect of the regulation will be limited. This prescriptive aspect of the legislation has been required as for many years credit providers have shown that they will rely heavily on lawyers to draft contracts so as to maximise their rights based around the existing regulatory regime. Further, detailed regulation also provides an element of certainty as both consumers and credit providers can then consider whether a particular transaction is within the bounds of the regulatory regime or not. The problem with more generalised regulatory regimes is that whether a particular practice conforms with that regime becomes something of a subjective judgment. The difficulty in that for consumers is that where they are engaged in a dispute with a credit provider who has significant financial and legal resources, it is important for the consumer to be able to determine their exact legal rights with certainty, so that they can make an informed judgment as to their prospects of successfully challenging an illegal practice. It is often said that the objectives of a regulatory regime can be met in a variety of ways, for example, Codes of Conduct. The core of a regulatory regime is that there needs to be, as stated above, detailed rules applicable to credit providers, which are then enforceable by consumers by way of obtaining redress and by government through the application of a penalty. This is, in essence a legislative regime and such regulation should be prescribed by Parliament, not by other bodies. Finally, the consumer experience with Codes of Conduct has not been positive to date. Currently a study of Codes of Conduct is being undertaken by Consumer Credit Legal Centre (NSW). Preliminary results indicate that neither consumers, nor employees of those industries subject to the Code, such as the Banking sector, are aware of these Codes. While often such Codes are very general in their regulatory requirements, see the discussion at page 22 as to disclosure under the Banking Code of Conduct. Questions for Response 3.2.1.1 3.2.1.2 3.2.1.3 Are there any other provisions in Part 2 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 2 of the Consumer Credit Code? Are there alternative mechanisms in which the objectives of Part 2 of the Consumer Credit Code can be achieved without impacting on competition? Division 1 of Part 2 - Disclosure In considering this issue, we start from the premise that the provision of information to consumers has two important roles in ensuring competition. The first is to provide pre-contractual disclosure to a consumer so as to allow them to make an informed decision as to whether or not to enter into a particular credit contract. This decision, at least on a rational level, involves two separate questions. First, whether the credit being offered is on acceptable terms when compared to other products on offer in the market. Second, a determination that the cost of credit is not in itself excessive, and so therefore a viable option compared to paying cash for the product or deferring purchase of the product for which the credit is required. As such disclosure is central to ensuring a competitive environment whereby consumers make informed choices both as to which provider to contract with, and whether to utilise credit at all. However, there is a second purpose in disclosing contractual information to a consumer. It is important for a consumer who is engaged in a dispute with a credit provider to have ready access to all terms and conditions that relate to their credit contract, so that they are able to readily ascertain their rights and obligations under the contract and check that the credit provider has met their obligations, and accordingly the anticipated benefits of the transaction arose. If it were otherwise consumers could not “judge” the performance of credit providers to determine future choices in the market. It is certainly clear that the impact of the Code has meant that more information has been provided to consumers than was previously the case. There are two separate reasons for this. First, in areas that were previously unregulated, such as housing lending, the disclosure requirements now mean that all financial information must be provided to the consumer at the point of contract entry. Second, in areas such as personal lending where the Credit Act previously applied, there has been a proliferation of information caused by the fact that the deregulated charging mechanism now means that information is not rolled up into convenient categories of amount financed and credit charge, as was previously the case. Credit providers are now able to employ more complex charging regimes and this is necessarily reflected in more complex disclosure. It should be pointed out that this is not a feature of the Code itself but the choices made by credit providers as to how they structure their products. Similarly the length of credit contracts is a feature of the complexity of terms and conditions imposed by lenders. All the Code requires is disclosure of these things in a meaningful way - and as such assist provide information that promotes consumer choice and so competition. To illustrate this we enclose two separate credit contracts by different credit providers relating to comparable loan products, but of significantly different length and complexity. (see annexure 11). It is our view that it is undoubtedly the case that the Code‟s disclosure requirements, particularly in the area of housing lending, have resulted in improved consumer position as consumers now have access to information, particularly on the issue of costs, which is central to the choice to enter into, and rights under, the credit contract. This view is supported by the Malbon study, see particularly page 82 of the study. In so far as the Code is criticised for causing lengthy and complex documents then this over supply of information is able to be overcome by the provision of short summary information in a simple format. At the time the Code was being negotiated, Consumer Credit Legal Service (Vic.) strongly lobbied that an American style Schumer box should be utilised as required under the United States Truth in Lending Law. Unfortunately the approach taken by the Code was to provide a far more complex Schumer box style disclosure which has effectively meant that the Schumer box has turned into two to three pages of disclosure in which the vital information to a consumer is lost. The disclosure requirements of the Code provide that the credit provider is to calculate and disclose all costs, both fees and charges and interest, relating to a credit contract is certainly of assistance to consumers in comparing credit products. The provision of this financial information is obviously vital to consumer choice. Previously, in relation to unregulated products, some financial institutions, particularly banks, relied on disclosure such as „bank‟s usual fees and charges will apply‟. Such disclosure meant that the consumer usually only obtained a disclosure of the interest rate and little else in relation to the cost associated with the credit price. Such a position did not promote informed consumer choice. The advent of the Banking Code of Conduct had some effect in improving bank disclosure, but it still remained of a general nature. Annexure 5 contains a sample of fee disclosure by Westpac prior to the Code. Two features are noteworthy:  fees are disclosed generally - the consumer is not advised which fees apply to their product,  the fees shown are minimum fees only. However, even the most rudimentary survey of products offered indicates that the recent development of significant establishment and ongoing fees means that the ability for consumers to compare the total cost of credit between credit products is now very difficult, and consequently the need for meaningful disclosure very important. As such the disclosure provisions of the Code provide an important benefit in ensuring that consumers are able to make informed choices and, in turn, stimulate competition. However the one failing of the Code in this regard is it‟s failure to fully assist consumers to compare products. To illustrate this point, let us consider a consumer who is currently considering a personal loan to finance some renovations to his or her home. That consumer initially considers a $5000 loan from the Commonwealth Bank and so is presented with the following two options: Loan 1 Commonwealth Bank unsecured fixed loan - rate 12.7% fixed, no fees and charges apply - true cost of credit 12.7%. Loan 2 Commonwealth Bank secured variable rate loan - $300 establishment fee, $8 monthly account-keeping fee, 6.8% - true cost of credit 14.57%. However, if the consumer decides that $5000 is an inadequate amount, and now seeks a loan for $15,000, the situation changes: Loan 1 Commonwealth Bank unsecured fixed rate personal loan - 12.7%, no fees and charges apply - true cost of credit 12.7% Loan 2 Commonwealth Bank secured variable rate loan - $300 establishment fee, $8 monthly account-keeping fee, 6.8% - true cost of credit 9.34%. Having considered these options at the Commonwealth Bank, the consumer decides to consider loan options at the National Australia Bank. At this bank the consumer has three loan options that are relevant. The first is an unsecured personal loan at a fixed rate, the second is an unsecured personal loan at a variable rate, and the third is a secured variable rate investment-housing loan. Again, the consumer‟s preference is for the term of the loan to be three years with payments to be made monthly. Option 1 - $5000 loan Loan 1 National Australia Bank variable rate personal loan - interest rate 13%, establishment fee $100 - true cost of credit 14.42%. Loan 2 National Australia Bank fixed rate personal loan - 11.5%, $100 establishment fee true cost of credit 12.91%. Option 2 - $10,000 loan Loan 1 National Australia Bank variable rate personal loan - interest rate 13%, establishment fee $100 - true cost of credit 13.7%. Loan 2 National Australia Bank fixed rate personal loan - 11.5% fixed, $100 establishment fee - true cost of credit 12.2%. Option 3 - $15,000 loan At this point, the consumer considers the possibility of a secured loan at the bank‟s owner-occupier rate. The establishment fee is $600 with a $5 monthly account-keeping fee and an interest rate of 6.7% - true cost of credit 10.215%. The above example illustrates the number of choices a consumer must make when determining which loan product to enter into. These choices include:   Determining which product has the lowest overall cost of credit, Whether to enter into a fixed rate loan or a variable rate loan, and the level of interest rate trade off between these different type of facilities that is appropriate for their situation, ie. is it better to enter into a contract with a slightly higher interest rate which is fixed rather than a contract at a lower rate which is variable, Is it better to enter into a contract with a lower up-front fee but a conversely slightly higher interest rate or vice versa.  In this environment of product diversity, it can be seen that it is easy for consumers to be distracted by the large number of choices and decisions they have to make. As such, it is important to make disclosure of essential information as readily accessible as possible. As such, the failure of the Code to provide a comparison rate significantly limits the ability of consumers to make appropriate choices, and so inhibits competition. Indeed, it is interesting to note that it is in the area of credit cards and personal loans that there is relatively poor competition on price. It is these products where fees have the most effect on the understatement of the interest rate. As seen from the above examples, fees and charges can effect a personal loan by 2% - 4%. On housing loans interest rates are more comparable as fees will usually have an impact of up to 1%. As a matter of mathematical fact, a comparability rate can be calculated in relation to any credit contract. We concede that in relation to open-end credit contracts, a number of assumptions must be made and this does create greater complexity. However, in relation to housing loan and personal loan products, the calculation of a comparison rate is relatively simple. Indeed, it should be pointed out that all information required to calculate the comparison rate is contained in the current Consumer Credit Code disclosures. We would further point out that the vast majority of lenders now calculate interest rates for disclosure purposes by way of computer. This has occurred for two reasons. First, the impact of civil penalties over the last decade has made it cost effective for credit providers to place resources into ensuring compliance, and one of the best ways of doing this is to centralise documentation creation. Second, the advent of ongoing fees and charges, such as monthly account-keeping charges, means that it is no longer possible to calculate the interest rate on a contract by way of rate charts or financial calculators. Where the interest rate is calculated by way of a computer program, then that program can be altered to also calculate a comparison rate. Essentially, the computer program recalculates the interest rate on the basis of treating the fees and charges payable under the contract as additional sums of interest charge. A further argument against a comparison rate is that it is difficult to calculate it as one is unaware of what fees and charges will apply to a credit contract. This problem has already been dealt with by the Code. Under the Code, the total amount of credit fees and charges that must be disclosed as payable under the contract, are those credit fees and charges that will arise during the life of the contract, based upon the assumption that the consumer will make the contractual repayments, and the contract will operate on a „no change basis‟. These assumptions are perfectly acceptable for the calculation of a comparison rate, in the same way as they are perfectly acceptable for the calculation of the interest rate. Division 2 & 3 of Part 2 - Interest Calculation & Financial Obligations The provisions of Divisions 2 and 3 of Part 2 are vital to ensuring both consumer welfare and fair competition in the credit market. These provisions deal with, inter-alia, the allowable methods by which credit providers can calculate interest including the manner in which interest is debited to accounts and the way in which the account balances are kept. One would be excused for thinking that the method of calculating interest rates would be a relatively minor issue in the year 2000 but recent experience suggests otherwise. As the Malbon report stated, it was not so long ago in the recent past that it was difficult to compare interest rates due to the differing ways of calculating interest rates, ie. flat rates, nominal rates, effective rates. More significantly, credit providers have, until the introduction of the Consumer Credit Code, used a number of mechanisms which build hidden costs into credit contracts based around the method by which the account balance is calculated for application of the interest rate. This issue is best illustrated by a case study. Annexure 12 contains a credit contract entered into by Ms M with Nissan Finance Corporation on 27 march 1996. Under the terms of the contract Ms M was to repay the loan amount at 12.75% per annum by way of 60 monthly repayments of $356.60. At the time Ms M entered into the contract she hoped that she might be able to pay the loan off more quickly and was told by the car dealer (the loan contract was entered into a car yard to finance a vehicle purchase) that this was possible. In fact, Nissan Finance Corporation calculated interest on an assumed balance basis and only provided a rebate for unaccrued interest (based on the Rule of 78 method) once the loan had been fully paid out. Under the situation any payments in excess of the contractual requirement had no effect on the account balance unless they were sufficient to pay the loan out. Ms M made a large number of additional repayments, but under the interest rate calculation method used by Nissan Finance Corporation was almost $2000 worse off than if the interest charge was calculated on the basis of crediting her account with each payment and calculating interest on the “live” balance of the account. The annexure also contains these calculations. There is of course little point in having interest rate disclosure if the rates stated on various contracts are not comparable because of different interest rate calculation methodologies. It is also, in our view, manifestly unfair for credit providers to calculate interest on anything other than “live” balances and to apply anything other than a daily or at worst, monthly rate to a daily or monthly balance. To allow such conduct simply makes the already complex problem of calculating the price of credit even more hazardous for a consumer. It should be noted that the above example is not isolated as prior to the introduction of the Consumer Credit Code, the methodology employed by Nissan Finance Corporation was utilised by most finance companies in Australia. Division 4 of Part 2 - Fees & Charges. Division 4 of Part 2 essentially deals with the disclosure of fees and charges in ensuring that any amount debited to a loan for a third party fee is the actual amount charged by that third party for the fee. The provision was inserted to overcome difficulties that had arisen under the Credit Act 1984 from the decision in Custom Credit Corporation v Gray where court held that a credit contract was not in breach of the law by disclosing, and charging a greater fee for a third party service for provision of a vehicle security register certificate than was actually payable. Clearly, if the market is to be in any way competitive then consumers need to be accurately informed of the cost of any products. As such, the provisions of Division 4 are necessary to ensure such competitiveness. However, the provisions are capable of criticism in that they do not go far enough and require the amount of all fees and charges are accurately disclosed. The failure to correctly disclose, or disclose at all, the existence of fees and charges has been a serious issue in the past. The current Credit Act civil penalty case involving the ANZ Banking Corporation is a case in point as the bank has both failed to disclose and incorrectly disclose the amount of fees and charges on many thousands of credit contracts. Further, the correct disclosure of fees and charges is important given the increasing tendency of credit providers to obtain their return on amounts lent through fees and charges. As discussed previously, the use of fees and charges can significantly affect the comparison rate on personal loans and so the failure to require accurate disclosure of such items will diminish the ability of consumers to make rational informed decisions. Division 5 of Part 2 - Statements of Account The public benefit of the statement of account provisions of the Code should not be under estimated. We note that the issue paper appears to discuss the role of statements of account as providing the debtor with information about the activity on the account during the statement period, and repeat certain information set out in the pre-contractual statement and contract document, including the annual percentage rate. While this is undoubtedly true, the role of the statement of account is more important than this and provides a pivotal role in ensuring competition. Unlike most other products, credit contracts are unique in that the price of the service can be, and often is, subject to constant variation. One unfortunate consequence, albeit an understandable one, of the doctrine of truth in lending has been that both policy makers and consumers are very much focused on the provision of information at the time of contract entry. The Consumer Credit Code, and before it the terms and conditions of most bank credit contracts, allows the credit provider to vary at will both the interest rate and indeed all other pricing information concerning the loan. Under the Code the debtor is not provided with real notice of any such changes at the time they take place. The Code simply provides that the credit provider must place a notice in a daily newspaper at the time of the change. There can be little conjecture that consumers are unaware of such notices and the relevance to their credit contract. The principal mechanism by which consumers are notified as to change of interest rates, changes in fees and charges, and the introduction of new fees and charges is through statements of account. In this regard, statements of account provide a pivotal role in ensuring that consumers are notified as to the current state of their loan so as they can make the important decisions as to whether to remain with that lender or whether to switch lenders. It should in this context be borne in mind that competition in this market is not entirely based around contract entry but also upon retaining consumers once they have entered into a product. If this were not the case then there would be no incentive upon a credit provider to remain competitive upon interest rates once an agreement has been reached. Nonetheless, as will be discussed later, the provisions of the Code combine with the operation of the credit market as such that competition policy is not properly implemented in this regard. In the context of statements of account the fact that the Code does not provide for such statements to provide detailed information as to interest rate variations is a great pity. It is important for a consumer to know not only what the interest rate is at the time that they have obtained the statement of account but also to be provided with details concerning interest variations over the previous statement period, in particular, what interest rate was applicable at the time. It is only then that a consumer can appreciate both what they have been charged over that period and the competitiveness of interest rates, as varied, of their credit provider and so determine whether to switch lenders. Questions for Response 3.2.2.1 3.2.2.2 3.2.2.3 Are there any other provisions in Part 4 that impact on competition and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefit of the provisions in Part 4 of the Consumer Credit Code? Are there alternative mechanisms which the objectives of Part 4 of the Consumer Credit Code can be achieved without impacting on competition? Part 4 of the Code is also a critical area with regard to consumer protection and competition factors. It is also an area where, particularly with regard to finance company lending, the greatest degree of deregulation has occurred in recent years and so is a good area in which to examine to the way in which the market operates in a more deregulated environment, and so to assess competition factors in that market. In our view there are some six critical areas in this part: ·Interest rate changes ·Repayment changes ·Credit fee and charge changes ·Reopening of harsh and unconscionable contracts ·Reopening unjust establishment and termination fees ·The ability of the consumer to seek hardship variations Varying the Interest Rate The issue of interest rate variations was touched on in the preceding section. As stated, the Code provides lenders with the great flexibility with regard to interest rate variations, in that the interest rate is able to be varied at will by the credit provider without prior notice. Indeed, apart from the use of a newspaper notice, the credit provider may not give notice to the debtor for some six months until the statement of account is provided. Notably, that statement of account need only provide details of the new annual percentage rate and, pursuant to amendments to the Code, need not provide full details of the change in interest rate, ie. interest rate change from x% to y% on x date. As recent changes in interest rates have shown, it is possible that during that six month period there may be multiple changes in interest rate and this currently causes consumers difficulties. By the time the consumer is notified of the actual changes on their contract the interest rate information is to a large degree historic as it may well be significant increases in interest rates have been applied to the consumer‟s contract for up to six months prior to individual notification. This has two ramifications for consumers. The first is that the consumer‟s decision as to whether to exit from that lender and refinance will be made well after the event and so is likely to add to the inertia of that consumer staying with that credit provider. Second, the consumer is not in a position to readjust their repayment level to continue to obtain the same degree of equity in their loan at the time interest-rate variation takes effect. As will be discussed later, the manner in which termination fees are levied on credit contracts, especially housing loan contracts, makes the choice for a consumer to leave a lender very difficult. The interest rate variation notice provisions add to this difficulty. Such an impact is anti-competitive as it forces competition to be at the entry point of the writing of credit contracts and relaxes the pressure on lenders to compete on rate on existing contracts. Accordingly consumers need to be notified of interest variations in a meaningful way at the time of the interest rate variation. Varying Credit Fees & Charges Another significant change is that credit providers are now able to vary both the amount and type of credit fees and charges payable with respect to a loan contract. In particular, a credit provider is able to introduce new fees and charges after the point of contract entry. This is significant as the entire pricing situation upon which the consumer made a rational decision to enter into the contract can be altered after they have entered into the contract without their consent. The impact of early termination penalties for ending the contract may make it uneconomical for the consumer to refinance the loan and so to a considerable degree the consumer can become captive to changes in credit fees and charges with no real remedy. Of course, the ability to vary both credit fees and charges and interest rates allows unscrupulous credit providers to bait consumers into a credit contract by the promise of low fees and charges and a low interest rate and then to vary these costs once the consumer has “signed up”. In the relatively short time that the Credit Code has been in operation we have already seen some examples of where lenders have taken advantage of the variation provisions to significantly change the terms of the contract that was agreed with the borrower. A relatively recent example, contained in Annexure 13, is a Letter of Variation by Toyota Finance to all its customers introducing the range of new fees and charges. Significantly, Toyota Finance introduced a default rate set at 2% above the annual percentage rate. In no other area of commerce is a party to a contract permitted to fundamentally vary the consideration agreed to for entering into a contract. This is different to varying an interest rate which can be characterised as adjusting the price of credit to keep it at a consistent level depending on economic changes. We view such a practice as anti-competitive and the Code needs to strike a better balance between the ability of a credit provider to vary the contract and the need for a consumer to be able to rely upon the bargain they have struck. As seen below, the option of the consumer simply “leaving” the contract upon an unfair variation may be limited by an early termination clause. Unjust Establishment Fees The significant area of change under the Consumer Credit Code when compared to the Credit Act has been the ability of lenders to charge an establishment fee on personal loans. The ability to charge this fee is essentially unfettered save for the one protection that a consumer is allowed to challenge such a fee as unjust where that fee exceeds the lender‟s actual or average cost of establishing that loan. The policy behind this provision is to allow product flexibility for lenders whilst ensuring that the fee charged is the actual establishment cost and so avoiding lenders artificially lowering their interest rate by moving interest costs into the establishment fee. Consideration of recent changes to the charging of establishment fees by credit providers raises serious issues as to both the operation of the market and the effectiveness of the Code to prevent such conduct. The table below compares the establishment costs amongst major personal loan lenders. Institution Adelaide Bank ANZ Bank Australia Central C/U Bank of Melbourne Bankwest Bendigo Bank Challenge Bank Commonwealth Bank Community First C/U CPS Credit Union (SA) Illawara C/U (NSW) Illawara Mutual B. Soc. Establishment Fee October 98 125 100 80 100 0 100 0 0 40 50 30 75 135 125 110 150 95 120 150 99 100 65 100 100 Establishment Fe Two features are immediately able to be noted from the above table. First, the surprisingly wide range of price of establishment fees, which vary from $50 to $150. Given that the fee is meant to be based around the actual cost of establishing a facility one would have expected such costs to be similar between lenders and so establishment fees would cluster around a fixed pricing point. Second, that most lenders have taken the opportunity to “unbundle” their annual percentage rate and charge a separate establishment fee. As discussed previously, this has had the effect on the market of making cost comparability more difficult for consumers. This is particularly the case given the broad range in the cost of establishment fees. However, most surprisingly is the way in which lenders have increased the amount of establishment fees over a relatively short period. For example, ANZ Bank has increased its establishment fee by $25 in under 18 months. Similarly, Australian Central Credit Union has increased its fee from $90 to $110 in the same period. As is apparent from the above Table, a significant proportion of lenders have significantly increased the amount of their establishment fees in this 18-month period. It is difficult to see that in the past 18 months that the cost of establishing personal loans should have increased significantly and one is left with the conclusion that in the personal loan market there has been a marked trend towards increasing fees. Notably, no case has been run under the unjust establishment fee provisions of the Consumer Credit Code. In light of this one must question whether further measures are required to ensure that the pricing of credit products is comparable, and that establishment costs are not used as a measure to increase profitability of the product. As seen earlier, where one is dealing with non mainstream lenders, the capacity to charge upfront fees is capable of considerable exploitation and this continues to occur. At Annexure 3, which has been previously referred to, is a copy of a Bailey O‟Neill contract where the amount of credit is $10,000 but the upfront fees total $1,950. Notably, amongst these fees is a $350 establishment fee and a $1000 procreation fee payable to Bailey O‟Neill. The effect of these fees is to increase the stated annual percentage rate of 12% to an effective comparison rate of 35%! As such, the operation of establishment fee provisions is not in itself anti-competitive but has failed to adequately redress the anti-competitive movements of the market with respect to establishment fees and limiting them to proper establishment costs so that price comparison remains effective because of consumers. Nonetheless we would submit that the provision should remain as it is of some assistance in ensuring competition, but additional measures are required. Unjust Termination Fees Similarly, with termination fees, the developments in recent times have had the effect of locking consumers into loan contracts by the charging of penalties rather than proper early termination fees. In this regard the comments made at pages 16 and 17 concerning termination fees and the Rule of 78 are repeated here. Such practices are anticompetitive, and the provisions of the Code dealing with such unjust fees are a response to such practices and an attempt to restore competition, whilst also providing individual consumers with redress for such unfair practices. Indeed, some lenders such as Capital Finance‟s more recent form of contract attempt to obtain the best of both worlds in that a flat termination fee is charged plus an amount calculated by the Rule of 78 formula is also used to calculate the all-up termination fee for a consumer exiting the contract. Notably, in both the cases of the Capital Finance contracts and in virtually all finance contracts where the Rule of 78 is utilised, the application of the termination fee is not dependent upon whether interest rates have decreased over the relevant period. The termination fee is payable in all circumstances including where rates have increased and notionally the early termination fee should be being paid by the lender to the consumer. Perhaps the most disquiet occurs where a termination fee is payable where the loan is discharged in consideration of that consumer entering into a further refinance contract with the same lender at a higher rate. In the housing loan area, the amount of early termination fees is very considerable and will have a great impact in locking a consumer into a lender, even where that lender has ceased to be competitive due to interest rate rises. For example, consumer A enters into a home mortgage with Bank B, which can be summarised as follows: Amount Borrowed $100,000 Interest Rate Monthly Repayments Term 6.5% $675.21 25yrs The interest rate of 6.5% is fixed for the first five years. At the time the consumer entered into the mortgage the bank‟s wholesale interest rate was 5.5%. After 12 months, consumer A wishes to pay out their mortgage and enter into a new mortgage arrangement with a different credit provider. At this time interest rates have dropped 2% since consumer A entered into the mortgage. If the early termination fee is calculated by estimating the present value of the credit providers loss (a common method) then consumer A would be liable for a prepayment penalty of $7071.45. It would be a brave consumer to pay such a fee to move to a lender with more competitive rates, given that the new lender may be able to change the rate at will. Notably, in the area of housing lending, most credit providers do not provide a benefit to the consumer where they terminate early and interest rates have increased. The early termination clause normally only operates where interest rates have fallen and accordingly an amount is payable by the consumer to the lender. Again, as with establishment fees, there is nothing anti-competitive in the unjust early termination fee provisions of the Code, more relevant is whether those provisions will be capable of addressing the anti-competitive features illustrated above. Reopening Unjust Credit Contracts Finally, we note the reference in the Issues paper to Section 70 and the ability of the consumer to reopen the credit contract, guarantee or mortgage on the basis that, at the time it was entered or changed, the contract mortgage or guarantee was unjust. As has been discussed earlier, the Code allows credit providers a very broad capacity to change credit contracts, and indeed to structure the type of credit contract the consumer enters into. This provision provides a safeguard against abuse of that broad regulatory regime. In general terms it is difficult to see how such a provision could operate in an anticompetitive mechanism as it will only strike down unjust arrangements and presumably the market should not be encouraging competition based around unjust conduct. The only area where an issue might arise is with respect to Section 70 (2)(l), the over commitment provision. We note the issue raised in the discussion paper as to whether or not the over-commitment provision has exacerbated the effect of pushing low income consumers away from available credit from banks to more high interest rate lenders such as finance companies and fringe lenders. We acknowledge that this is a reasonable concern, but have little evidence that this is the case. In any event, we would submit that this should not be the case if the provision is properly utilised. If the consumer is being placed in a position where the credit contract being sought would lead to an overcommitment situation or perhaps even more importantly, an asset lending situation, then the credit should not be provided - whether it be by way of a low interest rate lender or a high interest rate lender. Hardship Variations Finally, we note the reference to possible anti-competitive impacts of the hardship variation provisions of the Code. We find the inclusion of this provision in this context somewhat surprising, as its actual application in the marketplace has been virtually nil as was the case with its predecessor under the Credit Act. In the majority of cases the lender and the consumer deal directly with each other and endeavour to reach a compromise over hardship variation. The experience has been that many lenders are sympathetic to such hardship situations with debtors, where the debtor is able to “trade out” of their difficulty. Indeed, we are unaware of any situation where a debtor has made an application to a court or tribunal that has gone to hearing with respect to the hardship variation provisions of either the Code or the preceding Credit Act. As such, it is difficult to say that the provision has imposed any cost upon credit providers. Questions for Response 3.2.3.1 3.2.3.2 3.2.3.3 Are there any other provisions in Part 5 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 5 of the Consumer Credit Code? Are there alternative mechanisms which the objectives of Part 5 of the Consumer Credit Code can be achieved without impacting on competition? The enforcement provisions of the Consumer Credit Code are modelled on various repossession and enforcement provisions that have existed in various forms of credit law for some 50 years. The basic premise of these provisions is that consumers who falls into default should be given a short period in which to get their affairs in order so as prior to enforcement action being taken, but once enforcement action occurs, the cost to consumers escalates rapidly through the fact that considerable enforcement expenses occur and the dispute becomes difficult to unravel. As such there is a significant public benefit in the provisions. With respect to the provisions raised in the discussion paper we respond as follows: Section 76 - Statement of pay out figures The importance of this provision is often understated. First, to understand its operation one must consider the preceding provision section 75 which allows a consumer the right to pay out their credit contract early without a penalty (as opposed to a legitimate early termination fee). It was not that many years ago that many credit providers did not allow a right of early termination under a credit contract and so the consumer was required to pay either the full amount of the contract out or incurred a substantial penalty. Indeed, in some segments of the market this remains the case. Annexure 6 contains a standard form Victorian Law Institute Mortgage and it will be noted that no right of early repayment exists under this mortgage. Section 76 extends the protection for consumers with respect to early repayment. It is not only important for a consumer to have a right to early repayment but to be able to actually exercise that in an informed manner. To do that, a consumer needs to be able to check the calculations of the credit provider to ensure that the method of calculating the pay out figure is correct. Earlier references was made to the complex mechanisms by which early termination fees are now calculated by credit providers, and if consumers are to have any capacity to make a meaningful decision about early repayment they need to be able to obtain a statement of the early termination penalty. The most convenient and sensible way for this to occur is through a pay out figure. If such a pay out figure was not provided in itemised form, then consumers would simply be unable to calculate whether the early termination fee both complied with the credit contract and was fair in accordance with the principles established under the Code. Past experience of consumers paying out credit contracts has shown that credit providers often incorrectly calculate the pay out figure in systematic ways. The most prevalent difficulty in this area is the failure of credit providers to include a rebate for the unexpired portion of a consumer credit insurance premium when the contract is terminated. For example, the ANZ Bank routinely failed to provide such a rebate for the period 1985 through to 1997. Sample documentation illustrating the ANZ error is included in Annexure 14. A further example of the problem was the incorrect calculation of interest rebates under the Credit Act 1984, see Anderson v HFC Financial Services Ltd. Section 80 - Default Notice Clearly there is a cost in providing debtors with a Notice of Default as required by Section 80. However, the public benefit attached to prior notice before enforcement action or repossession occurs is considerable. That notice has two potential positive effects. The first, debtors who are in arrears are given the opportunity to get their account in order and so avoid the personal and financial difficulties associated with enforcement action. It is our understanding from scrupulous lenders that enforcement action is not particularly cost effective for credit providers and so preferably avoided. Of course, some credit providers, particularly those closely associated with some solicitors have found enforcement proceedings to be a profitable process through the revenue generated by high enforcement expenses. It should be noted that in the Bailey O‟Neill example provided Annexure 3 that various enforcement fees which are stated to be late payment penalties are included in the Mortgage Terms and Conditions. The amount of those penalties is stated below. Amount overdue $0 - $300 301 - 500 501 - 1,000 1,001 - 1,500 1,501 - 2,000 2,001 Late Fee $100 per month $200 per month $300 per month $400 per month $600 per month $1000 per month Of course, not all enforcement action occurs due to default by a consumer. Sometimes credit providers make mistakes with regard to the calculation of consumer‟s liabilities and default notices are of considerable assistance in this context. First, it provides an opportunity for the consumer to notify the credit provider that there is a dispute about the amount that has been paid, and second, if there is a subsequent dispute about that enforcement action, it allows the consumer to show the basis upon enforcement action was taken by the credit provider. An example of this occurred with respect to a dispute by a consumer of this service with RACV Finance. That consumer had purchased a motor vehicle on finance by RACV Finance and had generally kept the account up to date, although the consumer had clearly struggled to meet repayments exactly on time. The consumer moved to Queensland and was finding difficulty physically getting payments to RACV Finance in Victoria. Accordingly, after discussions between the credit provider and the consumer a direct debit facility was established. Unfortunately, for reasons that have never been clearly established, this direct debit facility was set up incorrectly and the consumer‟s payments were credited to an internal administrative account within RACV. The consumer returned to Victoria and the day after their arrival in Victoria the vehicle was repossessed. At the time the repossession occurred the consumer was some $35 in arrears under the contract, although according to the default notice, when it eventually caught up with the consumer, the amount stated to be in arrears was well in excess of $1000. The default notice was important in negotiating a settlement of the dispute with RACV Finance which initially took the view that it had taken enforcement action because the consumer had moved interstate without informing them (which was denied by the consumer) and because the account was in default by $35. The default notice then became clear evidence that in fact the real reason that enforcement had taken place was due to the mistaken belief of the credit provider that the account was in serious arrears. It is also important to note that when considering the enforcement provisions such as Section 80, Section 94 and Section 96, that the costs associated with enforcement are a legitimate amount able to be claimed from the proceeds of sale of any property taken to satisfy the debt. Finally, we would make one criticism of Section 80 default notices. The form of termination notices under the Consumer Credit Code is far more vague than under the Credit Act. These notices tend to state that unless the consumer rectifies the default within 30 days, then „enforcement proceedings may occur‟. In fact, the situation is that the debtor is being notified that unless they rectify the default within 30 days, repossession will occur. Many consumers do not realise that the enforcement notice was in effect a repossession notice, and so failed to recognise that they were now in a serious legal position. Indeed, a consumer could be forgiven for misinterpreting the phrase „enforcement action may be taken‟, as referring to the fact that the next step will be the serving of a repossession notice! Surely, where goods are going to be seized without further notice, then the enforcement notice should make this fact plain. Sections 94 and 96 - Procedure for Selling Mortgaged Goods When considering these provisions it should be pointed out that they only apply to the repossession of goods and do not have application to the seizure and sale of real estate. Again, the public benefit of these provisions would appear to be obvious. Once a vehicle has been repossessed it is then very important for a consumer to make an informed decision as to how they intend to proceed. There is little doubt that despite considerable progress that has been made the price of a vehicle sold on repossession is significantly lower than the retail price. For example, one consumer purchased a Daewoo motor vehicle on finance from Esanda for $17,797.00 (the vehicle was overpriced and probably worth about $13,000) in December 1997. The vehicle was surrendered by the consumer to Esanda and sold for $4,600 in August 1999. Ensuring that consumers are given an approximate value of the products expected to be obtained on sale of the goods allows the consumer to make the decision (apart from when they are actually able to redeem the goods) as to whether to allow the sale to proceed or whether to try and introduce a buyer at a higher price and so lower the loss arising to all parties from the sale. Similarly, those provisions that arise once the sale of repossessed goods have taken place ensures that the credit provider acts appropriately in accounting to the borrower for the proceeds of sale. The concept of a mortgagee who sells property accounting for the sale proceeds is a very old one. The reason for it is the principle that the seizure and sale of mortgage property should only arise in the context of the proceeds of those goods being properly utilised in diminution of the loan debt. Therefore, the credit provider should calculate the amount owed and then itemise the various amounts realised from the sale with respect to that debt, including various enforcement expenses. As is seen in relation to the pawnbroking transaction included in Annexure 2, there has been an increase in the failure to account for the proceeds of sale, whereby the pawnbroker does not apply the sale proceeds in diminution of the debt, but simply pockets the proceeds. Finally, we cannot leave the enforcement provisions of the Code without commenting on the continued failure of credit regulation to deal with the issue of harassment of consumers in relation to the enforcement of credit contracts. As has already been stated in this submission, it has been of grave concern that a number of the poorer practices of the past seem to have come back into vogue since the commencement of the Code. Over the past year or so, harassment has become a major issue in relation to consumer credit. Perhaps as many as one third of all phone calls received by Credit Helpline Victoria relate to complaints about harassment. The various forms of harassment fall into two distinct categories. First, the overuse of collection activity without reference to the cost being generated by such activity. There has been significant increase in recent times of financiers sending out collection agents to the home of consumers, who are not seriously in arrears. These collection agents ostensibly arrive to repossess the vehicle, but in fact make no reference to the fact of a repossession when arriving, and really, just have a general discussion with the consumer that their payments are a little behind. The difficulty for the consumer is that they then later discover that a sum of $200 or so has been debited to their account as a collection cost relating to this visit. The second, and in our view, more significant problem, relates to the various collection activities of credit providers. In recent times we have seen the revival of practices such as:  Using documents and/or practices that are purported to have court based authority, when they do not. An example of this is a recent practice of St. George Bank sending out agents to conduct „oral examinations‟. An oral examination in the strict legal sense is a court process whereby the consumer is required to provide information, much of it confidential, to enable the court to determine the debtor‟s financial situation. The expression „oral examination‟ is a very old one, and is associated by many debtors with a court process. Annexure 15 contains an example of a letter sent by St. George to a debtor with respect to one of these „oral examinations‟. Informing friends and relatives of the fact that a debtor is in arrears with payments. that their failure to make payments is a criminal offence.   The difficulty for consumers in complaining about harassment is twofold. First, general legislation that prohibits harassment fails to specify what activities constitute harassment and so considerable uncertainty arises. Second, there is little incentive for a consumer to complain about harassment as a finding of harassment does not in any way affect the debtor‟s liability under the contract. One approach taken to overcome these difficulties was proposed by the Victorian Debt Collection Bill 1989. The Bill specifies various forms of conduct that constitute harassment (Part 3), and that an award of up to $1,000 could be made to a consumer for humiliation or distress if the debt collector was convicted of harassment (clause 79). . Questions for Response 3.2.4.1 3.2.4.2 3.2.4.3 Are there any other provisions in Part 6 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 6 of the Consumer Credit Code? Are there alternative mechanisms in which the objectives of Part 6 of the Consumer Credit Code can be achieved without impacting on competition? Consumer groups continue to strongly support the role of civil penalties under the Code. The central policy premise of the Code, and most preceding consumer credit laws, is truth in lending. The experience of the last 10 years has shown that civil penalties have been fundamental to ensuring that credit providers operate within a “compliance culture” whereby credit contract provide accurate disclosure in accordance with the Code. As such civil penalties are a significant factor in assisting competition in the credit market. This is consistent with the policy objective originally stated by the Molomby Committee, and accords with the views of the Saskatchewan Law Reform Commission in it‟s review of the regulation of consumer credit. : „Too often the funding for consumer protection programs is viewed as “fat”, to be trimmed from public expenditures in the time of restraint. Enforcement of consumer rights should not depend solely on the availability of government funding. Another, which has induced the Commission to recommend the retention of the private enforcement system, is the fear that public administrators responsible for enforcement of consumer rights may not always act in the interest of consumers. In some situations regulators become „captured‟ by the very people that they are to oversee. This can result from factors other than neglect of duty on the part of the regulator. For example, the person regulated may have more expertise than the regulator and therefore can influence his decision on technical matters. The complex nature of the consumer credit market may produce this result. Further, public enforcement measures focus heavily on prevention and are not generally designed to obtain redress or compensation for aggrieved consumers‟. If one considers the past decade three points become apparent: Ÿ Enforcement action via prosecutions under the Credit Act, and more recently the Code have been virtually non-existent. We are unaware of one prosecution against any credit provider, other than fringe providers. Ÿ In the field of civil penalties, experience has shown that the vast majority of civil penalty cases are brought by non-government bodies, such as Consumer Credit Legal Services, or by credit providers. The latter circumstance arises due to the nature of the civil penalty regime, and is most unlikely to occur under other enforcement regimes. Ÿ The impact of civil penalties has had a major effect in ensuring that credit providers place appropriate resources into ensuring credit contracts provide accurate disclosure. We are aware that AGC, Westpac and HFC put in major compliance programs to ensure proper contractual disclosure immediately after major civil penalty issues arose. The reason for this, as the Molomby Committee predicted, was that it had become a financial necessity to comply with the law. It was not always so. During the 1980‟s the standard of disclosure on credit contracts was poor. On occasions the credit contract would be virtually blank, and regularly fees and charges were not disclosed. An example of this is annexure 16 which contains an ANZ credit contract entered into in 1987. The contract doesn't disclose the total amount payable and fails to state the interest charge ( the $10,000 figure is obviously a repeat of the amount financed). Notably the credit provider, as is now the case with most, now utilises a computer written contract system and such errors no longer occur. Three further points should be made as to the role of civil penalties: ŸIt is often argued by industry that civil penalties are anti-competitive as no other industry is subject to such penalties. This argument is incorrect, other industries are subject to civil penalties. A good example is the regulatory regime put in place by the Regulator-General with respect to utilities in Victoria. For example, if a water supplier fails to ensure that the performance standard on interruption of a consumers water supply is breached, then it must pay a civil fine to the consumer by way of refund. ŸIt is often said, as is the case in the Issues Paper, that consumers can obtain compensation for disclosure errors, and that a better penalty method would be to allow consumers to make claims where consumers have suffered loss as a result of a disclosure error. Such a position fails to understand the legal effect of nondisclosure. As a matter of law nondisclosure will rarely result in a right to compensation. Take for example a credit contract that fails to state the interest rate. In most personal loan contracts the consumers contractual obligation is to make the stated repayments. The interest rate is often only a required government disclosure, and it‟s absence does not effect the consumers liability. Similarly, if the rate was incorrectly stated, say 3% instead of 13%, the consumer would probably not be able to sue the credit provider for compensation under the contract, or for false and misleading conduct. There are two reasons for this. First the consumer would be unlikely to be able to show it could have got such cheap credit and so technically suffered no damage (see the High Court decision in Marks & Ors. v GIO (1998) ATPR 41-665 on similar facts to this example). Second, many consumers will struggle to prove that they relied on the interest rate and would have gone elsewhere if the correct disclosure was made - bearing in mind the burden of proof is on the consumer ( see the discussion in Stan Cusak v Director of Consumer Affairs (ACT) where the credit provider was charging between 34% - 36% but disclosing a flat rate of 18%. The ACT Tribunal was not prepared to look at potential losses caused by the nondisclosure.) ŸFinally, the Issues Paper refers to recent decisions under the Code on civil penalties and suggests that the costs associated with such applications are disproportionate to the penalty applied. There are two responses to this. First, the decisions in Suncorp-Metway and Macquarie Credit Union are both reported and it appears from the decisions that the costs were taken into account and treated as the penalty. Second, the level of legal costs incurred in civil penalty applications is often less a function of the civil penalty regime and more related to the credit providers, and their lawyers, approach to the litigation. In both Suncorp-Metway and Macquarie Credit Union the credit providers engaged Queens Counsel who usually charge in excess of $4,000 a day. In assessing the costs of these applications one must consider the reasonableness of the legal costs - and if the errors were minor then large legal costs may be an indication of competition factors in the legal profession! Nonetheless the above should not be taken as unqualified support for the current civil penalty regime. In our view the regime is less effective than might be the case. Two central criticisms arise. First, it seems extraordinary that two of the most important disclosure requirements for consumers do not attract civil penalties under the Code. It is plain that many consumers rely heavily on repayment details when determining whether to enter into a credit contract. As such, the requirement to disclose details of repayments pursuant to Section 15(F) of the Code should carry a civil penalty. Similarly, the requirement to disclose insurance commissions pursuant to Section 15 (N) should also be prescribed as a key requirement. Indeed, both the Supreme Courts of New South Wales and Victoria have affirmed the view that disclosure of insurance commission is a vital consumer protection. The failure of the Code to prescribe disclosure of insurance commission as a key requirement has made it possible for credit providers to avoid commission disclosure by relying upon the concept that the disclosure is unascertainable. They are able to do this in the knowledge that no effective enforcement action is likely to occur given that the breach is difficult to prove and correspondingly uneconomical to pursue. The second, and perhaps more significant problem with the current civil penalty regime arises from the fact that where a credit provider makes an application for determination of civil penalty, then any penalty resulting from that application must be paid to a Consumer Credit Fund, and cannot be paid to effected debtors. Two effects flow from this regime. First, where an organisation such as Consumer Credit Legal Service becomes aware of a disclosure problem with a credit problem, it must, in accordance with its duty to its client, do nothing to alert the credit provider as to that disclosure error, until it has either instituted proceedings on behalf of its client, or negotiated an appropriate settlement. If the service were to take a „systemic approach‟ to the error, then there is the risk that the credit provider will institute proceedings first and therefore the Legal Service's action will have resulted in its client losing their right to an interest penalty. The effect of these regimes is that consumer advocates are now no longer able to raise disclosure problems with credit providers in the informal way that previously occurred, as they are effectively required to take a litigious approach. Further, as a consequence of this regime, it is arguable that Consumer Credit Legal Services, and other public interest litigators will no longer be involved in systemic civil penalty applications. The reason for this is that either it will be determined that they have no right of appearance, or, even if this is not the case, there is likely to be little point in their involvement, given the fact that the debtors they represent in those proceedings will not be eligible for any penalty under those proceedings. The net effect of this is that civil penalty issues have returned to a contract by contract argument and so the prospect of credit providers being forced to bring proceedings in relation to systemic problems significantly decrease. Indeed, we are aware of one major bank whose approach in relation to a serious systemic disclosure breach has been to contact the consumers involved, and ask them to return to their branches to sign new loan contracts that correct the error previously made - the error is in fact a significant discrepancy in the amount of repayments stated under the contract. The approach likely to be taken with this particular error is that cases will be raised with the bank on a one off basis as this is the only basis upon which consumer benefit can be obtained by the consumer advocates involved. There is little point, from a consumer benefit basis compared to a public enforcement basis, to force the bank to bring a civil penalty application as the only beneficiary of such an application will be government Consumer Credit Funds. This difficulty is able to be overcome by a relatively minor change to the structure of the civil penalty provisions. If the court, where a civil penalty application is brought by the credit provider or Consumer Affairs, had a discretion to award a penalty to either a Consumer Credit Fund or to debtors, then there would be some incentive for debtors to appear in these proceedings and the above problems would be overcome. Indeed, this is what has occurred in past cases where large awards have been made to Consumer Credit Funds. In these cases, such as Westpac Banking Corp. v Various Respondents, those debtors who appeared ( a small number) received refunds and a substantial award was made to the Fund. This approach was part of the civil penalty proposal put forward by Consumer Credit Legal Service (Vic) which formed the basis for the current provisions. This change could be easily made by replacing the word "must" with "may" in S.106 of the Code. Questions for Response 3.2.5.1 3.2.5.2 3.2.5.3 Are there any other provisions in Part 7 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 7 of the Consumer Credit Code? Are there alternative mechanisms which the objectives of Part 7 of the Consumer Credit Code can be achieved without impacting on the competition? In considering Part 7 and the regulation of related sale contracts with respect to consumer credit it is important to bear in mind the context of point of sale credit transactions. This area was subject to particular criticism in the Malbon Report and was additionally an area that London Economics cited as being likely to suffer consumer detriment due to imperfect information. The Malbon studies show that in this area consumers significantly shop around less whilst both studies also commented on the likelihood of commission arrangements causing consumers to be improperly informed by sales persons as to product features. As part of this process it should be remembered that of course credit is often a secondary purchase and so does not receive the level of attention that it should by the consumer. Similarly, the transaction is one which is often a bundle of several purchases being a car, credit and insurance and this of course all mitigates against consumers using information in a proper way to shop around to make informed choices. As a consequence of this, linked credit has been at high interest rates and has been a major area of consumer dispute. Tied Suppliers In this context, Section 118 of the Code, which places liability upon the credit provider for misrepresentations by the supplier about the credit contract is an important provision in endeavouring to redress the anti-competitive features referred to above. The effect of Section 118 is to equate the position of a tied supplier with that of an employee of the credit supplier, and this is appropriate. A credit provider should be no less liable for the misleading information provided by a tied supplier, particularly where that tied supplier is being paid on commission from the credit provider, than if the misrepresentation were made by an employee. Previously, the law drew an artificial distinction in this regard; see Customer Credit Corporation v Lynch. If Section 118 did not exist, then there would be an even greater lowering of competition at point of sale as credit providers would be at an advantage in selling through suppliers as their liability for unjust behaviour would be reduced. As it is, section 118 needs to be amended to make it fully effective. As currently drafted, section 118 only makes the credit provider liable for misrepresentations of a tied supplier - it does not make the supplier the agent of the credit provider with respect to the credit contract, which would be the case with an employee. Therefore if the consumer informs the supplier of relevant information when entering into the credit contract, the consumer cannot rely on that conversation in a later dispute with the credit provider. Discharge of Tied Contracts Sections 124 to 129 effectively allow a consumer to unbundle a tied credit contract where the related sale contract has been terminated or discharged in some way. The provision is reflective of the way in which credit and credit related products, such as insurance are part of a bundle of products forming the one transaction, which has been brought about due to the tied relationship that credit providers establish with suppliers. In this regard, where any loss arises to a credit provider, it should be noted that the credit provider will have recourse against the supplier under the provisions of the trade or tie agreement. However, one anti-competitive aspect of the current provisions is that they only apply where the tied contract relates to goods or services and the provisions do not apply where there is a supply of land ie. a housing purchase contract. Such a distinction appears artificial. Linked Credit Providers The third set of provisions making up Part 7 of the Code relate to the liability of credit providers as linked credit providers. These provisions are appropriate in the current market as they reflect the commercial reality that: 1. The provision of credit by a major financier to a supplier creates the impression in the minds of consumers that they are not dealing with a fly by night trader but a solvent ethical supplier, and 2. That credit providers are the only persons likely to be in a position to be aware of the ethical trading standards and solvency of a particular supplier. Further, it should be kept in mind that the linked credit provider provisions have had the most application in those cases where the financier and the supplier are related corporations. It is manifestly unfair for a consumer to purchase goods through company A on credit from company B and then not be provided with the goods or services from company A but still be liable to pay company B despite the fact that the two corporations are part of a single business entity. A good example of this was the litigation that arose five years ago in relation to the club resort‟s time share group, where some consumers purchased time shares from Club Resorts on finance through a related corporation and then were pursued by the financier when the timeshare company was liquidated without having built the time share. In this regard, linked credit provider provisions play an important part in ensuring that unscrupulous operators cannot use the distinctions that arise in corporations law to avoid their liabilities with respect to the supply of goods or services. Questions for Response 3.2.6.1 3.2.6.2 3.2.6.3 Are there any other provisions in Part 8 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 8 of the Consumer Credit Code? Are there alternative mechanisms which the objectives of Part 8 of the Consumer Credit Code can be achieved without impacting on the competition? We have already commented upon the anti-competitiveness of commissions. The reforms in the Credit Act went some way to addressing this issue, but were insufficient in that they failed to either cap the amount of commission, or require disclosure of the amount of commission. It was therefore positive to see both initiatives in the Code. However two factors have mitigated against these reforms having real effect First the avoidance of commission disclosure remains widespread. This is able to occur due to the way in which the Code allows disclosure not to be made if an amount is unascertainable. For consumers, or more particularly an advocate acting on their behalf, it is difficult (and very costly) to prove whether or not the amount of commission was ascertainable at the time the contract was entered into. In fact, there is very little point in the consumer advocate pursuing this issue as the failure to disclose insurance commission is no longer a civil penalty and so there is no monetary benefit to the consumer in pursuing this issue. Of course, it may be argued that if the commission is not disclosed then the consumer is entitled to have the amount of the commission subtracted from the premium. However, as the average amount of commission would be in the vicinity of $300, it is uneconomical to pursue such issues. In annexure 17 we enclose three sample disclosures made by credit providers. The first contract („A‟) is an example of the problem. Contract 'B' you will note, discloses that the commission in relation to the consumer Credit Insurance policy with Accident Insurance Mutual, is also unascertainable. However, the dealer obviously was somewhat confused as to whether or not the commission was actually 20%. Apparently they entered this figure and then crossed it out. In fact, it is our understanding that 20% is the commission payable in relation to Accident Insurance Mutual consumer credit insurance policies, and contract 'C' is an example of a contract which finances such a consumer credit insurance policy, and correctly discloses the commission rate as 20%. It is noteworthy that these contracts were written only a couple of months apart. Second, as referred to earlier, some operators have created new “products” such as gap insurance to top up falling commission revenue due to the cap on consumer credit insurance. Further the provisions of the Code preventing “forcing” of insurance are fundamental in attempting to allow consumers some chance to shop around for insurance. We refer to the comments at page 10 concerning the effects of commissions on consumer choice and the resultant high cost of credit related insurance. Finally it is important to recognise these issues as point of sale credit issues, and not insurance issues, which are appropriately dealt with in credit legislation - indeed it would be inappropriate to deal with these issues as part of general insurance regulation. Questions for Response 3.2.7.1 3.2.7.2 3.2.7.3 Are there any other provisions in Part 9 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 9 of the Consumer Credit Code? Are there alternative mechanisms which the objectives of Part 9 of the Consumer Credit Code can be achieved without impacting on the competition? In our view these provisions have failed in creating a competitive market as they have little impact on forcing credit providers to advertise the cost of credit. Advertising is primarily based upon “lifestyle” issues, or non cost features such as reward points. The one limited exception is home loans, and it is notable that this is the area where competition has taken place on price, and translated into cheaper credit for consumers. The issue of canvassing credit also arises here. Products sold to a consumer in their home raise serious competition issues as consumers are vulnerable, as they can‟t just up and leave, and the purchase is more likely to be spontaneously made without the opportunity to shop around for the best deal. Consumer advocates continue to receive complaints of harassment in this area with respect to the sale of products on credit such as home alarms and vacuum cleaners. The product is usually very expensive at credit is at high rates, eg. 25%. Questions for Response 3.2.8.1 3.2.8.2 3.2.8.3 Are there any other provisions in Part 10 that impact on competition, and if so, how do they impact on competition? Is the impact on competition outweighed by the public benefits of the provisions in Part 10 of the Consumer Credit Code? Are there alternative mechanisms which the objectives of Part 10 of the Consumer Credit Code can be achieved without impacting on the competition? The starting principle with leases is that where it is used as a credit product, as opposed to a true lease it should be regulated in the same way. Most importantly pre contractual disclosure is particularly important due to the significant and harsh early termination costs (we understand in some cases the fee is calculated as the vehicle value), and the additional complexity of the transaction. Currently, the level of disclosure is poor on leases and this does not foster competition. Annexure 10 contains an example of the level disclosure on leases. Of particular concern is that in some areas, such as Newcastle, motor vehicle financiers are now utilising leases as an alternative to loan products to finance consumer purchases of motor vehicles. These consumers are unaware that they are leasing the vehicle and believe they are obtaining a loan. Questions for Response 3 3.3.1 Please comment on the extent of these practices in the consumer credit market and any difficulties or distortions they may cause. Please identify other practices which fall outside the code that cause distortions in the consumer credit market. 3.3.3.2 The issues of Solicitor Nominee Lending and Pawnbroking have been dealt with earlier in some detail. We are unable to provide data on the extent of these forms of lending, but can say they are significant and appear to be increasing. Other relevant practices include: “Interest Free” Lenders We agree with suggestions in the Malbon study and the issues paper that “interest free” car loans are a serious issue. The way in which the contract operates is that the price of the goods purchased on terms, often a motor vehicle, is inflated to effectively include a high interest component - but the terms of the agreement state that no interest applies to the agreed purchase price. The nature of the arrangement is in itself anti - competitive as interest is hidden from the consumer in the overpricing of the car. This product gives rise to a range of serious problems including: Ÿthe contract terms are often ambiguous and sometimes even unwritten, creating fundamental problems of contractual uncertainty, Ÿdealers do not often provide copies of documents or statements of account when requested, Ÿenforcement procedures are commonly at will and extremely onerous. Enforcement procedures do not necessarily follow any process of sending notices to defaulting borrowers, or providing time for borrowers to remedy their default. Ÿupon sale of a repossessed vehicle, dealers often do not account to borrowers for the proceeds of the sale, or do not account in such a way that borrowers are advised of any of the particulars of the amount owing at the time of sale, the amount of the sale, and any amounts due to them by the dealer. As such these products exhibit no basic consumer protection features. The problem is easily overcome if the Code were amended to define a charge for credit as arising where goods were sold on terms at a price exceeding their reasonable value. This issue is also not just associated with car loans, but also applies to the sale of whitegoods. Annexure 18 contains a recent article from a local newspaper on the issue. Pay Day Lenders A new group of small-loan, high-interest, fringe money lenders which has, since about the middle of 1999, begun to trade in New South Wales and Queensland. They often go by the names “Pay Day” or “Cheque Exchange” lenders. A central feature of these loans is that the cost of the loan to the borrower is described, not in terms of an annual percentage rate and interest, but in terms of a “fee” which varies depending on the size of the amount borrowed. Loans by these credit providers are created in such a way that they are not regulated, as all other consumer credit is, by the Consumer Credit Code (“the Code”). These loans “utilise” the exemption provided by 7(1) of the Code, by which loans of a length of less than 62 days do not need to comply with the consumer protection requirements of the Code. The s7(1) exemption was never intended to exempt loans of this nature from regulation by the Code. By virtue of the utilisation of this exemption, payday lenders, for example: ·are not required to give borrowers copies of contracts; ·are not required to give borrowers statements of account which detail payments made as loans; ·are not required to issue ANY warning notices before taking possession of any secured property; ·may impose ANY terms or conditions which they want without the contract being subject to scrutiny by the courts through the reopening provisions of the Code (ss.70, 71). This means, for example, that a lender bent on exploiting the poverty and desperation of a low income borrower may impose as large a fee as possible for the loan, without being open to challenge under the Code. ·are not required to describe the cost of credit in terms of an annual percentage rate, thereby enabling borrowers to compare the cost of these loans with other loans. Since commencing operations last year (starting it appears on the Gold Coast and spreading nationwide) they have expanded in size. The fact that these lenders are unregulated by the consumer credit laws (the Fair Trade Practices Act (Cth) 1974 and Fair Trading Act 1989 are vastly inadequate as ”checks” on the conduct of lenders in the consumer credit market) allows them to exploit their power imbalance against borrowers. Characteristics of these loans include: ·the extremely high cost of the loans, described in terms of a “fee” rather than an annual percentage rate; ·the practice of multiple borrowings, or “rolling over” or refinancing loans. This practice (which has been the cause of great concern in the United States) increases the cost of the loan and often signifies that the borrower has, in reality, been caught in a debt trap; ·the risk of over commitment by borrowers; ·the willingness of pay day lenders to demand high value security for extremely small loans; ·the extremely harsh enforcement practice which allows pay day lenders to repossess a car given as security for a loan without any prior notice to the borrower, let alone any attempt to arrange alternative repayment arrangements; ·the attempt to impose fees on borrowers for which the borrower has no contractual obligation to pay. By demanding these fees after it has repossessed a car, the lender is arguably deliberately exploiting the position of weakness and desperation of the borrower who may need the car returned. Without regulation these borrowers have no ability to protect themselves against unlawful or unjust conduct by the lenders, given the relatively small loan amount and the usual low-income demographic of borrowers unable to afford private legal representation. There is an urgent need for the regulation of the pay day lending industry. We note that in the United States of America, which has had experience of pay day or cheque cashing lending throughout the 1990‟s, different states have adopted different regulatory approaches to pay day lending, approaches which have included capping annual percentage rates and prohibition. Credit Brokers The final area that falls outside the Codes coverage that causes distortions in the consumer credit market is the provision of credit via credit brokers. Complaints received by financial counsellors and Consumer Credit Legal Services indicate that there has been a significant increase in credit broker conduct in the area of consumer credit. Problems that arise in this area include: A number of these brokerage arrangements do not make clear what charges will apply with respect to the arrangement of the loan. The failure of these agreement to state how and when and what amount of brokerage charges will apply, results in an environment where disputes concerning misrepresentation by the broker are likely to arise. A number of complaints have been received where the consumer states that the broker says that there would be no fee charged if the credit was not arranged, but subsequently a fee has been levied although no credit contract was entered into. Related to the above point, disputes arise over the basis of brokers‟ fees levied, and indeed whether those fees represent a reasonable amount for the services provided. A recent case study illustrates this point. The consumer, Mrs. B., approached her lender, Aussie Home Loans, to refinance her home loan. Aussie Home Loans turned down her request and so she then approached a broker, Australian Consolidated Mortgages, who indicated that they would be able to assist her in refinancing her home loan at an interest rate comparable to bank interest. The broker further indicated that it had access to bank finance. The broker then proceeded to arrange a loan with Liberty Finance at 13% on her behalf. The client was reluctant to proceed with this loan given the high interest rate and indeed, just prior to entering into the credit contract, was able to arrange bank finance herself. Liberty Finance at that point had incurred a number of set up cost in relation to the loan and rendered a bill for $129 for those costs, which Mrs. B. was happy to pay as it represented a reasonable amount for the work undertaken by the financier in setting up the facility. However, she then obtained a bill from the mortgage broker for $1,249. Mrs. B was shocked by this bill as the broker had done little work on her behalf in arranging finance with Liberty Finance. Annexure 19 contains copies of correspondence relating to this complaint. Concern has arisen as to whether Section 118 (which has the effect that any misrepresentation by a supplier in relation to the credit contract will give the debtor the same rights against the credit provider as the debtor would have had if the misrepresentation had been made by the credit provider) applies to credit brokers. As many credit brokers operate on the basis that their fees are contingent upon the consumer entering into the arranged credit contract, there is a risk that brokers will misrepresent the benefits of the credit contract. In this respect, the position of a broker is analogous to that of a car dealer or other supplier of goods or services to which Section 118 applies. Indeed, it is understood that some car dealerships are now employing brokers to arrange finance rather than directly arranging that finance themselves. It therefore would be a strange result that a consumer who was misled as to the interest rate on a credit contract by a broker would be in a worse position than a consumer who was misled as to the interest rate on a credit rate by a car dealer. Section 118 of the Code therefore needs to be amended to make clear that it applies to credit brokers. The end result of this is that consumer are less well informed, more likely to be mislead as to the finance arranged ( due to the financial incentive to the broker in fees and commissions) and the overall cost of the transaction increased. Questions for Response 3.4.1.1 Do you consider that any provisions of the recommendations contained in the Post Implementation Review Final Report could be considered to restrict competition within the credit marketplace? If so, is the impact on competition outweighed by the public benefit? Are there alternative mechanisms which the objectives of the recommendations without impacting on the competition? 3.4.1.2 3.4.1.3 We remain supportive of the vast majority of the Reports recommendations and believe that implementation of the Reports recommendations will both significantly assist competition and be of public benefit. In particular the following initiatives will be most significant in redressing the anti-competitive behaviour referred to earlier in this submission: Ÿthe introduction of a redesigned, shorter Schumer Box, Ÿthe introduction of a comparison rate, Ÿendeavouring to adjust the contract entry process to create a meaningful interval between provision of the pre contractual statement and signing the contract,, Ÿcoverage of Solicitor Nominee Lending, Ÿamending the definition of cash price so as to prevent avoidance of the Code by “Interest free” lenders, Ÿregulation of Finance brokers fees. Of the above issues, all but the first have already been discussed in this submission. It is worth commenting on the Schumer box recommendations as they are most important in assisting consumers to make informed choices. As will be seen from the sample of credit contracts attached to this paper, the financial information provided under the Code is most valuable. The difficulty is that the information that is critical to consumer choice is spread throughout pages of financial information, and so is difficult to locate. In this regard we will refer to the difficulty of identifying the interest rate in many of these contracts. In our view the Code does well in ensuring that credit contracts contain all necessary financial information in a reasonably summarised way. The failing of the Code is in relation to the way in which the precontractual Schumer box has been approached. The Schumer box should not be used as a tool to disclose the terms of the contract, but rather as a summary of the important choice information for consumers. Take the example of credit fees and charges payable in relation to a personal loan. Clearly it is important for the consumer to know how the sum total of these fees and charges is calculated. However, as is apparent from some of the credit contracts, this information can be spread over a page or more. The pre-contractual statement on the other hand, needs to give the consumer a short, "sharp" warning as to what is their liability for credit fees and charges. In this regard the most important disclosure is the total of these fees and charges that will be payable under the contract. The sample disclosure document in annexure 20 provides the summary information in the Schumer box but then allows for the detail of this information to be provided through the body of the contract. It is important to note that aside from the issue of the comparison rate, all the information contained in the suggested redesigned Schumer box is already disclosed in personal loan contracts under the Code. The issue is merely one of redesigning the credit contracts to give prominence to this important information. Finally we would express grave reservation concerning the effects of two of the Reports recommendations: Recommendation 2.5 - This recommendation proposes to delete insurance provisions in the Code that duplicate regulation contained elsewhere. At first glance the recommendation do not appear contentious. However, deleting these provisions will have the effect that consumers will no longer be able to use low cost Consumer Tribunals to determine some insurance disputes, ie. the Tribunal has jurisdiction to hear Consumer Credit Code disputes, but not disputes under the Insurance Contracts Act 1981. Recommendation 2.16 - The recommendation to delete contingency fees and charges from the civil penalty regime is misconceived. At section 3.2.3.1 of this submission an example of late fees charged by Bailey O‟Neill was provided. Such fees can be vital to the consumers choice of product and the overall fairness of the transaction, and should attract the same penalty for non disclosure as other fees and charges. Second, the creation of a civil penalty distinction based around contingent fees and charges will create an opportunity for avoidance as lawyers construct clauses making fees that are technically contingent but effectively always payable. 4.3 Options for Reform. Retention of the Consumer Credit Code? As is apparent from the foregoing, we strongly support the retention of the Consumer Credit Code. Virtually all provisions have a public benefit, many of which have been recognised for many years. The policy behind the provisions of the Code have been in place in some legislative form for 100 years. Unlike most consumer purchasers, one poor decision, or unfair contract, in the consumer credit market can financially destroy a consumers life. An all too common example is a consumer who enters into a consolidation loan at 30+%, and which is secured over their home. Interest “snow balls” as do enforcement expenses and the consumer loses their home. This is stated in a context where we continue to see: Ÿhigh interest rate lending, Ÿunfair collection practices, Ÿhigh pressure selling. Examples of these points have been provided earlier. Regulation by a Mandatory Code of Conduct, or by the Market? We oppose regulation by a mandatory Code of Conduct. Such Codes have usually been drafted in general terms. This is an area where products and practices are complex, and so require detailed rules to ensure certainty and avoid ambiguity. Consumers in this area are often in poor financial circumstances (hence they require credit) and are in a poor position to challenge questions of interpretation in a Code of Conduct. We see no basis at this time for any argument that reliance should be placed in market forces to regulate this field. There is every indication that the recent lessening of regulation in the area of credit cards and personal loans has resulted in poorer practices and products. Indeed we would argue that there has been a lessening of competition. While the Malbon study raises significant issues as to a serious lack of competition in point of sale lending. We note the discussion as reliance on “principles of disclosure” to allow for a reduced legislative disclosure regime. Such a position would be disastrous. We have already seen that a reduction in the detail of regulation between the Credit Act and the Consumer Credit Code has resulted in a lessening of disclosure. Consider two examples. The use of “interest free” car loans to avoid disclosure of interest rates, see earlier at page 46 . The avoidance of commission disclosure on the basis that the amount of commission is “unascertainable”, see page 44. Deleting provisions included in other Legislation? The final issue raised is whether those provisions in the Code that have equivalents in other legislation should be deleted. We believe that there are at least six reasons why such an approach should not be taken: Ÿdeletion of such provisions may have an impact on whether forums such as the Credit Tribunals continue to have jurisdiction e.g. the Tribunals have no jurisdiction to determine disputes under the Insurance Contracts Act 1981 Ÿwhere a provision is deleted in favour of a Commonwealth Act, such as the Trade Practices Act 1974 then coverage will be effected, e.g. a intra State non corporate credit provider would not be covered by the Trade Practices Act 1974. Ÿrelevant Statute of Limitation periods can differ between such provisions, Ÿremedies available upon contravention can differ, Ÿthere is the advantage of simplicity in having all the relevant “rules” in one place, Ÿif the relevant provisions in different legislation are the same then we cannot see any cost in the “duplication”.