On Sunday 12 December 2010, the Acting Prime Minister and Treasurer, the Hon Wayne Swan MP, released a broad package of reforms designed to drive a more competitive and sustainable Australian banking system. This alert discusses key measures relating to consumer mortgages, transaction accounts and credit cards.
Mallesons has released separate alerts on 12 December commenting on proposals about support to smaller lenders and enhancements to wholesale funding arrangements and changes to competition and consumer laws in relation to price signalling.
As a whole, the changes to mortgages, transaction accounts and credit cards will have far reaching effects on the financial services industry. They may require changes to how internal and external costs and expenses are recovered within individual products and across a lender's whole product portfolio. The government has confirmed that it will move extremely quickly to settle and implement the changes.
Financial services entities should investigate opportunities to engage with the reform process, either directly or through an industry association. Under the Government's timeline, targeted consultation on the package is to commence in December 2010, including the establishment of Government-industry consultation groups, and initial meetings during the weeks of 13 and 20 December 2010.
The Government has announced that it will take tough measures to outlaw “exit fees” charged on mortgages. Treasurer Swan confirmed that changes made to the National Credit Code (NCC) will apply to all NCC regulated lending, including by non-bank lenders. Targeted consultation will be carried out from December 2010, with draft legislation to be released in January 2011.
The package notes the ASIC Guidance of 10 November 2010 on how ASIC views existing laws, (such as the NCC and the unfair terms provisions of the Australian Consumer Law (ACL)) already limiting exit fees. The Government’s intention appears to be to further restrict exit fees, so that legitimate expenses that might be recoverable under the NCC and ACL can no longer be charged. It is not yet clear whether it is intended to ban all exit fees, including, for example, break costs calculated as a result of a break to a fixed rate period. The package also notes that attempts to recover the costs represented by such fees in another way, for example by way of entry fees, can be reviewed by ASIC for compliance with the NCC.
The Government has released for comment a proposed “key details summary” sheet for a home loan. It would be compulsory for lenders to prepare a sheet using a prescribed format and inclusions to allow easy comparison of loan costs and features. The standard form will include details of a variety of websites offering loan comparisons.
It is not yet clear when credit providers will be obliged to provide this document, and how it will fit with the new disclosure document regime introduced under the National Consumer Credit Protection Act (NCCP) with effect from 1 January 2011. It remains uncertain if the key details are to be provided on request, or with the new credit provider's Credit Guide when it becomes apparent that a credit provider is likely to enter into a loan, or both.
It is also unclear how the document will be provided when a customer deals through a broker. A broker is obliged to provide various documents (its own Credit Guide, a quote and a proposal, which set out certain details about the proposed loan) and do certain things (a preliminary assessment of suitability) before and during the process of providing credit assistance (suggesting or assisting the consumer to apply for a particular loan). The Government has indicated that these provisions are likely to be further varied in early 2011 as part of the bedding down of the NCCP obligations. Adding a “key details” document may add further complexity and raise the following questions:
Is the “key details” merely a document that customers can request, or is it intended that customers must obtain this document directly from the credit provider before the broker can commence this process?
If not, is it intended that credit providers must provide it to brokers who request it, at what stage in the process is the broker permitted to ask for it (eg must a suitability assessment be done first), and must the credit assistance process cease until it is provided?
Should some of the broker's disclosure documents be abolished or streamlined as a result of the provision of the “key details”?
There are also a number of practical issues to be resolved about the content of the document. There are specific assumptions in the NCC which credit providers may (and must) rely on to calculate some of the matters needed to complete the “key details”. Total interest charges is one example. However, the prescribed assumptions are not sufficient to allow these calculations in all cases, for example, a construction loan with an unknown drawdown schedule. Other issues will arise in using the “key details” template to compare loans which are not relatively standard home loans.
The Government has repeated its commitment to implement in full its “fairer, simpler banking” election commitments in relation to credit cards, discussed in our September edition of Regulator. Treasurer Swan confirmed that the changes will be ‘fast tracked’. These changes will have impacts for card issuers’ systems and procedures and for pricing and product offerings. Draft legislation for these measures is also expected to be released in January 2011.
A joint Treasury / Reserve Bank Taskforce will report to the Government in June 2011 on the need for further action regarding ATM charging and access, with a preliminary report in February 2011 on issues affecting remote and indigenous consumers.
The Government will instruct the Reserve Bank of Australia (RBA) to identify positive steps that can enhance the ability of consumers to move their business from one provider to another. Consultation will begin in January 2011. Ultimately, the Government proposes consumers might have personal, transferable account numbers to which all their direct debit and credit arrangements attach. These would be retained when they move to another provider, although Treasurer Swan has noted in interviews that this may be a long term goal.
In undertaking this review, the RBA is required to consider how regulatory protections, including privacy protections, can be retained with a new system.
The RBA will also investigate whether it would be possible to have a central holder of mortgage securities, so that a borrower can refinance a home mortgage without the mortgage (or any lenders mortgage insurance policy) being discharged and replaced. Implementing such a proposal would likely require very significant changes to conveyancing and financing practice, and may have implications for state and territory stamp duty revenues.
The Government’s proposed changes to the laws affecting retail financial services are likely to lead to significant changes for all entities involved in the provision of consumer credit (particularly residential mortgage lending and credit cards) and transaction accounts.
The proposals follow a year of almost unprecedented upheaval for the sector with the commencement of the NCCP and the ACL. They add to a range of significant regulatory reforms that are still in progress (“tranche 2” credit reforms, privacy reforms, changes to anti-money laundering and financial sanctions laws and the review of the Electronic Funds Transfer Code of Conduct). Retail financial services providers should prepare to engage with these reforms also, and should expect them to be implemented as a high priority by the Government.