ASIC prescribes new responsible lending reform

From 1 January 2019, credit licensees will be required to assess whether a credit card contract or credit limit increase is unsuitable for a consumer based on whether the consumer could repay the full amount of the credit limit within the period prescribed by ASIC.

The regulator has noted that the new responsible lending obligations will apply to licensees that provide credit assistance and licensees that are credit providers, for both new credit card contracts and credit limit increases under existing credit card contracts.

ASIC has claimed that the three-year period would “strike an appropriate balance” between:

• preventing consumers from being in unsuitable credit card contracts, and
• ensuring that consumers continue to have reasonable access to credit through credit card contracts.

ASIC also stated that when assessing whether a credit card is “not unsuitable” for a consumer, it expects that:

• The credit provider will assume the consumer is being charged interest over the three-year period and that the highest rate of interest applicable under that contract be applied in the calculations.
• Where a consumer has existing credit card contracts with other credit providers, the credit provider will assume that the consumer is making repayments on those existing contracts sufficient to repay the limit — including interest — within three years (rather than the minimum repayment amount required under those contracts).

Moreover, ASIC has said that credit providers are expected to have systems in place to ensure that they can meet the new obligations before the legal requirement comes into effect on 1 January 2019.

The reform follows a review (REP 580) by the regulator into credit card lending in Australia, in which it looked at 21.4 million credit card accounts open between July 2012 and June 2017.

ASIC’s review found that there were over 14 million open credit card accounts as at June 2017, with outstanding balances totalling almost $45 billion.

The proposal was met with opposition from the Finance Brokers Association of Australia (FBAA), which, following the release of its consultation paper in July 2018, Credit Cards: Responsible lending assessments, submitted to ASIC that such a proposal would impede customer choice and limit access to credit.

“We do not agree with a three-year period,” the FBAA said. “We are concerned the interference with the majority of consumers’ legitimate choice and access to credit outweighs the protective nature of the reforms, aimed at addressing the concerns around the misuse of credit by a subset of consumers.”

In response to such concerns, ASIC noted: “We do not expect that our prescribed period will have a substantial effect on the ability of consumers to ensure their credit card has features that suit their needs.

“While our proposal might reduce the credit limits available to low-income consumers who might have otherwise accessed higher limits that they could repay over a very long time frame, we think that credit cards will still be accessible to these consumers.

“We expect there will be only a small proportion of consumers who either cannot access a credit card at all due to the prescribed period, or who cannot reduce their existing credit card debt to a level below which they could switch to a different provider if they chose.”

The regulator continued: “We also note that the reform will not prevent credit providers from amending the terms of a credit card contract to ensure that a consumer has a credit card that is well suited to their needs.

“More generally, a period of three years might appropriately segment the market so that those consumers needing larger loans with longer repayment options could move into lower-cost products, such as some types of personal loans.”

ASIC has also noted that it will monitor the prescribed period and its guidance to ensure that it is achieving the goals of the reform.

[Related: ASIC warns banks not to outsource responsibility to brokers]