CREDIT (COMMONWEALTH POWERS) AMENDMENT (MAXIMUM ANNUAL PERCENTAGE RATE) BILL 2011
The Hon. GREG PEARCE
(Minister for Finance and Services, and Minister for the Illawarra) [11.58 a.m.]: I move:
That this bill be now read a second time.
I am pleased to introduce the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011. It is a short bill but one which preserves an important consumer protection measure that was first introduced by the Fahey Government in 1994. Last year this Parliament passed legislation to transfer regulatory responsibility for consumer credit from New South Wales to the Commonwealth. This was the first phase of national credit reforms agreed by the Council of Australian Governments. It corrected an anomaly by which the Commonwealth had power to regulate all financial products and services except consumer credit and finance broking. The credit marketplace is very much a national marketplace and all parties welcomed the introduction of consistent national laws.
New South Wales has always been a leader in consumer protection for borrowers and played a leading role in the development of the Consumer Credit Code. The code was uniform legislation that operated successfully for 14 years in the States and Territories. When power to regulate credit was transferred to the Commonwealth the code was also transferred, largely unchanged except for some modernising amendments, and is now known as the National Credit Code. Despite the undoubted advantages of national legislation, a Federal system of government can benefit from innovation in different jurisdictions to find solutions to problems, leading to better public policy and service delivery. Regulatory innovation can also benefit the community. The Fahey Government was responsible for such innovation when it proposed an amendment to the Credit Act 1984 to provide for a maximum annual percentage rate which took effect on 1 July 1994. This measure was not adopted by all States and when the Consumer Credit Code commenced in 1996 interest rate caps were among the regulatory arrangements that fell outside the Uniform Credit Laws Agreement. New South Wales decided to keep its cap and introduced a maximum rate of 48 per cent.
The consumer credit market has changed over the past decade and the interest rate cap has changed with it. The most recent adjustment was made on 1 July 2010 when New South Wales introduced a cap of 48 per cent inclusive of fees and charges, including fees paid to third parties such as brokers. And 1 July 2010 also marked the commencement of phase one of the national credit reforms. This involved the transfer of regulatory powers and the introduction of a national licensing system for credit providers and finance brokers and new requirements for responsible lending. Although the Consumer Credit Code was transferred to the Commonwealth, non-uniform provisions were not. This meant that those jurisdictions with interest rate caps were free to retain them while the phase two reforms were developed. Victoria, Queensland and the Australian Capital Territory have all retained their interest rate caps. None has a cap that is as comprehensive as that operating in New South Wales, although Queensland and the Australian Capital Territory include fees and charges in the calculation of the maximum rate.
The comprehensive interest rate cap in New South Wales is particularly targeted at the short-term small-amount lending industry—also known as the payday, fringe and predatory lending industry. It was understood that phase two would, among other things, include an examination of the approach to be taken to short-term small-amount lending with any further legislation required to be in place within 12 months. For this reason the Credit (Commonwealth Powers) Act 2010 provided for the maximum annual percentage rate in New South Wales to expire 12 months after 1 July 2010. It is now clear that phase two reforms will not be in place until December 2011 at the earliest.
The O'Farrell Government is not prepared to leave vulnerable and disadvantaged consumers at risk of exploitation by these lenders. We are talking about loans from $100 to $5,000, with repayment periods ranging from a week to two years. Payday lending, a particular category, generally refers to a loan under $1,000 and for a duration of less than three months. Low income consumers are a significant proportion of the borrowers. Research shows that between 50 and 74 per cent of borrowers earn an annual income of less than $36,000 and up to 25 per cent fall beneath the Henderson poverty line. Approximately 70 per cent of loans are used to meet recurrent or basic living expenses, including utility bills, food, rent, car repairs and registration. Such lending is targeted at people who have difficulty accessing funds in an emergency or who struggle to meet regular household payments and expenses. These loans are high-cost loans. Annualised interest rates may be as high as 1,000 per cent, late payment fees may be up to $75 for every day that a payment is late and establishment fees may be 50 per cent of the amount borrowed. Very few consumers choose these loans on the basis of cost. The advertising focuses on features such as speed, accessibility and lack of credit checks.
In the absence of a competitive market, the New South Wales interest rate cap is designed to protect disadvantaged and vulnerable consumers from excessive costs. There are micro-lenders who operate lawfully in the market and comply with the cap. Without charging excessive costs they are assisting people who do not have ready access to mainstream financial services and find it difficult to manage large bills and sudden emergencies. These borrowers appreciate the accessibility, convenience and customer service they receive. The Government proposed to extend the operation of the maximum annual percentage rate beyond 12 months in order to maintain consumer protection and certainty in New South Wales until assured that the Commonwealth regulatory and enforcement measures in respect of short-term small-amount lending are appropriate and adequate.
I turn now to the provisions of the bill. Schedule 1 amends schedule 3 to the Credit (Commonwealth Powers) Act 2010 to provide for the repeal of the maximum annual percentage rate provisions by proclamation rather than repeal 12 months after 1 July 2010, as is currently the case. Schedule 1 provides for the repeal of clause 9 of schedule 3 by proclamation rather than repeal 12 months after 1 July 2010, as is currently the case. Clause 9 is a savings provision that applies the maximum annual percentage rate applicable prior to 1 July 2010 to credit contracts entered into prior to 1 July 2010. As these contracts may still be on foot, the relevant provisions are continued. Schedule 1 also amends schedule 3 to enable regulations to be made of a savings or a transitional nature consequent upon the enactment of the proposed Act. This bill gives New South Wales the discretion to decide when and whether its 48 per cent interest cap is no longer needed. I commend the bill to the House.
The Hon. SOPHIE COTSIS
[12.05 p.m.]: I represent shadow Minister Cherie Burton and lead for the Opposition in debate on the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011. The Opposition does not oppose this bill, which has as its object to amend the Credit (Commonwealth Powers) Act 2010 to allow for the repeal of provisions in that Act that provide for the maximum annual percentage rate for credit contracts when appropriate legislation has been enacted by the Commonwealth to address that matter. I have been advised that the Commonwealth indicated it would enact this legislation in its spring session later this year. Accordingly this bill will remove the current expiry date of 1 July 2011 for provisions that specify a maximum annual percentage rate for credit contracts and will enable those provisions to be repealed by the Governor by proclamation.
Essentially, as the Minister said in his agreement in principle speech, last year when Labor was in office we passed legislation to transfer regulatory responsibility for consumer credit from New South Wales to the Commonwealth. In her speech the then Minister commented on the importance of allowing a single regulator to act quickly and decisively to protect consumers as the need arose. A streamlined approach is important also when dealing with credit and lending. Dating back to 1994 there has been a maximum annual percentage rate in New South Wales. However, not all States adopted it. New South Wales also has the most inclusive cap which includes fees and charges and fees paid to third parties, such as brokers, and it protects those most vulnerable in the community from short-term lenders who often are referred to as shonks. I have been advised that not all short-term lenders are shonks; some of them run reputable businesses to help those who are experiencing short-term financial strife. However, there will always be lenders in the community who choose to exploit those who are vulnerable and desperate. The aim of this legislation is to protect the most disadvantaged and vulnerable consumers from excessive costs.
The Opposition recognises the urgency of this legislation and does not oppose it. The Act provides a deadline of 1 July 2011 and unless the legislation is amended the 48 per cent cap would not apply beyond that date, which would expose vulnerable people to the shonks in the industry. The Government proposes to extend the operation of the annual percentage rate beyond 12 months, which will maintain consumer protection and certainty in New South Wales, while awaiting the Commonwealth's regulatory enforcement measures. The Opposition believes that this legislation protects those in our community who are vulnerable and I commend the Government for dealing expeditiously with this matter. When the Commonwealth legislation is enacted by proclamation of the Governor, which I understand will be in the spring session, the State legislation will fall into line with the Commonwealth legislation. The Opposition supports the bill. People in need must be protected. Opposition members are proud that New South Wales consumers enjoy the best protection. The Opposition supports the continuance of that protection. I commend the bill to the House.
Dr JOHN KAYE
[12.09 p.m.]: The Greens do not oppose the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011, which extends the 48 per cent cap on interest rates until the Commonwealth implements a uniform cap on interest rates. When the original legislation was debated in this Chamber, I raised a number of concerns about the way in which payday lenders and microcredit lenders were being regulated. In particular I raised concerns about the issue of capping the interest rate as a mechanism for protecting individuals from predatory lending.
While The Greens support the cap on interest rates, I reiterate very briefly that it must also be understood that a cap is a very blunt instrument. The reality is that whether a loan is for $300 for three weeks or for $5,000 for six months, the fixed costs of that loan are more or less the same. Unlike larger credit providers who provide longer-term credit for larger amounts, the fixed costs become quite dominant in a transaction. The 48 per cent rate sounds large—and indeed it is large for a larger loan over a long period—but it is quite small with respect to fixed costs attached to a short-term loan for a small amount.
It must also be understood that short-term loans for small amounts are important in the day-to-day lives of people who live in low-income households and who deal with exigencies. Some people experience emergencies, such as needing to escape from an abusive relationship, and a short-term low-interest loan works well for them. Although the provision of short-term low-interest loans fulfils a very important social function in many cases, the problem is that a number of operators behave in an exploitative manner and go out of their way to ensure that the people to whom they lend become more heavily indebted. The Greens support the extension of the interest rate cap. After all, if this legislation is not supported, interest rates would not be capped.
However, I again urge all governments involved in this legislation to closely examine two key features. The first is regulation to allow for payments that incorporate some measure of fixed costs associated with loans, particularly with respect to very short-term small loans. The second is to re-examine regulation so that there is a registration process that drives the truly awful exploitative businesses out of the industry. I understand the Commonwealth Government is moving in that direction. I reiterate that The Greens do not oppose the legislation.
Reverend the Hon. FRED NILE
[12.12 p.m.]: The Christian Democratic Party is pleased to support the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011, which will ensure the retention of maximum annual percentage rates for consumer credit contracts. The bill will amend the Credit (Commonwealth Powers) Act 2010 to retain the maximum lending interest rate for consumer credit contracts or loans in New South Wales until appropriate protection is provided through phase two of the Council of Australian Governments national credit reforms. Similar legislation has been discussed a number of times in Parliament because members share concern for vulnerable members of the community who in desperation sign contracts for high interest rate loans that they are not able to afford. Their suffering is compounded when they are hit with higher fees if ever they are late with repayment. Vulnerable people who take out payday loans often find themselves in debt traps necessitating further borrowing from one lender to make repayments to another.
New South Wales always has supported maximum lending interest rate provisions that were introduced in 1994. By virtue of this legislation, the interest rate cap will remain in place until further protection is provided through national reforms. The payday lending industry is not happy with retention of the cap and has met with members of Parliament on previous occasions. It claims that it cannot recover costs and will go out of business. So far the retention of the interest rate cap does not seem to have had any major impact on the payday lending industry. The operation of the legislation will be monitored, particularly the Commonwealth legislation that will be implemented in due course. This bill will amend the Credit (Commonwealth Powers) Act 2010 to repeal the existing sunset provision and extend transitional application of the maximum lending interest rate until appropriate protections in phase two of the Council of Australian Governments national credit reforms are implemented. The Christian Democratic Party supports the bill and hopes the Commonwealth legislation will be enacted and implemented in the very near future.
The Hon. WALT SECORD
[12.15 p.m.]: I support the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011. As the shadow Minister indicated in the other place, the Opposition supports the legislation. This bill has bipartisan support because it builds on and complements work by previous State Labor governments. Its origins date back to the historic consumer protections introduced by the Neville Wran Government in the early 1980s. The Minister for Fair Trading said in the other place that this bill is intended to protect the most vulnerable members of our society and protect vulnerable people from a minority of unscrupulous short-term lenders and fringe credit providers who charge excessive interest rates.
It is about protecting people who take up loans when they are in desperate circumstances, such as a young mum who is in short-term financial strife due to sudden unemployment, a marriage breakdown, divorce, or a death in the family. It will protect those who do not have a credit rating, who do not own a home or vehicle and whose income is very low or reliant on government benefits. Those members of society find it next to impossible to borrow from a mainstream bank. While not all payday lenders and other small-amount lenders are unscrupulous, unfortunately there will always be lenders in the community who exploit those who are in desperate financial straits. That is why this legislative protection is necessary and why Labor supports the bill.
We are talking about loans from $100 to $5,000 with repayment periods from as little as a week up to two years. Interest on a $100 loan for a seven-day contract can be $7. Generally loans of less than $1,000 are for periods of less than three months. Not surprisingly, low-income families comprise a significant proportion of people using short-term small-amount lenders. Up to 74 per cent of borrowers receive an annual income of less than $36,000 a year. Approximately 70 per cent of loans are used to meet cost of living and basic living expenses, such as food, white goods, rent, car repairs and vehicle registration. In 2008 the National Financial Services Federation stated that payday lending and microloan advances provided approximately $500 million worth of loans a year in Australia. Anecdotally it would appear a significant increase in the market has occurred since that estimate. Industry members estimate that approximately 400 lenders operate in Australia. Last year throughout New South Wales more than 40,000 people sought advice from financial counselling services. NSW Fair Trading has a hotline—13 32 20—to refer people to counsellors and experts.
I would like the O'Farrell Government to do more to help people who are experiencing financial problems, struggling with the cost of living and suffering mortgage stress. I look forward to the Coalition Government's first budget later this year and hope that it will provide genuine assistance to struggling families. In technical terms the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011 amends the Credit (Commonwealth Powers) Act 2010 to allow for the repeal of the provisions of that Act. This bill will provide for a maximum annual percentage rate to apply to credit contracts when appropriate legislation has been enacted by the Commonwealth Government. The Minister for Fair Trading advises that the Commonwealth intends to enact complementary legislation in its spring session of the national Parliament. I support a national approach. The bill removes the current expiry date of 1 July 2011 for provisions that specify a maximum annual percentage rate for credit contracts. The Opposition recognises the urgency of 1 July and does not oppose the bill.
Last year the Labor Government passed legislation to transfer regulatory responsibility for consumer credit from New South Wales to the Commonwealth. This legislation represents a continuation of that work. State Labor agrees that a single regulator is required to act quickly and decisively to protect consumers. A streamlined approach is important also when dealing with credit and lending. New South Wales has had a maximum annual percentage rate since 1994. New South Wales also has had the most inclusive cap as it includes fees and charges, and fees paid to third parties such as brokers, and protects the most vulnerable in our society. Unless the legislation is amended, the 48 per cent cap will not apply beyond 1 July and vulnerable people could be exposed to unscrupulous lenders.
In the United States the cap is set at 36 per cent and the United Kingdom has no maximum cap but lenders are required to state the rates in their contracts. I hope that the State, Territory and Federal fair trading Ministers in about three or five years time will re-examine the 48 per cent cap. Again, I am pleased to be associated with legislation that protects the most vulnerable in our community. We support and commend the Government for dealing with this matter quickly. Opposition Labor members are proud of the fact that families in New South Wales enjoy the best consumer protection in Australia. The bill builds on the fine work of Labor fair trading Ministers, who include Faye Lo Po', Linda Burney, Virginia Judge, Brian Langton, John Watkins, John Aquilina and the late Jeff Shaw. We will support the continuation of that protection. I commend the bill to the House.
The Hon. MATTHEW MASON-COX
(Parliamentary Secretary) [12.20 p.m.]: It certainly gives me pleasure to support the Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011. As members would be aware, the object of this bill is to amend the Credit (Commonwealth Powers) Act 2010 to allow for the repeal of provisions of that Act that provide for the maximum annual percentage rate for credit contracts when appropriate legislation has been enacted by the Commonwealth to address that matter. Accordingly, this bill removes the current expiry date of 1 July 2011 for provisions that specify a maximum annual percentage rate for credit contracts and enables those provisions to be repealed by the Governor by proclamation. It is worth reflecting on some of the history surrounding this bill. I note in particular the contribution of the Hon. Walt Secord about the time spent in this area by a number of former Labor Ministers. I also note in particular the contribution of the Hon. Kerry Chikarovski, a former Liberal fair trading Minister on this issue.
The Hon. Walt Secord:
She brought in the cap.
The Hon. MATTHEW MASON-COX:
In fact, this bill is a direct link in the sense that in 1996 Kerry Chikarovski brought in the 48 per cent cap that is the subject of this debate. It was an important innovation at the time and certainly was a first for all States as it provided real consumer protection to some of the most vulnerable people in our community. Over the past decade the consumer credit market has changed, and the interest rate cap has changed with it. There has been a rapid growth of payday and other short-term small-amount lending, which is marketed to disadvantaged and vulnerable consumers in particular and is characterised by high interest charges and exploitative fees. Over the years this fringe-lending industry has adopted several innovative avoidance techniques to deny consumers the protection of the cap. As a result, adjustments have been made, with the most recent being in July 2010 when New South Wales introduced a cap of 48 per cent inclusive of fees and charges and including fees paid to third parties, such as brokers.
Industry members argue that they cannot recover costs under the cap and will go out of business, with the result that low-income consumers will be denied access to credit. We can debate these claims, but there are strong counterarguments. Some short-term small-amount lenders operate lawfully in New South Wales despite the cap; others continue to operate, but use avoidance techniques. A quick scan of the internet or suburban shopping centres shows that there is no shortage of offers to vulnerable consumers who have difficulty accessing mainstream credit. The comprehensive cap is due to expire from 1 July 2011. It was retained for 12 months in New South Wales while the Commonwealth Government decided whether to adopt a similar mechanism as part of its national credit reforms. These reforms began on 1 July 2010 when the States and Territories referred power to the Commonwealth to regulate consumer credit. The Consumer Credit Code was transferred to the Commonwealth and is now known as the National Credit Code.
The transfer did not extend to interest rate caps. It was agreed that States and Territories with caps could keep them while an assessment was made of their effectiveness in addressing predatory or fringe lending. In the meantime, in the first round of national credit reforms, the Commonwealth Government introduced an Australian Credit Licence, with membership of an external dispute resolution body a mandatory condition of obtaining a licence. Responsible lending requirements were part of the package of reforms. The industry argues that the national reforms provide sufficient protection for consumers, yet at the same time some lenders admit to structuring their businesses so that they operate outside the National Credit Code and its associated protections. Community legal centres and financial counsellors who see clients caught up in the debt spiral and other negative effects of high-cost lending maintain that despite the avoidance mechanisms, the New South Wales interest rate cap is an effective consumer protection mechanism.
The 48 per cent maximum annual percentage rate, inclusive of fees and charges, sends a clear signal to the market about what constitutes lawful or unlawful lending. Advocates are able to negotiate remedies for their clients on the basis of an alleged breach of the cap. The Commonwealth Government is still consulting with stakeholders and developing options for the increased regulation of payday and other short-term small-amount lenders at a national level. Whatever is decided, it is not likely to commence until 2012. Therefore, this Government will retain the comprehensive interest rate cap in New South Wales until satisfied that disadvantaged and vulnerable consumers will be adequately protected by national credit laws. Accordingly, I commend the bill to the House.
The Hon. GREG PEARCE
(Minister for Finance and Services, and Minister for the Illawarra) [12.25 p.m.], in reply: I thank all members for their participation in the debate and for their support of this important Credit (Commonwealth Powers) Amendment (Maximum Annual Percentage Rate) Bill 2011. As members have heard, this bill makes it possible for New South Wales to retain a comprehensive interest rate cap for consumer credit contracts while national regulation is developed. As I have outlined, in 2010 all States and Territories transferred to the Commonwealth their regulatory power with respect to consumer credit. This transfer did not extend to the imposition of maximum annual percentage rates on the understanding that States and Territories with interest rate caps could retain them and the Commonwealth would examine their impact as part of the second phase of national credit reforms.
The latest information we have from the Commonwealth is that these second wave reforms will not be ready before the end of 2011. The New South Wales Government is not prepared to allow the interest rate cap to sunset when no equivalent protection is in place. For this reason the bill amends the Credit (Commonwealth Powers) Act 2010 to remove the current expiry provisions and replace them with provisions that permit the interest rate cap to be repealed by proclamation. The New South Wales Government's primary concern is the protection of consumers, particularly vulnerable and disadvantaged consumers. If national reforms provide this protection there will be no need to retain a State-based cap. On this basis, the power to repeal would be exercised on the date on which substitute Commonwealth legislation commenced. Again, I thank members for their contributions to the debate and commend the bill to the House.
Question—That this bill be now read a second time—put and resolved in the affirmative.
Motion agreed to.
Bill read a second time.
Leave granted to proceed to the third reading of the bill forthwith.
Motion by the Hon. Greg Pearce agreed to:
Bill read a third time and returned to the Legislative Assembly without amendment.
That this bill be now read a third time.