Call to tighten responsible lending rules for credit cards

The Australian Securities and Investments Commission has raised the prospect of tightening responsible lending rules covering credit cards to ensure consumers are not exposed to the risk of running up big card balances incurring high interest charges.

ASIC's proposal is included in its submission to the Senate Economics References Committee, which is inquiring into credit card interest rates. ASIC's is not the only submission to raise the prospect of tightening responsible lending rules that apply to credit cards.

ASIC's view is that high interest rates on cards are not the cause of hardship. Rather, it is the fact that "some consumers over-borrow and under-pay large amounts of credit card debt (to which the high interest is applied)."

ASIC said: "Some people begin with the intention of always paying off their balance in full and believe they will never pay interest."

It said there may be a need to "refine responsible lending obligations with a focus on appropriate product selection."

The Treasury submission said proposals to clarify and strengthen the obligations on card providers to understand consumers' requirements "merited further consideration".

Treasury said tighter responsible lending rules "may reduce the likelihood of consumers receiving credit cards and credit limits that are inappropriate to their financial requirements."

It also suggested that credit card providers be required to conduct serviceability assessments based on repayments required to pay off debt within a reasonable period.

Bank Australia's submission was more emphatic, saying the inquiry should recommend better use of responsible lending practices. It also recommended that credit card accounts going into arrears consistently should be reviewed.

Consumer Action Law Centre recommended that credit assessments for credit cards be based on whether the consumer could afford to repay the full credit limit within three years. It also recommended that minimum monthly repayments be increased.

Under the current responsible lending rules, credit providers must make reasonable inquiries about a consumer's financial situation and their requirements and objectives; they must take steps to verify the consumer's financial circumstances; and they must be satisfied that the credit contract is not unsuitable for the consumer.

The debate about credit cards has arisen because interest margins on cards increased sharply during the financial crisis and have increased further in the post-crisis period.

The Australian Bankers Association submission said widening credit card margins were symptomatic of a re-pricing of risk in response to increased uncertainty and volatility in financial markets.

However, Treasury said the "slight increase" in non-performing credit card loans in recent years "appears unlikely to account for this increasing spread."

The ABA also argued that consumers appeared to be having little difficult coping with their credit card repayments. "For the past decade repayments on credit cards, excluding interest, have exceeded new transactions. Over the 12 months to May repayments of $301 billion exceeded the value of transactions by $8 billion.

"Balances accruing interest have been falling since 2012. The current level is just over $2000."

Treasury said this needed to be put in perspective. "Low-income credit card users are more likely to pay interest and tend to have higher amounts of credit card debt relative to their income. Low-income households are more likely to be subject to fees for failing to make minimum payments."