More limits likely on business and investment lending

With the Credit Act and the National Consumer Credit Code up and running Treasury has turned its attention to national regulation of other parts of the credit system. Yesterday it issued a green paper on phase two of the government's national credit reform project.

Phase two may be a more radical re-writing of credit regulation than phase one because its proposals include the extension of the protection consumers currently receive to small business and investors.

The paper addresses issues related to the regulation of credit cards, reverse mortgages, investment lending, payday lending, consumer leases and small business finance.

The reasons put forward in support of small business borrowers being afforded the same degree of protection as consumers include similarities in the types of securities used for small business loans, such as the primary residence, and similarities in the level of sophistication in small business borrowers' understanding of credit contracts and credit products.

When the states reviewed the old Uniform Consumer Credit Code in 1999 they decided not to extend coverage to small business. The sector was thought to be so diverse that attempts to include it would dilute the UCCC's consumer protection focus.

According to the green paper, since then there have been studies, such as one done by CPA Australia last year, that show small business owners do not have a good understanding of financial services.

The paper acknowledges that there may need to be some "scalability" in the coverage of small business, with coverage designed more for the micro end of the small business market.

Another reason for extending credit protection to the sector is that small business borrowers do not always have appropriate mechanisms for dealing with their lenders when they get into financial difficulty.

The case for further regulation of investment lending is based on a concern that a lot of investors borrow to buy shares or managed investments without getting any advice.

The paper cites the finding of last year's Parliamentary Joint Committee of Corporations and Financial Services inquiry into financial products and services (the Ripoll Report) that borrowers of investment loans are no more sophisticated than those who borrow for domestic purposes.

Ripoll also said that the "motivations and incentives" of intermediaries in the investment lending market had the potential to reduce lending standards. A concern of government is that family homes are put at risk in cases where the equity in the home is used to secure an investment loan.

The Credit Act regulates investment loans only where the loan is intended predominantly to purchase, renovate or improve residential property for investment purposes. Margin loans are regulated under the Corporations Act.

While credit card lending is covered by the Credit Act, the green paper looks at whether there is a need for further regulatory action "to reduce the incidence and impact of unmanageable debt on consumers while maintaining access to such credit".

The paper also looks at whether regulation should be used to rein in excessive credit card and store card interest rates and fees. Some items that might be regulated include the setting of minimum repayment percentages, and assessment practices that result in the granting of inappropriate levels of credit.