National Credit Act a success but the job is half done

Getting the states to agree to hand over power to the commonwealth is no mean feat, so the government deserves credit for persuading the states to scrap the Uniform Consumer Credit Code and allow the federal government to take control of consumer credit law.

The government gets even more credit for having introduced a National Credit Act and a National Consumer Credit Code that most industry participants say work pretty well.

There is, however, some unfinished business. The industry had been hoping that the government would change the Privacy Act to liberalise consumer credit reporting, as recommended by the Australian Law Reform Commission, to coincide with the launch of the Credit Act.

The government has made a commitment to adopt the ALRC recommendations on credit reporting but no bill surfaced during the term of the last parliament.

Lenders and brokers are still waiting for guidance on whether certain commission structures, such as higher commission payments for meeting volume targets, create an unacceptable conflict of interest. The industry has put this question to ASIC but it has said it is not able to provide guidance.

With the new regime up and running, Treasury turned its attention last month to national regulation of other parts of the credit system. 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, and therefore more challenging for government, because its proposals include the extension of the protection currently available to consumers 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.

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.