I spoke today about payday lending, reverse mortgages, and Labor’s history of consumer protection.
Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011
26 June 2012
Not all debt is bad. Many of us here have a mortgage. Many of us have taken a loan to buy a car. My own calculations using data from the Household, Income and Labour Dynamics in Australia Survey suggest that 60 per cent of Australian adults live in a household that has some debt and that the average is $100,000 of property debt. On average, debt levels rise with household net worth: if a household increases their net worth by $10, they will typically take another dollar of debt. Thanks to home loans, Australians are now able to buy houses at a much younger age than was the case in my grandparents generation. So credit in that sense has made us better off. Business loans also make the corporate sector grow faster; they help productive firms grow more rapidly. Car loans allow young people to take a job that requires four wheels. And although too many Australians probably carry unpaid balances on own credit cards, they are a handy source of finance to carry us through a tight spot.
It is only when sources of credit are made available to people in circumstances contrary to their interests that it becomes a problem. Care Inc., a financial counselling service in the ACT, told me the story of a client of theirs on a disability support pension, supporting her low income by selling the Big Issue magazine. She had sought assistance for a payday loan she had been paying for well over a year, and that was despite the initial loan being for one month. The client was regularly short of money to pay for food and utilities but continued to take out payday loans. Often a new loan would be provided with the outstanding amount being rolled in. That client felt trapped in a cycle of debt and felt great anxiety. Care Inc. told me that her limited understanding of budgeting and dependence on payday loans significantly affected her quality of life. Having an intellectual disability and mental health issues only compounded the issue.
The Minister for Financial Services and Superannuation referred in his second reading speech to documented cases of lenders charging $1,477 in interest and fees on a loan for $1,000 for 26 weeks, or $2,074 in interest and fees on a loan for $1,000 over the course of a year. So the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 introduces essential consumer protection reforms. It is about providing greater protection for those experiencing financial hardship, those who feel vulnerable and desperate and seek sources of credit ultimately to their own disadvantage. We need to make sure a financial rough spot does not lead to financial ruin. This bill also delivers on the reforms to reverse mortgages promised in the 2010 election. Through COAG those reforms will be national, so all Australians can benefit from the protections in the bill.
The Labor Party have a proud tradition of being the workers party, but we are also the party that looks after consumers. It was the Whitlam government that established the Prices Justification Tribunal. The Prices Justification Act 1973 was directed at foreign corporations and trading or financial corporations that had annual receipts over $20 million. Those companies were required to notify the tribunal when they proposed to raise the price of goods and services, and the penalty was a fine of $10,000. It was the function of that tribunal to inquire into proposed price rises to ascertain if they were justifiable or whether a lower price should be charged. Most companies did comply due to the likelihood of adverse publicity. It was later that year that Lionel Murphy began preparing a bill dealing with restrictive trade practices, monopolies and consumer protections, and the Trade Practices Bill 1973 went beyond the competition matters contained in earlier statutes.
In introducing the bill to the House, Kep Enderby, Minister for Manufacturing Industry said:
‘The Bill will also provide on a national basis long overdue protection for consumers against a wide range of unfair practices.’
… … …
‘In consumer transactions unfair practices are widespread. The existing law is still founded on the principle known as caveat emptor—meaning ‘let the buyer beware’. That principle may have been appropriate for transactions conducted in village markets—‘
than for the modern, consumer oriented transactions of today. He continued:
‘The untrained consumer is no match for the businessman who attempts to persuade the consumer to buy goods or services on terms and conditions suitable to the vendor. The consumer needs protection by the law and this Bill will provide such protection.’
The Trade Practices Act 1974 became operative on 1 October that year. It was the first legislation to contain consumer protection provisions. It empowered consumers to take private action to enforce their rights. It was legislation introduced by a Labor government. Until that time, through those long salad days of the Menzies government, consumers had to rely on common law remedies in matters where there was evidence of duress, negligence or unconscionable conduct.
It is no accident that Australia’s most efficient and commercially successful producers are those that have been subject to strong competition. The most competitive standards are those found in world markets. Suppliers of goods or services protected from international competition are not subject to the pressures that ensure efficient management and production techniques which require them to deliver high-quality products. They can get away with shoddy or overpriced goods and services without fear of loss of markets. The effect of this is doubly damaging and debilitating for the rest of the economy. It imposes higher prices and poorer services on Australian consumers. In this sense Labor’s tariff cuts did as much to help Australian consumers through lower prices as they did to encouraging Australian companies to compete in the world stage and to raise their performance to a world level.
In 1995 under the Keating government the Independent Committee of Inquiry into a National Competition Policy reviewed the Trade Practices Act. Fred Hilmer’s committee found that ordinary Australians benefited from the competition reforms in the way of price reductions, lower inflation, greater economic growth and more jobs. The key institution that came out of the Hilmer committee was the Australian Competition Commission, later the Australian Competition and Consumer Commission. Again, the Labor Party were looking after consumers. The tradition of protecting consumers from unconscionable business practices continues with this government. The changes proposed in this bill are part of a broader suite of reforms to increase fairness for consumers seeking credit, to better educate consumers about what they are signing-up for, to create a set of uniform laws across Australia. As the minister said in his second reading speech, this bill:
‘… is part of our commitment to always stand on the side of consumers.’
Today this bill is part of another Labor tradition of looking out for those who are vulnerable to poor consumer practices. It introduces reforms to the regulation of payday loans. These include: increasing the cap on short-term small-amount contracts to a 20 per cent establishment fee and a four per cent monthly fee; introducing a mid-tier cap of 48 per cent plus $400 for loans between $2,000 and $5,000 in terms of two years or less; a prohibition on loans of terms of 15 days or less; and a maximum 200 per cent total cap on charges for all lending. This bill enhances credit regulation and provides greater consistency between consumer leases and credit contracts. While access to credit can help manage unexpected expenses or see us through a rough spot, we need to remember that the most vulnerable members of our community are the ones least able to access legal advice to help them understand their rights and obligations of credit providers.
The reforms in this bill may have an impact on some lenders, and we have certainly heard from some of those lenders over recent months. We need to keep sight of the big picture. Research shows that over a third of all payday loan consumers have an annual income of less than $24,000. The majority have an annual income of less than $36,000. For those at the lower end of the income scale, the risk and consequences of getting caught in the debt spiral are all too real.
A client of Care Inc. in the ACT was a single female on the disability support pension. She had a number of health issues and had taken three short-term loans with separate credit providers. All of the loans were to cover medical and living expenses. Soon she was repaying by direct debit a third of her net pay. As a result there was not enough left to cover the rent and over a few months she had built up substantial arrears and was at risk of being evicted from her government rental property. In the meantime the credit card debt was increasing and that was exacerbating her existing health issues and she became stressed by it. With the assistance of a Care Inc. financial counsellor she was able to access emergency relief to buy food and negotiate an arrangement to repay her rental arrears. She eventually paid out the short-term loans, but not without considerable stress.
The bill also introduces statutory protections for those taking out a reverse mortgage. Just as a regular mortgage allows people to live in a house while they are paying it off to the bank, a reverse mortgage allows someone to live in a house while receiving regular payments from the bank. A regular mortgage ends when the house is paid off. A reverse mortgage ends when both members of a couple pass away. Reverse mortgages have the potential to allow older Australians to access the equity that is in their home for living expenses. But it is important that we put statutory protections around them. This bill introduces statutory protections against owing more than the value of the asset, effectively against negative equity, and puts in place additional precontractual disclosure requirements.
It was good to see in the chamber today the member for North Sydney claiming paternity for parts of this bill, which is certainly true. I have a press release of 3 April 2001 from the member for North Sydney when he was the Minister for Financial Services and Regulation in which he said, ‘Payday lending is an insidious practice.’ But it is Labor that finally brought these reforms home, as we have done with other reforms. The Howard government talked about education reform and structural separation of Telstra. I was reminded on reading the member for Moreton’s ‘Moreton Report’ that it was the Howard government which in 2007 said:
‘In the years to come it will provide a model for other nations to follow. Being among the first movers in carbon trading in this region will bring new opportunities and we intend to grasp them.’
But, while John Howard just talked about pricing carbon, it is this government that has done it.
The Labor Party takes care of the vulnerable in our society, be it with the pension in 1909, Medicare in 1984 or the National Disability Insurance Scheme we are working towards today. It is what we do. Good government involves the economic and the social; they are not mutually exclusive. For pensioners and retirees taking out reverse mortgages, we understand the risks they take. For those who need payday lending, we understand that it is important to place protections around them. Taking the sharp edges off predatory business practices is a social responsibility that this government takes seriously.
In my electorate there are organisations working with people experiencing credit and debt problems. Some of the organisations doing this marvellous work include Moneycare, provided through the Salvation Army, and Care Inc., which includes the Care Inc. Financial Counselling Service and the Consumer Law Centre of the ACT. I have met with Moneycare at their Dickson offices and seen how hard they work to provide assistance to people in the community who are under pressure from their debts. Moneycare reminded me that many people suffering from financial difficulty are also experiencing high levels of depression or anxiety as a result—that financial pressure and financial stress can trigger a number of other burdens that reduce a person’s quality of life.
Care Inc. are the main consumer law advocacy body in the ACT and also provide advice and assistance to consumers. They rightly point out that, even though low-income earners carry less debt than high-income earners, the potential for that debt to have a negative impact is far greater.
Moneycare told me of a client whose wife had an addiction and left him when the youngest of their four children was only a baby. Raising their four children by himself, he eventually got into another relationship. By his own admission, he was so in love with his new partner that he bought her whatever she wanted. Making purchases on multiple credit cards and short-term, no-interest loans, he accumulated a significant debt. His new partner then also left him. With $140,000 worth of debt and on a single income, he could not keep up with repayments. He became suicidal and tried to kill himself. He felt like a failure who was no good to anyone, but, with help from Moneycare, things are now going well for him and his children.
The history I have outlined demonstrates that it is vital to look out for the interests of consumers as well as the interests of the workers. This bill reflects the values of the Labor Party. Care, decency and respect are at the heart of decent, humane and responsible government. I commend the bill to the House.