Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Keynote Address to the National Consumer Congress
13 March 2009
Good morning, and thank you for that kind introduction.
Thanks also to my Ministerial colleague Gail Gago and the South Australian Office of Consumer and Business Affairs for hosting this National Consumer Congress.
The theme of this congress, A Fair Marketplace, encapsulates very well the Rudd Government's vision for a modern consumer affairs system for Australia.
I know that yesterday you heard from my Ministerial colleague Chris Bowen, who spoke to you in detail about the Rudd Government's plans for a new Australian Consumer Law.
As Chris's agenda clearly illustrates, the Rudd Government is very concerned about a consumer marketplace that is fair and balanced and will foster well-informed and confident consumers.
Another key element of our approach is national consistency. Chris yesterday spoke about how a nationally consistent approach to consumer law will see Australian consumers – whether they're in Perth or Melbourne, or here in Adelaide – protected by one, national and consistent regime.
This morning, I'd like to continue with that theme – of consumer protection, of national consistency, of getting the balance right – and discuss with you the very latest on the National Consumer Credit project.
But before I do, I'd like to touch on why all this work is just so critical, and why it's been such a priority for Chris, for me and for the Prime Minister.
Consumer credit and the need for action
Earlier today, I visited the Uniting Care Wesley Centre here in Adelaide.
It was an important visit for me to make.
Uniting Care Wesley is at the frontline of dealing with the fall-out when consumer credit goes wrong.
The Wesley staff have been providing financial counselling services to the people of Adelaide for a long time, including an outreach service at the Lynay Community Centre at Blakeview for over a decade.
Like other organisations in this field, so many of which are represented here at this Congress, the services being provided by Wesley are critical to many in our community.
The details of each individual case can, as you know, vary widely, but so often the core of the problem is one where an irresponsible or inappropriate amount of credit has been extended to a person, and over time, they've become unable to keep up payments.
Even where the amounts of money are not significant, perhaps just a few hundred dollars, if this is your situation, it can cause immense anguish and stress.
Or another example could be where a retired couple are encouraged to enter into a reasonably high-risk margin loan, including removal of equity from their family home to buy up leveraged shares on the stock market.
When things turn sour on the global markets, a very local impact hits the couple – they're suddenly subject to a margin call, potentially negative equity, financial ruin and removal of the roof over their head.
Did they know and understand the risks? Did they know about the commissions being paid when they took out the margin loan? Was such a product ever appropriate for them?
For over a decade, these situations – from the cause of credit-induced financial stress through to the risks of retail investments such as margin loans – were roundly ignored by the former Federal Government who did not see a role for Canberra in any of this.
I can repeat here today that the Rudd Government has taken, does take and will continue to take a very different view.
Global financial crisis and consumer credit
Before I turn to the consumer credit project, I just wanted to make a few comments about the broader financial and economic environment in which we find ourselves.
We are all well aware that the world is in dire financial straits - we are in fact heading into a global recession with global growth forecasts slashed for this year. Globally, growth is expected to fall to the lowest level since World War II.
Just this week, the IMF, through its Managing Director, Mr Dominique Strauss-Kahn, warned that the world was gripped by what he and the Fund called a "Great Recession".
Fiscally, the international picture is grim, with the IMF forecasting a collective budget deficit of seven per cent of GDP for advanced economies.
Australia obviously cannot be immune from the effects of this crisis.
A budget deficit is now forecast for 2008-09 of $22.5 billion, or 1.9 per cent of GDP.
Comparatively, this is markedly better than any comparable economies and, as a member of the Rudd Government, I can again reaffirm our commitment to deliver budget surpluses, on average, over the course of the economic cycle.
As the economy recovers, and grows above trend, the Government will take action to return the budget to surplus.
And we've taken action.
On 13 February, the Australian Parliament passed the Rudd Government's $42 billion Nation Building and Jobs Plan to support jobs and invest in future long-term economic growth.
Stimulus packages are a sound strategy.
Treasury estimates that the Nation Building and Jobs Plan will support up to 90,000 jobs in 2008-09 and 2009-10. The initiatives in the Plan will boost economic growth by about ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.
The $42 billion Nation Building and Jobs Plan builds on the stimulus measures already implemented by the Rudd Government to support economic activity and jobs, including the $11 billion Economic Security Strategy.
With so much at stake, this is clearly no time for indecisiveness or delays. In fact, the IMF recently urged governments world-wide to implement their stimulus packages quickly.
And, that's exactly what this Government is doing.
Coming back to the core issue of today's Congress, as this global recession sweeps through our economy, having a sound set of consumer protection laws in place will prove critical.
Credit, in particular household consumer and mortgage credit, lays very much as the heart of the global financial crisis.
The story of outrageously irresponsible and inappropriate lending to the "sub-prime" mortgage market in the United States is now very well known.
National regulation of consumer credit
Well before the global financial crisis hit world markets and the Australian economy, Kevin Rudd, Wayne Swan, Lindsay Tanner and I had discussed the need for action on consumer credit.
What we agreed was that should we win Government in 2007, a Rudd Labor Government would step up and quickly seek agreement with the States and Territories for a nationally consistent, clear regime covering the remaining credit and financial services not yet regulated nationally.
We had already received report after report suggesting just that – and - sadly they'd all been ignored.
Now, whilst the systemic problems that beset the US have no comparisons here, we have nevertheless decided that we must take action now, avoid complacency and bring Australia's credit regulation regime into the 21st century.
And – we determined – that at the heart of this plan would be a new approach for Australia built on responsible lending and consumer protection.
As such, in June last year, I released the Financial Services and Credit Reform Green Paper, and in March and July, the Prime Minister secured the agreement of State and Territory leaders to transfer consumer credit to the Commonwealth.
On the back of the Green Paper and further COAG agreement on the details, I announced the Rudd Government's $71 million National Consumer Credit Action Plan for single, standard, national regulation of consumer credit for Australia.
This Action Plan was structured around three core goals – boosting consumer protection, cutting red-tape for business and delivering on the Government's commitment to modernise Australia's key financial services.
I want to be very clear – although I know all those in this room will appreciate this – this project is of substantial scale.
To make the transition as smooth and as seamless as possible, we are implementing national credit regulation in two clear phases.
This phased approach strengthens consumer protection, while minimising disruption to business.
Under the first phase, the Commonwealth is taking responsibility for the existing State and Territory legislation — the Uniform Consumer Credit Code — by enacting it as Federal law.
Work on this phase is well underway.
Before the middle of 2009 I will introduce into Parliament the National Consumer Credit Protection Bill.
It is not by chance that the words "consumer" and "protection" will be prominent in the name of this Bill.
An intensive process of peak industry and senior official consultation has been underway since the Action Plan was announced and in the very near future I will receive the outcomes of this work.
Shortly after that, the Federal Cabinet will consider the draft Bill. This will be followed by a full public exposure period.
Once the Bill is on the table I look forward to hearing the individual views of those at this Congress – I know you'll all have views.
I think the balance, as it has been struck so far, is the right one and I would take this opportunity to thank each of the industry groups for their intensive and positive contributions.
Without going into the details of the regime – that will all be made clear with the Exposure Draft – I can confirm that the regime will deliver on our commitment to responsible lending and consumer protection.
The responsible lending provisions in the new law will emphasise general conduct obligations.
Credit providers and providers of credit services more generally, will need to provide credit services honestly, fairly and responsibly.
Specific responsible lending requirements will also be put in place to protect consumers from being offered loans that are clearly unsuitable for them or that they cannot afford to repay.
If lenders do not meet these conduct obligations there will be serious ramifications, the details of which will be announced shortly.
Activities such as extending credit without any credit checking or analysis of capacity to pay, will simply not be allowed under these obligations.
The benefits of responsible lending requirements in the law will be many: if individuals are not put into unsuitable credit products from the beginning, if their true capacity to pay is properly assessed, then the frequency of debt stress and debt crisis will decline.
The fantastic work of financial counsellors such as those I visited this morning will always be needed, but my hope is that as these comprehensive conduct obligations regulate lender behaviour, we will see substantial and positive impacts.
It is critical that we match strong front-end obligations with robust and accessible consumer protections that apply once an individual has taken out a loan.
Consumer protection is currently provided under a complex web of different regimes.
To this end, the new national consumer credit law will establish, for the first time, a comprehensive national licensing regime which will be administered by the Australian Securities and Investment Commission, ASIC.
I stress again that this regime will be comprehensive. If you extend credit to retail clients as your business, you will be required to be licensed.
This includes all credit providers, as well as credit and mortgage brokers and advisers.
This national licensing scheme will ensure that lenders meet appropriate entry standards before they can offer their products and services to Australian consumers.
Once they have become licensed they will be required to meet continuing standards of conduct higher than those that currently exist at a State and Territory level.
These requirements will ensure that those who do not meet these standards must either improve their conduct or leave the industry.
ASIC will receive $66 million of the $71 million in new Commonwealth money to support the new national consumer credit regime, and will also be given extra powers as the sole regulator.
ASIC and Treasury are working with State and Territory bodies to ensure the core of knowledge and expertise at the state level is not lost during the hand-over.
The Government's strong expectation is that license breaches – particularly those in relation to responsible lending – could result in serious sanctions, including revocation of a licence, therefore, the provider's ability to extend consumer credit.
This is a very serious disincentive for bad behaviour, but not one we will shirk from using if needed.
It is also expected that initially, following introduction of the Commonwealth law, ASIC will have an active role in ensuring all lenders and brokers who are active in the marketplace are licensed, and in addressing unacceptable fringe conduct.
ASIC will also, among many other things, work with the states to develop a nationally consistent, yet well-targeted set of information guides for consumers about how the national regime will operate.
In short, consumers will be better informed, more engaged and more empowered.
Of course, regardless of how good the responsible lending requirements are or how comprehensive the licensing regime is, dispute can and will occur.
That is why, as a condition of their credit provider licenses, all providers will be required to be a member of an low cost external dispute resolution, or EDR, body.
This is a critically important consumer safeguard.
Currently, in the credit market, such membership is voluntary. Lenders or brokers with the least concern for their clients, or for repeat business, typically tend not to join these schemes. It means that consumers who have a dispute with these lenders or brokers can only seek redress through court action, or not at all.
All borrowers will be able to appeal to the external dispute resolution body for quick and simple resolution of a dispute.
This keeps costs down and ensures that dispute resolution is accessible to all.
I would take this opportunity to again note very specifically that the regulation of margin lending will be greatly improved under this regime.
Together with the National Consumer Credit Protection Bill, I will be introducing into Parliament in the first half of this year, the Corporations Amendment (Financial Services Modernisation) Bill.
This Bill will do a number of things to implement the outcomes of the Financial Services Green Paper, and among them, it will set up a new national regime to regulate margin lending.
Thinking back to that retired couple and their inappropriate margin loan I mentioned earlier, I want to specifically mention our plans on margin lending, because it's an area about which the Government has been concerned about for some time – and indeed well before the spate of very unfortunate margin lending related corporate collapses of recent months.
Margin lending will become a Chapter 7 financial product and its disclosure will be clear, succinct and contain information on commissions.
It will also have its own tailored responsible lending obligations, including a requirement for the ultimate lender to know whether the capital being brought to the table by the retail borrower is in fact their own, or whether it is itself debt, such as equity from a home. In such cases the lender will be required to assess what I call the "true loan to value ratio".
Another way we are creating a fairer marketplace is by facilitating product disclosure documents which are short, simple and readable. Documents which will better enable consumers to understand and compare the full range of financial products.
This work is being carried out by the Financial Services Working Group. The Group has already produced a four-page product disclosure statement for First Home Saver Accounts.
Recently, the Financial Services Working Group began consultations with industry on a new, national, margin lending regulatory regime.
The regime will include new short-form, plain English product disclosure documents.
It's important that investors not only receive clear advice about why a particular product or strategy is being recommended to them, but also what's in it for the person or firm recommending it.
Equally important is that specific responsible lending requirements will also be in place to protect consumers from being offered margin loans that are unsuitable for them and they cannot service.
That's why disclosures in the new short-form product disclosure statement will include all fees and charges, and fully inform consumers about any commissions paid by margin loan providers to advisers who sell the product.
Conservatively-geared margin lending may have a role in a balanced investment strategy. But it's critical that potential investors understand the risks associated with margin lending and are fully informed about how margin lending works in both rising and falling markets.
The new, clear disclosure regime will fill this information gap.
These reforms are a decade overdue and are the right response at the right time - the free-for-all of the last decade that has seen so many mums and dads, even grandmothers and grandfathers, ruined will not continue.
The second phase of the action plan will take this project even further.
Phase two will look at possible further rules to stem specific unfavourable lending practices, such as a review of credit card limit extension offers, deceptive advertising practices and other fringe lending issues.
It is in this phase, as agreed by the Prime Minister and the Premiers and Chief Ministers of each State and Territory, that the issue of interest rate caps is scheduled to be dealt with.
I remain in close dialogue with my State and Territory Ministerial colleagues on this issue, which I understand remains of importance.
I would say this, once the comprehensive responsible lending obligations come into effect, it may shed new light on the role that such caps actually play, including an assessment of their strengths but also their weaknesses in addressing the targeted problem.
I truly wish the type of lenders we all know as problematic were unnecessary and had gone from our landscape. But even if we were to legislate to that effect tomorrow, it would not remove the need for their services.
What we need to do is get the particular solutions to match the particular problems, and I still believe that a full and detailed analysis in Phase Two is the best place for this to occur.
In the meantime, I again thank my State and Territory Ministerial colleagues and officials for their work – we've made considerable progress on tough issues and done so whilst keeping the central goal of consumer protection in mind.
Whilst our colleagues in the United States grapple with a complex web of 50 jurisdictional turf wars, whilst the Canadians continue to predominately regulate financial services at the provincial level and whilst the European Union seeks to harmonise often widely varying laws between Member States, Australia will move to a seamless, national approach.
A national approach is also critical to improving international oversight of financial services. It is increasingly international financial services with often highly complex products instantly transferred around the world to unsuspecting retail customers.
Effective supervision can only occur through international action on a nation state to nation state basis within a robust international framework.
Keeping this momentum going will mean, in the very near future, we will have the kind of truly national system we need.
I would also like to take this opportunity to say a few words about financial literacy.
Recently, I travelled to Far North Queensland, to the remote Gulf country in the Northern Territory and to Alice Springs on a listening tour with ASIC and Treasury, exclusively focused on financial literacy.
It was eye opening indeed.
The level of need in these communities for financial literacy services is immense.
I today reaffirm the Government's commitment to assisting individuals and families to maximise their social and economic outcomes.
Government plays a key role in addressing disadvantage and promoting financial — and more broadly, social — inclusion.
Financial inclusion is about making sure that all Australians, particularly our most vulnerable, have;
- the skills to manage their money on a day to day basis,
- are able to plan for their futures and cope with financial pressures and,
- are able to deal with financial stress should they encounter unexpected financial difficulties.
I would like to briefly touch on these three aims.
First, the skills issue - financial literacy is an important skill that assists individuals and families to secure their financial futures and is also critical in augmenting and strengthening consumer protection.
As stated by the OECD:
"Financial education and consumer protection are not substitutes but rather complements. The latter provides a safety net for those who are unable or unwilling to improve their financial education."
Financially educated consumers are in a better position to manage risk and protect themselves. They are simply less vulnerable to fraud and abuse. In the long term, this results in more effective regulation.
Competent, confident and engaged consumers who make sound financial decisions will not only be improving their own lives but also society as a whole.
Raising financial literacy levels will also improve household savings performance, reduce dependence on Government allowances and help lower the level of problem debt.
In short, financially literate consumers are a vital ingredient in future economic growth.
This is why the Australian Government has an ongoing commitment to improving the financial literacy levels of all Australians — particularly the more vulnerable members of our community.
As you might be aware, the Government has consolidated its financial literacy response by creating a new Financial Literacy Office within ASIC.
By bringing together the twin functions of financial literacy and consumer protection, the Government is strengthening the role of ASIC in safeguarding Australia's economic reputation and wellbeing.
We all recognise that, when it comes to financial literacy, there are no quick fixes.
This is why ASIC's approach to financial literacy will be designed to create and sustain long-term generational improvements in financial literacy.
To achieve this goal, we need to understand financial behaviour. ASIC's approach will be based on evidence… grounded in our understanding of financial capability levels in the community… and informed by research.
A coordinated national approach will leverage the considerable commitments that a range of agencies — Government, private, and not-for-profit — have already made - to promote financial literacy.
This is an ambitious agenda that aims to forge a new path of co-ordination and cooperation.
ASIC's FLO has been consulting widely with key stakeholders and has established Community of Practice, held monthly via video link up around the country to facilitate such partnerships and shared learning that ASIC. I had the pleasure of attending the first one held a couple of weeks ago.
As part of our comprehensive approach to financial literacy, the work of ASIC will be complemented by the programs ofother Australian Government agencies.
Planning for the futures and coping with financial pressure
My visit to United Care Wesley earlier today, highlighted once again to me the critical role financial counselling plays in addressing these issues.
I can assure you the Rudd the Government recognises the importance and effectiveness of financial counselling.
In this last Budget, the Federal Government increased funding for financial counselling services by $20 million over four years. Specifically, we increased funding for the Commonwealth Financial Counselling program by $10 million, effectively doubling the size of the program.
As well, we will provide funding of $10 million over four years to develop and distribute easy-to-understand material to help Australians to manage their money better.
The increased funding will ensure that services are more readily available and can be accessed when needed – at critical turning points and before small problems become large ones.
In addition, Centrelink offices across Australia provide clients with information and assistance on specific financial issues. This has been boosted by the Government's commitment of $10 million over four years to develop and distribute easy-to-understand material to help Australians to manage their money better.
Dealing with Financial Stress
Access to basic financial services and affordable credit are essential to addressing financial disadvantage.
As a Government we are committed to ensuring individuals have access to appropriate financial products as well as the confidence and capability to use them.
Last month, I launched the expansion of the NAB Step UP low interest loan program in my home state of Tasmania. The program, a partnership between the National Australia Bank and Good Shepherd Youth and Family Services, complements the Good Shepherd "NILS" scheme and has been delivering low interest loans to low income earners in Australians since 2004, with about 1200 loans being made to date.
Loan programs such as these allow people in difficult financial circumstances to meet their basic needs without resorting to the high-interest, high-fee products offered by less credible lenders.
By respecting and building on the capabilities of low income earners, they build confidence and self esteem in borrowers.
By repaying loans, the customer establishes a credit rating and gains a foothold in the mainstream credit and banking market.
Importantly, programs such as these combine the loan application process and the repayment period with appropriate advice and support.
Appropriate, affordable and accessible financial services for low income owners can help to break the cycle of debt and alleviate the inequitable situation in which the poorest people are often the ones who pay the most to meet their credit needs.
The Government is committed to working with all stakeholders – banks, financial service providers, community and voluntary sector to address financial exclusion.
Access to appropriate, affordable and accessible financial services and support to disadvantaged individuals and communities, not only complements the reforms I have talk about today, it is critical to tackling financial exclusion and is something I am very keen to see expanded.
Ladies and gentlemen, the Rudd Government is about taking action.
My Shadow Minister is fond of saying I conduct too many reviews – well I can say that I am immensely proud of what we've done on consumer credit.
I did review the area – quickly, effectively and appropriately.
The problems were clear and we're now taking action to address them. The reforms are wide-ranging and ambitious.
They are about protecting consumers but also about laying a level playing field for business and cutting red-tape.
In doing this, they are indeed about creating a fair marketplace for all Australians.
And, in doing so, we will ensure that the Australian economy is modern and strong and that Australians are well informed and well protected.
Thank you, and I trust that you enjoy the rest of the Congress.