Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Joint Press Conference
27 April 2009
SUBJECTS: National Consumer Credit Regime; licensing; responsible lending; ASIC oversight; electorate allowances
Well, thank you very much, firstly, for coming in on a public holiday. It's been a busy day.
Today, I want to release the National Consumer Credit Protection Bill for consultation. What's central to this new legislation is the Rudd Labor Government intends to crack down on irresponsible lending, and we intend to weed out dodgy providers of credit finance and dodgy advisers from this industry, and we intend to introduce as part of the new requirements responsible lending practices which will see a major improvement in the way in which credit finance is provided in Australia.
And, in addition to a responsible lending requirement, an Australian first: there will be tough new licensing provisions which will set our minimum standards of practice, education and training for both providers and advisers in the sector, as well as the first time - for the first time a low-cost, independent dispute tribunal to cover the entire sector.
Just to give you some idea of the scope of the new federal laws, mums and dads in Australia every day are involved in credit financial transactions. We're talking about some 5.7 million households who have some sort of debt; 2.9 million households have a home loan; some 750,000 householders have an investor loan; and some 2.3 million households have a credit card.
So, we're talking about an enormous area of financial services in Australia. What is going to occur is the transfer of state and territory law - where it exists at the moment, in some areas it exists, the national consumer credit law, for example, in other areas it doesn't exist at all - we're going to transfer those responsibilities from the states to the Commonwealth.
So, we will have for the first time in Australia single, national, standard regulation of all financial providers and advisers in this country under one set of laws. There will be tens of thousands of individual (credit) advisers, currently regulated at state level, transferred to the national jurisdiction. And there will be thousands of providers, currently regulated - some areas not regulated - shifted from the states and territories to the commonwealth jurisdiction.
Now, part of this change involves, as I said, single standard, national regulation. We will be replacing, where the states currently regulate and supervise, some 2400 pages of state-based regulation and law, and much of this regulation and law is very complex and in fact contradictory; you can have different rules applying in different states and territories. We now have a national financial system and we believe it is the right time to move to single standard, national regulation of all financial services. It's about 20 per cent of the financial services sector in Australia are still regulated and supervised by states and territories.
As I've mentioned, this is the national Consumer Credit Protection Bill. There will be two further bills to transfer other responsibilities: margin lending, which has been an issue of some considerable dispute recently; and also trustee companies, and I'll be releasing that legislation shortly.
With me today is Tony D'Aloisio, the chair of ASIC. ASIC will have responsibility for the new licensing regime, the implementation and oversight and enforcement. Tony will say a few words when I've finished.
The new single standard, national regulation of financial services is an essential modernisation - bringing our financial services sector, its supervision, into the 21st century. There's a new national licensing regime built around what will be known as an Australian credit license.
There will be a new responsible lending provision, and for the first time in Australia the financial provider and/or the particular individual, a broker, will be required to assess when a person seeks credit, financial credit, they'll be required to assess what is a suitable product.
And further, and very importantly, they will be required to determine the capacity of the individual to repay that particular credit financial transaction.
There is a cut in red tape. As I have mentioned, at the moment there is some 2400 pages of state law that is being consolidated into single national law. So there'll be a significant reduction in law and complex, often contradictory regulation.
In addition to that, most financial providers in Australia operate across state boundaries, so one single standard set of law and regulations that a provider is supervised by is much easier for the provider to operate than six different state and two territory laws.
As I've mentioned, there will be compulsory membership of a low-cost dispute resolution service. This is not currently a requirement in state law, so that will be an indi… additional improvement in addition to responsible lending to the new national rules. This is a significant new consumer protection and will have effective redress mechanisms for individuals.
We're also extending the law to include for the first time investment loans. Again, this has been an area of significant controversy in the context of margin lending, so we're extending out the current state laws.
The existing credit code will be improved. Individuals, mortgage brokers, for example, are not licensed in Australia, so with this new licensing of those individuals will come standards of conduct, improved education training requirements, a compulsory membership of an independent, low-cost dispute resolution process and we've, as we announced last night, extended the threshold for hardship application.
ASIC has been allocated some $66 million in additional funding, and it will be employing approximately 200 new staff, with its significant new responsibilities.
I might say, before I take questions, this new single standard regulation of financial services has been subject to at least three inquiries over the last 12 years. There have been at least three inquiries: no action taken under the previous government. We decided, on coming to government, that the time was right for national regulation of all financial services.
And we came to that conclusion for a number of reasons. Firstly, from a business point of view, a moderate size economy, it's inefficient for financial providers to have differing laws and regulations across state boundaries.
Secondly, we observed very carefully what occurred with massive mis-selling of mortgage products in the United States, and that's reinforced our view that it was time to introduce national standard regulation and supervision.
Now, I won't go into all of the issues, but in the United States mortgage brokers were supposedly supervised by 50 different states. They could say and do anything to sell a product, usually commission based.
And we've looked very, very carefully; we haven't had mass mis-selling in Australia. We've had mis-selling and irresponsible lending at the edge of our financial system, but we believe it is now time, for the reasons I've outlined, that we should have a national, single set of rules on all financial services.
The third reason for moving down this route as quickly as we can is that it's very apparent, from the fall-out of the world financial crisis, that there'll be increasing levels of coordination and supervision at an international level, and realistically, when you've got about 20 per cent of your financial services regulated and supervised by the state governments, it is practically very difficult for state governments to be involved in international regulation and supervision.
So, for those reasons, the Labor Government strongly believes its time to move to national regulation of all financial services. And we're dealing here today with credit provision. As I've mentioned, I'll be releasing draft legislation on mortgage margin lending and on trustee companies. And of course the legislation will also include non-deposit taking institutions for the first time as well. So, everything is being shifted over to single standard, national regulation.
They're my opening comments. Tony wants to say a few words as the chair of ASIC, which will have responsibility for implementation and oversight of the new regime. Tony.
Thank you, Minister. Good afternoon. [Break in transmission] clearly pleased to have received the responsibility to administer these new national laws, and I think I can assure you that we'll be extremely proactive in administering these laws and vigilant in their enforcement.
Our responsibility is just to talk a little bit about those, is firstly - first in the area of registration and licensing. This is really an important tool that ensures that providers of credit meet certain standards, and clearly standards that we will seek to reinforce with training and standards, such as if they have adequate resources to provide the services; they're members of external dispute resolution schemes.
Our second responsibility is going to be around surveillance and compliance. That's to ensure, as much of our work is to ensure, that the law is complied with and will run in part of a surveillance. We've had examples where we've run shadow shopping exercises and we're currently doing a term deposit review, and we'll apply similar approaches in this area.
The area of responsible lending, a new initiative is clearly one that we will be looking at very carefully as it unfolds to ensure that it delivers the benefits that the minister has talked about. Our enforcement actions will also revolve around licensee misconduct, civil and criminal penalties and so on.
In addition, we have, as we have in other retail investor and consumer, financial consumer areas, placing increased emphasis in consumer credit education, ASIC will extend its various consumer and retail investor education programs, including in the financial literacy responsibilities that it has, to assist consumer creditors to better understand their rights, and we'll make greater use of such things as our FIDO website.
And clearly, we will also engage in industry and consumer consultation to simplify processes under the new regime once they're enacted.
We're very conscious of the fact that with such a significant piece of legislation, we will need transitional provisions and a very active and proactive approach of dealing with the myriad of issues that are inevitably going to arise from moving from a state-based system to a federal-state system.
As the minister has indicated, we have been given resources to carry out those functions. We anticipate hiring - we have been given over four years an additional $66 million. We anticipate an additional 200 full-time employees as a result of that over this next period.
Overall, that will be, I guess, a net contribution to employment. Our estimate is that the states are currently probably using about half of those - half of that number in this area. The doubling of it is also related to us getting additional responsibilities such as in the area of responsible lending.
We see that these resources - and we will be spreading these resources across Australia, particularly we're looking at strengthening our Adelaide, Traralgon offices, Perth and in particular Darwin to complement the work we do particularly in the - for the Indigenous communities in that part of the world. We'll be creating a new stakeholder team in ASIC to take forward the various issues that inevitably arise in legislation of this sort. We will have a new deterrence team that will be there to enforce the new consumer credit laws.
As the minister has indicated, when you look at the position in Australia, you've got 5.7 million households that have some sort of debt; you've got 2.9 million households that have a home loan; 750,000 households that have an investor loan; 2.3 million households that have a credit loan.
We will have an estimated population of some 10,000 entities to be registered. We will be seeing issuing something like 3000 new licences; 2000 current FSL licences will apply for the new credit licences; and probably 5000 extended to cater for retail end of the market.
So, I think you can see from that that the administration of this piece of legislation, when passed, will be very significant for ASIC. It is approaching it with a view to having proper and adequate resources in place.
And in short, we think that why consumer creditors will be better off with ASIC taking this responsibility, is really around the national framework: you will have a one-stop shop regulator; the additional resources that the Government has allocated to this area; the new registration and licensing system, because a substantial part at the moment, as the minister said, are unlicensed; the Australia-wide surveillance and compliance, the stronger enforcement powers, and I think we do have - ASIC does have proven consumer and retail investor education programs.
So overall, we're pleased to have received this responsibility and clearly we'll discharge it to the best of our ability.
Thank you, Minister.
What sort of penalties will apply [indistinct]?
If you look at the back of the press release entitled Public Exposure of National Consumer Credit, three levels: infringement notices, on-the-spot fine, if you like, for a minor transgression. Then the next level of civil penalties for licence misconduct. ASIC can impose fines of up to $220,000 on an individual and $1.1 million on a corporation. And then criminal penalties with up to five years jail for obviously significant breaches and actions determined by the courts, and that would of course probably mean the withdrawal of a provider's licence to provide financial credit in those circumstances.
Will there be any limit on lenders, like payday lenders and the like, what - a cap in the interest rates that they can charge?
Yeah, payday lenders will be covered by this legislation. I think three states have a 48 per cent cap. That will be retained.
What we are doing is adding this new responsible lending principle for the first time. Those states that don't have a 48 per cent cap, we're going to ask them not to impose a 48 per cent cap, and then we will assess the outcomes; we'll look at what has happened in the states that have a 48 per cent cap and those that don't, with a responsible lending provision that has come into force, and we'll look at what the outcomes are and determine whether it is appropriate to maintain that 48 per cent cap.
It's a good example, I think, of a practical way to assess the evidence in an area where there was strong disagreement between the various people, organisations who were consulted. This was one of the - an important area, one of the relatively small areas where there was disagreement during the consultations.
With measures such as changing the threshold where people can look for changes in their contracts, that's obviously designed to help people in tough times like we're seeing now. Why can't that be brought before Parliament and brought into law before November?
Well, this is a very major set of legislation - very, very substantial change to the regulation of financial services. We're dealing with a comprehensive total overhaul of our financial services regulation and supervision.
Now, it's my intention - I'm releasing this legislation today, a four-week consultation public period, into the House of Representatives in June, and I would certainly want to see this passed by September. That's our intention, subject of course to the Senate.
So, we want to see this legislation with a comprehensive overhaul passed as soon as practically possible.
And it's not practically possible to do it any…
Look, I think to hive off small but important parts of this legislation, we just practically wouldn't be able to do it.
And lifting the threshold to $500,000, have you done the back-of-the-envelope calculation as to how many Australians could benefit?
It would be in the thousands, but I can't give you an accurate figure. And the reason I can't give you a precise figure is that individual circumstances are changing.
Obviously, with the increase in unemployment over the coming months, new individuals will be in new circumstances, and it's dependent on individual circumstance.
Under this legislation, will people who give advice get blamed if people want to go ahead and make stupid decisions anyway? How much is this protecting people from themselves?
Well, firstly, the individual adviser, if you like, who will be licensed to take a mortgage broker, because there is no licensing of mortgage broker, the requirement is that the broker assess a suitable product and can only provide advice in respect to a suitable product that suits their circumstances. And on top of that they have to ensure they have an ability to repay.
So, in those circumstances - and we've seen some, mis-selling, if I could call it that, at the edge of our financial system - I think it practically would be very difficult for individuals who can't meet these new standards to obtain a loan. I think it would be practically very difficult.
And, to give you one other quick example, in margin lending, of course, the responsible lending provisions and the various new provisions in this legislation would be part of, say, margin lending. Now margin lending has been of significant contention over the last 18 months. For example, there have been individuals who only had their own home as the asset to support the lending to buy shares, and/or had a very low income. I think, with these new laws, it will be practically very, very difficult for individuals to enter into margin lending with these new laws.
Minister with the hardship threshold, it's going to be - you're going to have the same problem forcing the banks to renegotiate these loans that you're having in persuading them to reduce - to pass on the full Reserve Bank interest rate cuts really, aren't you? There's nothing you can do to force them, despite the fact you have the ombudsman.
Well, one - well, that's an important change.
Firstly we're not just dealing with the banks and we're dealing here with a threshold that affects all credit providers. We're not just talking about mortgages, there are other forms of financial credit provision, credit cards, payday lending, et cetera.
So, it's a lot more than mortgages, although mortgages are obviously the most important area, and there are a lot more providers than just the banks. And so what will happen is yes, you go to your provider, you seek relief it may be a principle or interest rate relief for a period given hardship. If you are not satisfied with the outcome you go to the ombudsman. Now for the first time, banks have signed up to the ombudsman service, that does exist for them, but there are many providers who are not signed up to any dispute resolution service at all - many providers who are not signed up at all.
And they will determine, the ombudsman service will determine - be the appeal process for the first time.
So those, the recommendations of the ombudsman will be enforceable?
Correct, they're signing up to the ombudsman. And part of this is that where you've got providers who are not signed up to the ombudsman - and there are a lot of them, a lot of them - they sign up to accept and abide by the decision of the ombudsman.
Can I just ask you what you'll be doing with your extra electoral allowance?
I'll be doing what I've always done with it, that is making donations to sporting organisations, clubs; I typically donate 50, more than 50 books to speech nights every year. I spend every cent of my electoral allowance for the purpose that it's meant for, and that's for providing assistance in my electorate of Tasmania and I spent the lot on that. That's why I'll be doing with it.
Do all of your colleagues spend all of that or…
Oh, you'll have to - I can only speak about my circumstances and as far as I am concerned, I get hundreds of requests every year for donations to individuals, donations to sports clubs, community organisations, book prizes, prizes for raffles, raffle tickets, shows. It's a very, very long list and that's what my electoral allowance is for and it's all expended.
Can you see how some people might see it as a bit hypocritical, given the Prime Minister froze MPs pay last year, to be allowing something which may allow MPs to increase their own pay if they don't spend all this [indistinct]?
Well, it's not a pay increase, it's an allowance increase for the purposes of expenditure in your electorate, and I've outlined what those types of expenditure are. Secondly, it's determined by the remuneration tribunal and as I understand the figure hasn't increased since 2000.
You won't be knocking it back though?
I will be paying my increase in electoral allowance to the same people in the community, sports organisations, shows, schools for books, all of those sorts of expenditures that I've entered into in the past, I will be paying that allowance for those purposes.
You're making it sound like a slush fund.
Well, I mean, well…
No, is that a reasonable description, you're…
Seriously the ele…
…being [indistinct] paid to handout in books to the libraries and [indistinct] on your own whim.
I am being serious.
Well, members of Parliament receive hundreds of requests, as I've said, for donations to sports clubs, for prizes, for shows, for raffles - I've outlined what a typical member of Parliament receives requests for and that's where the money goes.
And how do you account for this, how's the electoral allowance accounted for, do you send back something this is how I spent the money?
The expenditures have to be declared in your tax return to the ATO.
If you've giving it all away, why do you need more?
Well, every year we receive, well, certainly in my case I receive hundreds of requests. I can't meet all those requests, most I am able to meet, but I can't meet them all. And I am sure after my public comments today I'll be receiving a lot more requests, so I am very, very confident that the additional allowance will be spend for those sorts of purposes, very confident indeed.
Any further questions?
Can I ask you a more boring question on, you mentioned low-cost tribunals [indistinct] available for the first time. I know some consumer groups are concerned that in Victoria, New South Wales, consumers at the moment have access to low-cost tribunal. Is this what you're talking about? Would there be a national tribunal, or are you talking about the ombudsman?
We have, at the moment, a national ombudsman service. Now that will apply in most cases to the new set of disputes that arise from the transfer. We can't - we're not legally able to use existing state tribunals, there's a constitutional prohibition on federal law using state tribunals; however, we put in an additional safeguard and federally, the courts will be able to deal with disputes and there have been some discussions and mechanisms worked out to again ensure that if an individual wants to go to a federal court in a federal jurisdiction, they're able to do so in a low-cost way as well as the additional protection of the ombudsman's service which is very low-cost, in fact nil cost, in most cases, with no legal costs involved.
So, the ombudsman is basically taking over the role of say, in New South Wales, the CTTT?
In many cases it will but the individuals still have the right - they'll have the ombudsman service they can go to, or they can go to a court process which is going to be especially simplified in order to hear disputes in this area.
So, direct to the financial ombudsman's service - many cases at the moment consumers under state law don't have that access, some cases they do, some they don't - so they'll all have access to that, under all of the new dispute resolutions rules, supervision that comes over. And secondly, if they want to appeal beyond that, they'll have access to the court.
Or thirdly, if they want to directly go to the court, and I don't think most would want to, in first instance, they could do that and there'll be special provisions for low-cost, informal hearings, if you like, without the formality of a court.
How do you think this will affect, say, interest only loans or low-doc home loan?
Look, I think there will continue to be low-doc loans, if only because there are a group of people typically self-employed, which don't have a waged salary record.
So, I think it will have an impact, but there will still continue to be low-doc loans.
Okay, one more question and then we'll have to wind it up.
How do you define - like, how timely are you defining suitability of a credit product and capacity to repay?
Well, typically, if you go to borrow investment loans, say, and you need to borrow $200,000, that adviser - who will be licensed for the first time - will obviously need to look at the suitability of the product, i.e. are you going to pay it - repay the loan over say, 20 years rather than five years and what the level of repayment is. They will need to look at your income; they'll need to look at your other expenditures.
So, it's an individual assessment looking at those - and many providers, I have to say, do that at the moment. Some don't, but many providers do that at the present time.
So, what you've got in this area, and it's at the edges or the margins, some operators who fail to carry out these processes. And we're - in a sense we're either going to weed them out, they won't be allowed to practice if they can't adhere to the new responsible lending code, or if they do wish to be licensed and continue, they're going to have to lift their standards.
Do you think you could rule out unsolicited offers of credit cards [indistinct] the 18 year old kid with a $5000 credit card?
The issue of unsolicited credit cards - good question. That is going to be dealt with in the context of this legislation in stage two, at the end of next calendar year, but it's an area that we have under close consideration and scrutiny.
This project is divided into two parts for practical reasons, and I've indicated the areas we're transferring and how we intend to regulate. That area, as well as what we would call property spruiking - where individuals are selling property and there's a financial instrument or recommendation attached - that will be dealt with in stage two.
Thanks very much.