SUBJECTS: Unfair contract terms, interest rates, penalty/exit fees
Chris Bowen, a very good morning to you.
Good morning Geoff.
How will this work?
Well, we have the situation that were you enter into a contract and it is a standard form contract - so not one that is negotiated but a 'take it or leave it' type arrangement, and we are not just talking about banks here of course, we are talking across the economy and often these things exist for mobile phones and gyms and other things - you find that there are sometimes unfair clauses in there.
This law is designed to enable a consumer to be able to say 'well hang on a second, I think this clause in this contract is unfair, I know I signed it but it was a standard form there was no negotiation, I didn't have a chance to discuss it, and now I find it is unfair'. And so this will really rebalance the arrangements to give consumers a lot more power on their side when they are trying to get these things dealt with.
Why have you introduced it, what is behind it - is it because Treasurers, be it Wayne Swan or Peter Costello, would regularly tell us if we are displeased with what our banks do, swap them – but the reality is that it is not that easy, and that these bank fees have been financial hand-cuffs – is that one of the motivations?
Well look it is across the board Geoff. What we are doing at the moment is modernising our consumer affairs law - having one consumer affairs law across the country instead of different consumer affairs law in every state. As part of that process we looked at what is in the states' laws that works very well.
Victoria has this law for nine years and it has worked well. It really rebalances the arrangements and so we have agreed - the States and the Commonwealth - to apply it across the country.
And what it will do is, it will look at what is fair and what is unfair, and it will enable the regulators, the ACCC being the national regulator and the state regulators, to challenge a clause in a contract and say it is 'unfair'.
Now to use your example of exit fees, that is just one of many examples of things that people have raised, but to use that example; there will always be some sort of penalty for changing a contract. That is fair and reasonable, if you enter into an arrangement, and then you choose to seek to change that arrangement, there will be some sort of cost involved in that.
The whole question is what is fair and what is necessary to protect the legitimate interests of the supplier - the retailer or the bank. So if you may take out a gym membership, and your circumstances might change, you might have a family change, your family might break up and you need to move, or your job might get transferred and you need to move or you might find that the service provided is no where near the what you expected; and you might want to go and say 'well I want to cancel this contract'.
Well there will be some sort of fee or penalty, but what is fair in all the circumstances - in some cases those fees and penalties are much too high. Similarly in mortgages you will find that high exit fees, high penalties for trying to break. This will give the courts the power to say 'well in all the circumstances, some sort of fee is fine, but look this is just way in excess of the costs for the supplier and is not necessary to protect the legitimate interests of the supplier so we are going to rule it out'.
That is just one example; there are different examples of what are unfair. I have seen proposed terms in contracts which say you waive your rights to court action by signing this contract, or that if we fail to provide the good or service we will still charge you, I mean things that are patently unfair.
Let me just ask you, that example that I cited and I've read quite a bit about this morning, this notion about banks not passing on interest rate cuts.
Well, no what we won't do is cover the upfront cost of a good. So if you go into a contract and that's the price, whether it be the interest rate or the upfront price, that won't be covered because that is clear to you, you know what that is. And similarly what we are looking at is the arrangements where there needs to be some flexibility for the retailer, be it the bank or other supplier to change the price of the good.
So banks need the flexibility to move interest rates down or up, as the economy changes, there is no doubt about that, but what is necessary to protect the legitimate interest of the supplier is what will be covered by this law.
So look, I don't want to raise peoples expectations that all of a sudden all interest rate reductions will be passed on in full 100% of the time, that's not what this law is designed to do. But it is designed to rebalance the arrangements so that if you do come across a clause that's unfair in a contract which is signed, you didn't negotiate it, it is only standard form contracts, its not contracts where you might sit down and negotiate it through and change things – these wont be covered. It only covers contracts that are plonked in front of you take it or leave it, sign here if you want this good or service this is what you've got to sign.
Is the onus on me as the customer to prove the unfairness of all this? I've seen Steven Fielding quoted as saying that he doesn't much like that idea. Indeed I wonder as a possible consequence of this – all of us rushing of to court to talk about how unfair our standard form contracts are?
Look I don't envisage that there will be people rushing of to court in huge numbers to start with, and what the experience is elsewhere - in the UK where this has been the law for sometime and Victoria shows is that suppliers will be very careful about what they put in their contracts, they don't want to be dragged to court - they will be very careful about how they frame their contracts.
Now we are currently drafting the law, there has been 90 submissions to a discussion paper I released last month from businesses, consumer groups, individuals; which I am working through. And there is some fine detail to be determined over the next couple of weeks; for example do we just say that no contract term shall be unfair full stop and leave it to the regulators and courts to determine what is unfair - or do we put in a blacklist and say look the following terms will be unfair in all circumstances, or do we put in what's called in the trade a 'grey list' which is to say well look, the following sorts of clauses would cause us some concern but the courts might find in some instances that they are fair bearing in mind all the circumstances.
So the courts would look at all the circumstances, what sort of consumer it is – it is a big powerful consumer, or is it a vulnerable consumer up against a big powerful company and the term is unfair in that context.
So the intention essentially is to provide us will greater consumer protection but to create a climate where a contract is perhaps thought about more seriously by those who offer it, as to whether or not it is truly fair, whether or not the fine fair print is too small.
That's exactly right Geoff; you have hit the nail on the head. Look I am not interested in ripping up the law which says a contract is binding, of course not. All contracts are binding, but there is a situation that has arisen in recent years, where standard-form contracts, where there is no scope for negotiation. We don't have anywhere else to go as consumers; it is not like the contracts are often different across the board. If you change the supplier they are all the same, and look some of things in them are unfair. So it is rebalancing and it is designed to get suppliers to just look a bit more closely as to what is fair in their contracts.
Mr Bowen, briefly and finally, how long before this becomes law in Australia do you think?
Well, I am introducing it into the parliament in June, then it will have a process to go through as your listeners would understand Geoff, getting things through parliament when we don't control the Senate is a bit of an obstacle course but it will go through that process. There will probably be some sort of Senate inquiry then it is up to them whether they approve it or disapprove it, but I've indicated that I would like to see it law by the end of the year.
Thank you very much for talking to me this morning.
Good on you Geoff, thank you.