ASIC prescribes three-year period for credit card responsible lending assessments
Author: Economist Martin North www.digitalfinanceanalytics.com
From 1 January 2019, under the revised responsible lending obligations, a credit card contract or credit limit increase must be assessed as unsuitable if it is likely the consumer would be unable to repay the credit limit within this period. The three-year period will apply to all classes of credit card contracts.
ASIC has prescribed a three-year period to strike an appropriate balance between:
- preventing consumers from being in unsuitable credit card contracts, and
- ensuring that consumers continue to have reasonable access to credit through credit card contracts.
In July 2018 ASIC released Consultation Paper 303 Credit cards: Responsible lending assessments (CP 303), which outlined the proposal to prescribe a period of three years for responsible lending assessments. The consultation paper suggested this period would apply to all classes of credit card contracts.
Today ASIC published a feedback report (REP 590) which outlines the submissions received and ASIC’s responses. ASIC Credit (Unsuitability-Credit Cards) Instrument 2018/753 has also been created.
In REP 590 ASIC provides further guidance on the assumptions that should be made when assessing whether a consumer can repay the credit limit within three years. This includes guidance on:
- fees on credit card accounts
- interest rates charged on credit card contracts held with other credit providers, and
- the effect of the reform on responsible lending assessments for other credit products.
The new legal requirement commences on 1 January 2019. Credit providers are expected to have systems in place to ensure that that they can meet the new obligations.
The revised obligations will apply to licensees that provide credit assistance and licensees that are credit providers for both new credit card contracts and credit limit increases under existing credit card contracts. ASIC will monitor the prescribed period and our guidance to ensure that it is achieving the goals of the reform.
In March 2018 the Government implemented reforms in response to the Senate Economics References Committee report relating to credit card interest rates. As part of the reforms, responsible lending obligations were amended to require that a credit card contract or credit limit increase must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within a period prescribed by ASIC.
The purpose of this reform is to make sure that consumers can afford to repay their credit card debts within a reasonable period. Consumers will still retain the flexibility to make low minimum repayments on credit cards.
In July 2018 ASIC released Report 580 Credit card lending in Australia (REP 580), which contained our findings that more than one in six consumers are struggling with credit card debt, and that lenders could do more to take proactive steps to address persistent debt, low repayments or poorly suited products. We also found that in the 12 months to June 2017, $621 million could have been saved if consumers who regularly incur interest charges had used a lower rate card.
In REP 580 ASIC flagged that it would publicly report on the credit providers who do and don’t respond to the findings and this will occur later in 2018.
ASIC received 15 submissions in response to CP 303. ASIC thanks the people, businesses and associations that took the time to provide comments on our proposal.
This article should not be considered legal advice, but as a general guide only. If you are facing legal recovery action, please consult a legal attorney to assist you. For further information on how to have your debts cut by half or more through a specialist negotiator, reach out to us on [email protected] or contact us on 1300 490 030.