Thursday, 15 February 2018
Treasury Laws Amendment (Banking Measures No. 1) Bill 2017; Second Reading
I rise to speak on the Treasury Laws Amendment (Banking Measures No. 1) Bill 2017. Australians are people who believe in treating others fairly. The fair go is a hallmark of the Australian way of life. In turn, they expect fairness from those around them. They expect fairness from their mates, from the government and from the other institutions in society, such as the banking and financial sector; however, it's quite clear to most Australians that banks, the financial sector and credit card companies have not upheld their end of this fairness bargain. All of us have heard horror stories, and may even know victims of the financial sector—in fact, my own parents lost $150,000 some years ago.
There are dodgy financial products, hidden fees and charges and just plain rip-offs. We can clearly see from the overwhelming community support for Labor's call for a banking royal commission—which the government ignored for two years and then belatedly and begrudgingly supported once they had given their mates in the sector the opportunity to write the convenient terms of reference—that the community wants things to change.
I hope that the focus of the royal commission will turn to the victims of banking and financial scandals. This is an opportunity for those who have suffered because of insurance scams, dodgy lending and fee rip-offs to tell their stories and present their evidence to the royal commission. I hope that the royal commission delivers justice to families and small businesses that have suffered because of misconduct in the banking and financial services sector. We already know—and the royal commission will show us—that change is needed.
The bill before us today makes some important and significant changes—changes which will significantly help credit card consumers, in particular, and changes that Labor has been calling for for years. We really have to ask ourselves why it has taken this government so long. It's not that the issue only affects a small number of people: there were 16,690,289 credit cards in Australia as of November 2017. Almost every adult in Australia has a credit card, and many people have more than one. Why has the government taken so long to act? Is it to allow their mates in the sector to keep on rolling in record profits to squirrel away to tax havens, like Mr Turnbull's in the Cayman Islands? In 2015, a Labor-led Senate inquiry first stirred changes to credit card regulation. It was in response to the recommendations of the inquiry that the Treasurer promised to progress these changes to credit card regulation. Even with the passage of this bill, we won't see most of those protections come into place until 2019.
Let me tell you a bit about the bill. The bill makes three key changes. It will allow smaller authorised deposit-taking institutions, or ADIs, to use the word 'bank' in their business name, and the bill will give the Australian Prudential Regulation Authority, APRA, powers to deal with developments in non-ADI lending that pose a risk to financial stability. It also introduces reforms to improve consumer outcomes under credit card contracts.
As I mentioned, in 2015 the Senate Economics References Committee, which my colleague Senator Ketter referred to earlier, handed down its report Interest rates and informed choice in the Australian credit card market. This is quite a comprehensive report, and I urge anyone with any interest in the issue to download it from the committee's website and read it.
The committee handed down 11 recommendations in the report, derived from written submissions and five public hearings held in Sydney, Melbourne and Canberra. In 2016, the government promised legislation in the near future to respond to the recommendations of that inquiry, yet it's taken nearly two years to come to it. Seriously, I would hate to see this government on a go-slow, I really would. While the Treasurer dithered, the banking sector continued to thumb their nose at him. The Australian Bankers' Association refused recommendations from the review of their code of practice that, in the name of fairness to customers, they should voluntarily make changes. The banks refused to stop unsolicited credit card increase offers and tricky credit card interest rate charging practices. They also refused to clearly commit to simple online cancellation of credit cards.
If the government could just spend a little bit of time away from their internal bickering, their scandals, their back-stabbing and their incompetence, the Australian people would really appreciate them focusing their attention on legislating for the interests of the Australian people.
One of the changes to credit cards is the tightening of the responsible lending requirements. Many thousands of desperate people have racked up credit card debt beyond their means to repay. They've spent years trying to pay these debts off, often with interest rates over the 20 per cent mark. This change will require that the suitability of a credit card contract is assessed on the consumer's ability to repay the credit limit within a certain period. That period is to be set in a legislative instrument made by ASIC. We'll be watching closely to see what that period is.
It's obviously important that Australians are properly protected from predatory or unsuitable lending. Another of the changes is the standardisation of the way credit card interest is calculated. I was taught how to calculate interest in my high school maths classes; however, the well-respected website Choice has said that the way the banks calculate credit card interest is 'mind bending'. When respected governance adviser Phil Khoury conducted a review of the code of conduct of banking practice, he investigated the ways that banks were applying credit card interest. He looked at some practices and found that few customers would be aware that they were even happening at all. Khoury describes the interest calculation practices as 'unacceptable' and 'substantially unfair' and indicates that, if understood, they would be seen as 'just plain tricky'. This is pretty troubling criticism from a very respected reviewer. Under this bill, credit card providers are prohibited from imposing interest charges retrospectively to a credit card balance or part of that balance that has the benefit of an interest-free period. Again, we welcome these changes to the way credit card interest is calculated—but, again, they're long overdue, and we've been calling for them for many years.
Many Australians have come to realise that some of the credit products that they hold aren't suitable or aren't good value for money and they want to cancel them, but, currently, people can't do that online, where most Australians now do their banking. Under this bill, banks will now be required to allow online cancellation of credit cards. This makes eminent sense. You can get a credit card online quite easily, but, if you try and cancel a credit card online, it's very difficult—and it shouldn't be that way. If a customer sees a card that's a better deal, they should be able to move over to that better deal with great ease. Additionally, customers end up hanging onto old cards that they do not intend to keep, with access to more credit than they otherwise need, and these cards often have annual fees and other ongoing costs which add up over the years to a substantial amount of money. So it does make simple sense to require banks and card issuers to have simple online cancellation of credit cards. Under the bill before us today, a bank may not be required to cancel a credit card where there is still an outstanding balance. Again, we need to ensure that this element of the bill is monitored to make sure that the impact of encouraging customers to switch credit cards is real and to ensure that it enables customers to more easily ditch unsuitable cards.
Labor notes that this bill will also require banks to allow a reduction of credit card limits online. As those listening would all be aware, you can very easily increase your credit limit online, often in minutes, so it should be just as easy to reduce your credit limit online. If a consumer has the insight or the awareness that they have too much credit available to them and that they might not easily be able to pay that off and they want to do the right thing and take some control, they should find it easy, not hard, to reduce their credit card limit. I believe we should be supporting consumers that want to take proactive actions to limit their liabilities and we should make it easy for them to do that. The Consumer Action Law Centre has drawn attention to the fact that, as the bill is currently drafted, banks are not required to reduce credit limits below the minimum credit of the card. Labor will continue to monitor that closely and, if further improvements are needed, we will make those suggestions in due course.
Schedules 1 and 2 of the bill will give APRA powers in relation to non-ADI lenders. These powers, which have been described as reserve powers, are designed to be used should the activities of these lenders pose a risk to financial stability in the future. The bill also gives APRA power to collect certain data from these lenders. ADI lenders such as banks and credit unions are subject to APRA's prudential requirements and ongoing supervision. These new powers for APRA are proposed in recognition of the fact that APRA has responsibilities in relation to stability of the Australian financial system which are consistent with its core mandate of protecting depositors. Labor notes that some non-bank lenders have raised concern about the scope of these powers. We recognise that non-ADI lenders can play an important role in ensuring competition against banks; indeed, this is an increasing element of our financial system. There is disruption with these new providers, peer-to-peer lenders and others. This includes disruption in relation to business lending. As an example, innovative non-banking lenders can play an important role in providing finance needed to small-business owners to expand. And, as mentioned briefly earlier, schedule 3 will allow smaller ADIs to use the word 'bank' in their business names should they choose to.
As the explanatory memorandum points out:
… the changes will align community expectations in respect of the use of the term 'bank' with the fact that ADIs are prudentially supervised by APRA and deposits are covered by the FCS guarantee—
the Financial Claims Scheme guarantee. Under this change all ADIs can use the word 'bank' in their business name unless APRA, for whatever reason, has issued a determination to the contrary. Currently, APRA permits only ADIs with tier-1 capital exceeding $50 million to use the terms 'bank', 'banker' and 'banking'. There are a number of small ADIs who would benefit from the use of these terms, and I note that the Customer Owned Banking Association, which represents credit unions and building societies as well as mutual banks, has been particularly supportive of this change. Again, Labor supports this change.
Finally, schedule 4 to the bill modernises the Banking Act by inserting an objects provision. Similar industry acts, the Life Insurance Act 1995 and the Insurance Act 1973 contain objects provisions which guide the reader on the main purposes of the act. The main objects of the Banking Act will be (a) to protect the interests of depositors in ADIs in ways that are consistent with the continued development of a viable, competitive and innovative banking industry and (b) to promote financial system stability in Australia.
While the changes in this bill are welcome, they are long overdue. This government does not care about the consumer, and it only acts belatedly when it has no other choice—when it has to be dragged in, kicking and screaming. In contrast, Labor made significant reforms when we were in government. These landmark reforms included the National Consumer Credit Protection Act 2009. This was the first single standard and nationally consistent regime for consumer credit regulation and oversight in this country. This act gave oversight to consumer credit, including home loans and credit cards, to a national regulator, that being ASIC. It included what are proving to be very important responsible lending obligations. Labor also enacted the Future of Financial Advice, FOFA, reforms. Those opposite want to write these reforms out of history because their persistent opposition to FOFA now looks so embarrassing. They voted against FOFA in the House, they voted against FOFA in the Senate and, when they got into government, they tried to gut FOFA, first by legislation and then by regulation. Labor had to fight tooth and nail to protect FOFA, and it was lucky that we prevailed.
To take one example, ASIC's Fees for no service report revealed, in October 2016, that the big four banks and AMP had spent years taking fees from customers for financial advice services that were never provided. ASIC found that there were great systems in place to record incoming revenue but very little in place to prove that customers were getting anything in return. The number of customers affected is over 300,000. The amount of fees improperly charged is over $200 million. ASIC has stated that the FOFA requirements that were vehemently fought against by those opposite—namely, the requirement that customers periodically opt in to the advice relationship and the requirement that advisers provide annual fee disclosure statements to all of their clients, including existing clients—helped to bring to light this massive fees-for-no-service scandal.
In government, those opposite made massive cuts to ASIC, made massive cuts to the capability of the corporate regulator and gave a massive free pass to corporate misconduct. They only moved to restore funding to ASIC when Labor began calling for a royal commission. Those opposite have a record of giving free passes to financial sector misconduct at every turn, and that continued until recently with their stubborn refusal to initiate a banking royal commission.
Labor have identified other areas where we could see a greater stability in our economy—and I'd like to thank my colleague the shadow Treasurer, Chris Bowen, who has been working to highlight areas of our economy where there are unacceptable risks. I'd also like to concur with Senator Ketter's words about Mr Swan and to thank him for his work as well.
One such area where there is unacceptable risk is that of household debt, particularly in regard to household debt related to housing in Australia. Over the recent decade, we've seen astronomical price increases in the cost of housing, particularly in the Sydney and Melbourne markets and, interestingly enough, in the Hobart market, which is growing at a staggering rate. Australia's level of debt is now 100 per cent higher than the total earnings of all households. Australia has the most generous property tax concessions in the world when it comes to investing in housing. I'm speaking here, of course, of our negative-gearing regime—the ability to deduct interest payments on an investment loan for an investment property—and the capital gains tax discount: the 50 per cent discount on capital gains tax being paid on the sale of an investment property.
When these two reforms were introduced by the Howard government, importantly, in the budgetary context, they weren't funded. In other words, there was no revenue source that offset the reduction in revenue that came about from the additional expenditure associated with these tax concessions. Now that we've got a growing budget deficit—it's almost tripled under this government—we're seeing the folly of those decisions being borne by this generation of Australians, because there was no funding source put in place to introduce those very generous tax concessions into the budgetary process. Therefore, it's hardly surprising that we have one of the highest household leverage rates in the world.
For almost two years the Labor Party has been calling on the government to bring attention to the risks associated with such high household debt. The Reserve Bank, the International Monetary Fund, the Grattan Institute and the government's Financial System Inquiry have argued forcefully that tax concessions such as negative gearing distort economic decision-making and encourage leverage in the economy. The overwhelming evidence is that those who benefit from those tax concessions are the wealthiest Australians. It was confirmed in the newspapers fairly recently that the top 10 per cent of income earners in this country benefit from 80 per cent of the capital gains tax discount—that is, 80 per cent of the capital gains tax discount benefits go to the top 10 per cent of income earners in Australia.
We would welcome the government's making such additional reforms if they could be bothered to concentrate long enough on the task of government. While we welcome the bill before us and the consumer protections it entails, the government need to be reprimanded for their tardiness and their unwillingness to act until now. They really do need to sharpen their pencils, as a dear friend of mine would say. This legislation could have been enacted two years ago. That would have been an additional two years of protections for consumers across Australia. But I do call upon my fellow senators to support the bill. As I said, it's a start, but it's not enough. The government needs to pay more attention to the role of governing and sort out their squabbling and their bickering and their scandals so that the people of Australia can have some faith in this government.