Australian banks often look to their overseas counterparts for hints of new best practices, emerging challenges or troubles to come. So it appears to be with Australian regulators. Like their peers in Western markets like the US and UK, they are aggressively attempting to change the local banking landscape in ways they believe will promote more competition, fiscal stability, consumer protection and responsible lending.
It is this latter endgame, responsible lending, that has produced the most action in Australia, namely the National Consumer Credit Protection Act 2009.
This new commitment to responsible lending is coming in two phases.
Phase 1 came into effect in January 2011 and increases the onus on lenders to ensure a product is 'not unsuitable' for the borrower. Under Phase 1 of the Act, some lenders are already being asked by regulators to explain how certain unsolicited credit limit offers comply with the principles of responsible lending.
Phase 2 is scheduled to go into effect in July 2012 and has many implications for new credit cards (but not existing card holders at this time), as follows:
- Changes to the repayment hierarchy, mandating payments be applied to the debt with the highest rate of interest first.
- Prevention of over-limit fees, unless card holders opt-in and agree their account can go over their limit. To complicate matters, there are a couple other options also available to the borrower. A card holder could opt for a hard limit that can’t be surpassed or a buffer of 10 percent above the limit.
- Banning of unsolicited credit line increase offers, again unless the card holder opts-in and agrees to receive them.
- Minimum payment calculation. Lenders will need to inform borrowers about the consequences of only making the minimum repayment amount. For example, lenders may need wording on the monthly statement explaining how long it will take to pay off the outstanding balance and what the cost will be if only minimum payments are made.
What are the implications for card issuers in Australia? The regulations are expected to have tough effects on lenders, with penalty fees and interest income set to come under assault.
Sound familiar? Banks in the US, for example, have experienced similar challenges thanks to the CARD Act and other recent regulatory moves.
When the CARD Act measures were phased in during 2009 and 2010, we saw that compliance and rising delinquencies commanded the attention of card issuers, often at the expense of revenue-generating activity, as my colleague Andy Jennings wrote. Andy also discussed the results of a FICO client survey, where we asked our clients to share what they're doing in response to the CARD Act.
Are lenders in Australia likely to react in a similar way to what we’ve seen in the US? The short answer is: yes. Comparing the two markets:
- As happened in the US, expect to see practically universal increases in APR in Australia too.
- Over 50% of US clients surveyed were increasing APR at two missed payments. We don’t expect to see this occur with Australia’s Big 4 given intense regulatory scrutiny on unfair fees and charges.
- The US experienced an overall credit restriction, whereby fewer credit cards were offered to fewer customers. While FICO’s latest survey of bank risk managers showed a cautious optimism among bankers regarding US consumer credit this quarter, it could be expected that credit restrictions are an unintended consequence of the tougher responsible lending regulations in Australia.
As I watch these events unfold in Australia, I’m reminded of how Chase’s CEO Jamie Dimon famously put it: “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.”
We won’t have to wait too long to see how lenders in Australia change their menus.