The Government’s response to the Senate Economics References Committee Inquiry into matters relating to credit card interest rates containing credit card regulation reform proposals has been released for public consultation.

The Government believes that there is a subset of consumers incurring very high credit card interest charges on a persistent basis because of the inappropriate selection and provision of credit cards as well as certain patterns of credit card use.

The Government finds that this reflects, among other things, a relative lack of competition on ongoing interest rates in the credit card market (arising partly because of the complexity with which interest is calculated). These outcomes also reflect behavioural biases that encourage card holders to borrow more and repay less than they would otherwise intend leading to higher (than intended) levels of credit card debt.

The Government’s response outlines reforms to provide greater legislative protection to vulnerable consumers, to exert more competitive pressure on credit card issuers and to provide consumers with the information they need to make the best choices about how they use their credit cards.

Proposals
The legislative proposals are:

• Tighten responsible lending obligations to ensure card issuers assess suitability based on a consumer’s ability to repay the credit limit within a reasonable period
• Prohibit issuers from making unsolicited credit limit increase offers including the ability to seek prior consent
• Prohibit issuers from backdating interest charges and charging interest on the portion of the balance that has been paid-off
• Require issuers to provide consumers with online options to initiate a card cancellation or reduce their credit limit (to limit over-borrowing through accumulation of multiple cards).

The following proposals will be subject to behavioural testing to determine their efficacy in the Australian market and to ensure they are designed for maximum effect before being legislated:

• Require that issuers provide information on the annual cost of a consumer’s credit card use and to prominently display annual fees
• Require issuers to clearly disclose in advertising and marketing material a card’s interest rate and annual fee
• Require issuers to provide information about potential savings from switching to lower-cost products
• Require issuers to provide consumers with timely electronic notifications regarding the expiry of introductory offers and credit use
• Require issuers to provide consumers with alternative payment tools, and proactively contact consumers who are persistently making small repayments.