The Preliminary Regulatory Impact Statement (pdf) into the effectiveness of mandatory comparison rates (MCR) has been released.

The Regulatory Impact Statement will be a key factor in deciding whether the comparison rate provisions will continue to apply in their current form, be changed, or deleted entirely from the Consumer Credit Code.

The preliminary findings are inconclusive:

"The comparison rate does assist consumers to identify the true cost of credit although it is recognised that the “true” cost of credit can only be fully ascertained once the loan has been repaid and all actual costs incurred are realised.

Based on the cost and benefit data provided to date, there remains some uncertainty as to whether the … outcomes have been achieved at a net benefit to the community.

The situation in the future whereby the mandatory disclosure requirements sunset on 30 June 2006… creates a risk of information asymmetry resulting in some detriment to consumers who may engage in a fixed term credit contract without an understanding of the true cost of that credit contract. This risk is not able to be calculated with certainty due to the absence of statistically reliable empirical data.

The effect of ceasing the MCR regime would appear to have minimal negative impacts on credit providers and a slightly increased risk of confusion for consumers that is partly offset, in the mortgage industry particularly, by the existence and growing use of secondary market players: independent information providers and brokers.

If it is not possible to demonstrate a net benefit to the community from the continuation of the MCR regime, there will be a strong case for MCR to end on 30 June 2006.

The degree to which industry is meeting its obligations to comply with the comparison rate provisions of the Code would appear to be mixed, with the home loan sector providing the highest level of compliance and the motor vehicle sector reported by jurisdictions as the lowest level of compliance.

Data is not yet available to indicate that the benefits of the comparison rate provisions outweigh the cost to industry. Enhancements to the MCR regime assessed to date do not appear to greatly enhance the benefit/cost balance.

Most of the benefits obtained by consumers since the introduction as a result of the publication and disclosure of comparison rate information remain theoretical."

The Ministerial Council on Consumer Affairs (MCCA) introduced mandatory comparison rates with a three year sunset clause, meaning that at present, the provisions will cease to have effect after 30 June 2006. Their operation must be reviewed prior to 30 June 2006 and in time to permit MCCA to make a decision and implement that decision.

The preliminary RIS seeks further information from stakeholders, other interested parties and
members of the public on the effectiveness, impacts (including costs and benefits) and changes to the MCR regime to enable an informed decision on whether to continue with the requirements or allow them to sunset.