ASIC has today issued Consultation Paper: Responsible Lending Assessments (CP 303) which proposes for a 3 year period to be used for assessing whether a credit card contract or credit limit increase is unsuitable for responsible lending purposes.
Under the recent reforms to the responsible lending obligations for credit card contracts (Treasury Laws Amendment (Banking Measures No. 1) Act 2018 (Cth)), a credit card contract or credit limit increase under a credit card contract must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within the prescribed period set by ASIC. Consumers that cannot repay the proposed limit of the credit card contract within the period prescribed by ASIC are taken to only be able to comply with that contract with substantial hardship (and entering the contract would be a breach of the responsible lending obligations).
In accordance with the expectations described in the explanatory material to the recent reforms, ASIC proposes a three (3) 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 proposing the three (3) year period, ASIC makes the following assumptions about unsuitability assessments for credit card contracts:
- A consumer’s ability to repay the credit limit should be assessed based on interest charged over the three-year period. ASIC’s view is that it would be good practice for the assessment to assume interest is accruing at the highest rate that applies under the credit card contract and that this is consistent with some current practices, including how some providers calculate their mandatory warnings about the effect of repeatedly making the minimum allowable repayment; and
- Where a consumer holds other credit cards, providers will assume that the consumer is making repayments on the other contracts based on these assumptions, rather than the minimum repayment amount required under those contracts.
The new requirement will apply to licensees that are credit providers or that provide credit assistance in relation to both new and existing credit card contracts from 1 January 2019. ASIC will make a decision about the period to prescribe following the consultation process
ASIC is seeking feedback on the proposed three (3) year period and particularly in relation to the following:
- Whether a (3) year period is suitable and if not, why not?
- Should a period of two (2) years be instead prescribed for consistency with other requirements, such as the minimum repayment warning under the National Consumer Credit Protection Regulations 2010?
- Should the three (3) year period apply to all classes of credit contract and if not, why not?
- What changes would need to be made to systems and processes to ensure compliance with the prescribed period by 1 January 2019?
- Feedback on ASIC’s expectations about the assumptions (as set out in CP 303) that should be made when assessing whether a consumer can repay the credit limit within three years.
The closing date for submissions is 31 July 2018.
Our team of financial services specialists would be pleased to assist with further information or advice on the proposed reforms and/or submissions to ASIC during the consultation period.
This article was written by Michael Anastas, Partner and Jane Kam, Solicitor.
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