- Managing the cost of consumer credit in Queensland
- Report on unfair terms in consumer contracts – New South Wales
Managing The Cost Of Consumer Credit In Queensland
The Queensland government has released a discussion paper to explore viable options for ensuring that fees and charges relating to the provision of consumer credit are fair and reasonable. Submissions are invited and close on 15 December 2006.
Under the Uniform Consumer Credit Laws Agreement, the governments of each state and territory established the UCCC. The agreement provides that a state or territory can individually fix maximum interest rates.
The current situation is:
- NSW and the ACT - 48% pa maximum for interest and credit fees and charges
- Victoria - 48% pa for unsecured loans and 30% pa for secured loans. The cap applies to interest only and there is no cap on fees.
- SA - recently introduced legislation (not yet in force) that mirrors NSW.
In 2000, the Queensland Minister for Fair Trading established the Pay‑Day Lending Working Party to consider pay‑day lending. The PDL Working Party considered that an interest rate cap of 48% pa did not take into account the time, effort, and expense associated with the provision of pay‑day lending.
An interest rate cap without a fee cap is of little impact because the lender can exceed the cap through fees. Victoria's recent report on consumer credit recognised that Victoria's legislation could be circumvented in this way, but did not recommend introducing a cap on interest and fees.
Many commentators argue that imposing a cap will have the undesirable consequence of forcing pay‑day lending underground. It is reasonably commonly accepted that the cost of establishing a short-term loan (such a s a "pay-day loan") and the risk of making such a loan is not adequately recouped by a return of 48% per annum.
The Queensland report noted previous research which found that in 2002 the average annual earnings of pay‑day lending customers were approximately $24,500 with many customers earning less than $400 per week. Loans were typically used to pay bills or to cover day‑to‑day living expenses. Low income households also rely on credit to meet emergencies and fund major purchases.
If pay-day loans are prohibited, consumers may suffer an impeded ability to overcome financial difficulties, an increased likelihood of default on loan repayments, and further exclusion from the mainstream market.
Imposing a cap on interest and credit fees and charges might result in excluding some legitimate products from the market and propel consumers away from lenders who attempt to comply with the law and further into the fringe.
The report notes that imposing an interest rate cap creates an incentive for credit providers to develop and promote new products which are not covered by the UCCC. One such structure is promissory note lending. The cap could also result in consumers who are already excluded from the mainstream market, also being excluded from the fringe market. These consumers would be forced to obtain credit from illegal lenders which may place them at even greater risk.
Against this background, the Queensland report makes no recommendations and seeks submissions. The report covers the issue very well and shows a good understanding of the market and the issues.
By Jon Denovan
Report On Unfair Terms In Consumer Contracts – New South Wales
It is likely that specific legislation will be passed in NSW to prohibit unfair terms in consumer contracts following a report recently issued by the NSW Standing Committee on Law and Justice.
The committee recommends that the Fair Trading Act 1987 (NSW) is amended to establish a scheme for the protection of consumers in relation to unfair terms in consumer contracts. The committee considers that the protection offered to consumers in NSW through the Contracts Review Act 1980 (NSW), the Fair Trading Act 1987 (NSW), and the Trade Practices Act 1974 (Cth) is insufficient.
The committee also recommends that the NSW government model these proposed amendments on the existing Victorian scheme set out in Part 2B of the Fair Trading Act 1999 (Vic). This will provide consistency between the two jurisdictions.
The Victorian Fair Trading Act provides that a "term in the consumer contract is to be regarded as unfair if, contrary to the requirements of good faith and in all the circumstances, it causes a significance imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer".
Four types of terms were specifically considered to be usually unfair:
- terms which allow the supplier to unilaterally vary the goods or services;
- terms which penalise the customer but not the supplier when there is a breach;
- terms which allow the supplier to suspend services but continue to charge the consumer; and
- clauses which permit the supplier but not the consumer to terminate the contract.
The report considered that other areas where unfairness might arise included:
- the use of standard form contracts;
- the inability for the consumer to seek advice or negotiate;
- lack of alternatives to the standard form of contract (the growing use of standard form of contracts has increased the prevalence of unfair terms);
- excessively long contracts;
- lack of plain English.
The following services were seen as the most problematic in relation to unfair terms:
- mobile phones;
- cable television;
- internet service provision;
- gym membership;
- banking services (it's unclear whether this means lending, or is confined to cards etc);
- hire cars.
The report concludes that litigation pursuant to common law and the current statutory provisions:
- is costly and time consuming;
- has an emphasis on procedural rather than substantive fairness (procedural unfairness relates to the circumstances surrounding the formation of a contract, whereas substantive unfairness results in the actual wording of the contract – ie has the supplier included terms in a consumer contract that go beyond what is reasonably necessary to protect the legitimate interests of the supplier?);
- current remedies are not able to effect the systemic change required.
The case for specific legislation
One submission to the committee stated that while the legislation will be novel in NSW, industry will be asked to do nothing more than contract on fair terms. Industry opposed this view, saying that there was no demonstrable market failure or legislative failure that required remedy.
The Ministerial Council on Consumer Affairs (MCCA) is working towards uniform national legislation. The committee considered however that that process appears to have stalled and given the uncertainty, NSW should enact its own legislation.
The committee said it was sensitive to the amount of regulation to which industry is accountable, but considered that no industry displays exemplary behaviour in relation to fair contracts and so there is a need to enact legislation that covers all sectors.
On the basis that the NSW legislation will follow the Victorian model:
- consumers can take action if they believe their contract is unfair;
- businesses must ensure that their contracts comply with the legislation;
- unfair terms in consumer contracts are void;
- consumer affairs can determine that a term is unfair;
- it is an offence to use a prescribed unfair term in the consumer contract.
Consumer Affairs Victoria explained to the committee how they went to considerable trouble to ensure service providers were aware of the effects of the legislation so that it did not sneak up on them. Victoria also discovered that in considering contract terms, it was necessary to view the whole contract and not just individual terms, so that the provisions can be seen in context. Consumer Affairs Victoria (CAV) acknowledged the importance of open dialogue with business so as to understand businesses' perspective.
CAV reports that hundreds of terms have been amended on a voluntary basis as a result of the work they have done. The need for balance and compromise is understood.
Although consumer credit contracts are not regulated by the Victorian model, the NSW report recommends that the inclusion of UCCC contracts should be examined during the process of developing a model for NSW. In addition, the committee recommends that the issue of whether small business transactions should be covered by the new legislation be examined during the process of developing the model for NSW.
There is no indication when NSW may pass this legislation. However, even if passed, it is unlikely that the legislation will have a material impact on most businesses who already refrain from inserting unfair provisions in their contracts.
By Jon Denovan
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