Proposed Disclosure Changes For Credit Contracts Released

An explanatory package outlining proposals to streamline the disclosure of essential financial information to accompany credit contracts has been released for public consultation. Submissions on the package close on 31 March 2006.

Background

The package of materials contains amendments which flow from the Post Implementation Review (PIR) undertaken on the operation of the Consumer Credit Code (Code). The PIR revealed that, in respect of disclosure of key features of the proposed contract to assist consumers in ascertaining the cost of credit, there were three issues pf concern in relation to existing disclosure requirements—namely, timing, complexity and comparability.

It was also noted in the PIR that the application of key disclosure requirements encouraged 'over compliance', resulting in excessive documentation (which, in turn, acts against the principle of providing clear and comparable information).

Summary of the proposals

The package contains drafts of the Consumer Credit Amendment Bill 2005 and the Consumer Credit Amendment Regulation (No.) 2005. These drafts reflect the policy intentions of the recommendations flowing from the PIR that:

• the existing financial table be converted to a simplified 'Schumer Box' format, containing 'essential financial information',

• other essential information be provided outside the 'box', and

• the Code be amended to clarify which fees and charges should be disclosed 'in the box' or 'out of the box'.

The proposed amendments introduce two new concepts:

• the financial summary table, and

• the summary of other information.

It is not intended that either of these documents replace the complete and detailed information in the credit contract. Instead, the new documents would be provided in addition to the credit contract, so that the consumer can refer to the credit contract for additional information, if required. The summary of other information is intended to act as a 'bridge' between the financial summary table and the credit contract. In some instances, the summary of other information will amplify the entries in the financial summary table, and in others, it will simply refer to the relevant provisions of the credit contract.

It is intended, however, that these documents make it easier for consumers to understand product features such as 'honeymoon' interest rates or credit card concessional interest balance transfers.

Detailed Analysis

The substance of the proposed changes is contained in the draft regulations.

Format Of The Precontractual Statement

Proposed regulation 13 provides that the precontractual statement will consist of the financial summary table and the summary of other information. Proposed section 14(5) will make it clear that the precontractual statement must be in a separate document (or documents) to the proposed contract document (as opposed to the current position under section 14(5), which provides that the precontractual statement may be the proposed contract, or a separate document). The financial summary table and the summary of other information are to be set out on no more than two A4 pages (or the electronic equivalent) and must be easily legible and clearly expressed.

There is also the possibility of using hyperlinks to allow consumers to switch easily between the various documents where a consumer has agreed to disclosure by means of electronic communication.

If the credit contract relates to more than one type of credit facility, a separate financial summary table and summary of other information are to be prepared for each credit facility under proposed new regulation 13(3).

Financial Summary Table

The financial summary table must be in tabular form (either portrait or landscape), and divided into three columns which refer to:

• fixed categories of information, the titles of which are to be set out in column 1 of the financial summary table. Further information (as set out below) will need to be included in either columns 2 or 3, depending on the relevant category of information. For the following categories of information, the relevant information includes:
  
  - type of credit facility—a brief description of the type of credit facility is to be inserted in column 2
  
  - amount of credit—if ascertainable, the amount of credit being provided, or if not ascertainable, the maximum amount of credit agreed to be provided or the credit limit, must be inserted in column 2
  
  - annual percentage rate—the annual percentage rate or rates and whether the rate is fixed or variable must be included in column 2, with other information such as how different rates applies and how the rates may be changed, to be included in column 3
  
  - interest free period—the length of any interest free period is to be inserted in column 2, with further statements dealing with exceptions or conditions on the application of the interest free period and how interest applies to other purchase or purchases not fully paid for within the interest free period, to be included in column 3
  
  - fees and charges—in addition to the information set out below (which is generally to be included in column 2), other information to be inserted in column 3 includes information about variations to credit fees and charges and on government charges
  
  - repayments—continuing credit contracts, or repayments—credit contracts other than continuing credit contracts, and
  
  - term of loan—information on the duration of the loan (if known) or the statement 'until cancelled by either party' (if unknown or the contract is a continuing credit contract) is to be included in column 2, with references to the provisions of the credit contract that deal with how the credit contract can be cancelled to be inserted in column 3;

• details of financial information (such as the amount or percentage, whichever is applicable), and

• a notation or description of the financial information.

For a fixed term contract, the explanatory package includes the following example of what the proposed financial summary table will look like:

For a continuing credit contract, the explanatory package includes the following example of what the proposed financial summary table would look like:

Summary Of Other Information

The summary of other information provides information on those aspects of the product the consumer should be aware of before entering into the contract. Under new proposed regulation 13B, further information is to be included either into the summary of other information itself, or by cross-reference to relevant provisions in the credit contract.

The summary of other information is to contain additional information, including the following:

• in relation to the annual percentage rate, details about how a change in the annual percentage rate might occur

• in relation to interest, if the credit contract provides for exceptions to the application of any interest free period, details of those exceptions and how interest applies to other purchases or purchases not fully paid for within the interest free period

• in relation to fees and charges, further information about credit contracts which involve a purchase of an interest in land and statements about fees and charges not dealt with in the precontractual statement, as well as any circumstances in which a credit fee or charge may be waived

• certain further information in relation to repayments, and

• if a mortgage is being taken, details of the goods or property that are the subject of the mortgage, and if the credit provider requires the debtor to obtain mortgage insurance, a brief statement that the insured is the credit provider, rather than the debtor, and a statement as to how the premium for the insurance is dealt with.

Under proposed new regulation 13B(1), the credit provider is also to provide a warning at the beginning of the summary of other information that it only contains partial information and should be read with the financial summary table and the credit contract itself.

Disclosure Of Fees And Charges

The amendments introduce two new concepts in relation to fees and charges, contained in proposed regulation 13A(10):

• ongoing fees and charges—these are fees which are not contingent on the action of the debtor, other than entering into the contract. Therefore, account keeping fees and annual fees will be 'ongoing fees and charges', whereas termination fees, late payment fees and default fees, will not, and

• upfront fees and charges—these are fees which are payable before the first regular payment is to be made under the contract. Examples of these are establishment fees, application fees and charges for mortgage indemnity insurance. Government fees, such as stamp duty, are not included.

The aggregate of each of these fees and charges must be separately disclosed in the financial summary table.

It is intended that the summary of other information will cross reference to the provisions of the credit contract that relate to the various fees and charges, as well as other fees that can be imposed under the credit contract.

Termination fees must be separately described in the summary of other information under proposed new regulation 13B(4)(e).

Comparison Rates

Comparison rates will not need to be included in the financial summary table.

No commencement time or transitional period has been suggested in the materials, although it is noted that a 'significant lead in time' may be required for credit providers to implement necessary changes.

The length of the transitional period is to be determined after consultation.

Submissions close on 31 March 2006.

To assist in focussing the content of submissions, the following questions have been posed in the consultation package.

• Will the proposed amendments improve the consumer’s ability to understand the key features of the credit contract? If not, what improvements could be made?

• Will the financial summary table provide the right "snapshot" of the credit product? Are there any matters that should be included in the table, or not included?

• Will the summary of other information be useful for consumers? If not, in what way can it be improved?

• Are the definitions of 'ongoing credit fees and charges' and 'upfront credit fees and charges' sufficiently concise to enable credit fees and charges to be allocated between these categories?

• Are the proposals sufficiently flexible to cope with innovations in credit products?

• Does the implementation of the proposed amendments have unforeseen consequences for consumers or credit providers?

More information will be contained on the Ministerial Council for Consumer Affairs and Uniform Consumer Credit Code Management Committee websites from 6 January 2006.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.