House of Representatives

Treasury Laws Amendment (Banking Measures No. 1) Bill 2017

Second Reading Speech

Mr MORRISON (Cook-Treasurer)

I move:

That this bill be now read a second time.

In this year's budget, the government announced a series of measures that will deliver a stronger, safer financial system, with better competition and consumer outcomes for Australians.

The Treasury Laws Amendment (Banking Measures No. 1) Bill 2017 continues the work of implementing these commitments by further strengthening our financial system.

Schedules 1 and 2 to the bill provide APRA with a new reserve power to make rules in relation to non-bank lenders, called 'non-ADI lenders'. This will provide APRA the necessary flexibility to address risks to financial stability if they emerge. This measure also enhances APRA's ability to gather data to monitor non-ADI lenders. I stress that this is a reserve power.

Importantly, this new rule-making power is not a new 'peacetime' regulation of non-ADI lenders. These lenders are a vital source of competition in the lending market, and they do not rely on ordinary Australian depositors for their funding. Given non-ADI lenders have no depositors to protect, it is appropriate that they continue to run their businesses without being subject to ongoing prudential supervision by APRA which is not the intent of this bill.

The government supports this important sector and the competition it provides for customers.

However, international experience has demonstrated that risks can emerge from the non-ADI lending sector that threaten the stability of the financial system. It is appropriate for APRA to have the power to move decisively to curb these risks should they ever arise.

Having such rules in place should strengthen the non-ADI lending sector, by signalling to market that the sector is well regulated and stable, as appropriate.

I have often spoken of the need to approach financial stability risks with a scalpel rather than a chainsaw, and these powers will provide APRA a new scalpel to deal with risks to financial stability that are specific to non-ADI lenders, as appropriate.

Schedule 3 of the bill lifts the prohibition on the use of the term 'bank', so that all banking businesses with an ADI licence can now use the term.

This will encourage competition in the sector by allowing all ADIs to enjoy the benefit of describing themselves as a bank when they offer banking services to Australian customers.

This will prompt innovation in the sector by opening the door to new banking entrants who will no longer be subject to the systemic barrier to entry of not being able to call themselves a bank when offering banking services.

Schedule 4 of the bill seeks to modernise the Banking Act by incorporating a reference to the importance of APRA considering 'geographic and sectoral' considerations where appropriate. Government is putting APRA's powers and responsibilities to take account of these considerations-in line with its prudential mandate-beyond doubt.

Schedule 5 of the bill implements a package of reforms to reduce the incidence of consumers building up unsustainable credit card debt and to improve competition in the credit card market.

Too many Australians are burdened with excessive credit card debt and incur substantial credit card interest. More than 30 per cent of credit card holders in the lowest income quartile carry interest-bearing debt from period to period. For these consumers, inadequate competition on ongoing interest rates and insufficient protection in the current regulatory framework can contribute to real hardship.

Schedule 5 of the bill implements reforms to ensure consumers can afford credit card contracts, to reduce the barriers consumers face when switching credit cards, and to align the calculation of credit card interest with consumers' expectations.

I'll now provide more detail on these measures.

Since December 2014, APRA has taken a series of steps to address emerging financial stability risks by reinforcing the lending practices of banks and other ADIs, particularly in relation to residential home loans.

While these measures are effective in mitigating financial stability risks, the tightening of credit from ADIs creates room for non-ADI lenders to fill in the gap.

Although their current share of lending is relatively small, these non-ADI lenders may expand rapidly and their lending activities could potentially pose material risks to financial stability-risks that ultimately fall on the broader Australian community.

The global financial crisis showed us how costly these risks can be when left unaddressed.

However, APRA does not have power over these lending activities, even where they materially contribute to financial stability risks.

Schedule 1 to the bill will provide APRA with these powers.

APRA will be able to make rules relating to lending practices of non-ADI lenders, where it considers that their lending activities materially contribute to financial stability risks.

These new rules will be backed by appropriate enforcement mechanisms. If a non-ADI lender fails to comply with a rule, it can be compelled by APRA to comply. If it ignores an APRA direction, the non-ADI lender will face appropriate penalties.

Schedule 2 to the bill enhances APRA's ability to collect data from non-ADI lenders, so it can better monitor the non-ADI lender sector and determine if and when to use its new rule-making power.

In making this determination, APRA will use its independent judgement. However, it is likely APRA will consider a number of factors including: the size of the sector; the nature of activities of non-ADI lenders; and the impact of non-ADI lenders on ADIs.

Before it makes a rule, APRA must consult ASIC, and will also ordinarily consult with the other members of the Council of Financial Regulators.

The rule-making power is a reserve power that would only be used when APRA considers that the lending activities of non-ADI lenders are materially contributing to risks of financial instability. In other words, the government is providing APRA with a new 'tool' in its kit-rather than requiring the day-to-day operations of these entities to be regulated by APRA.

The government believes that non-ADI lenders are not currently materially contributing to financial stability risks and therefore the government does not expect APRA to use these powers on day one.

Schedule 3 helps innovative new banking entrants bring new product offerings into the Australian banking system. New entrants to the Australian banking market currently face a significant obstacle, and that is the prohibition on the use of the word 'bank'.

At present, only ADIs with at least $50 million in capital are permitted to use the term 'bank'.

This has two undesirable effects:

it discourages innovative new players from entering the sector, because they are unable to benefit from the advantages of being able to use the term 'bank' in the critical early phase of their development; and
it may lead the public to mistakenly believe that small ADIs differ from larger players in terms of regulatory protection.

In fact, all ADIs are subject to APRA's prudential framework.

And deposits at all ADIs are protected by the government's Financial Claims Scheme guarantee.

By lifting the prohibition on the use of the word 'bank', schedule 2 to this bill will allow the advantages associated with the term 'bank' to flow to all banking businesses with an ADI licence, especially new fin-tech entrants.

It breaks the vicious cycle for new entrants, where currently they need $50 million to describe themselves as a bank, but must describe themselves as a bank in order to grow.

Nothing improves the customer experience like robust competition in a market, particularly from innovative new entrants.

Competition in banking drives down interest rates for borrowers, drives down fees, increases interest rates for savers, and leads to advancements in the overall customer experience.

This measure will also ensure that there are no misconceptions about the regulatory safeguards that apply to all ADIs in the Australian financial system.

Schedule 3 will also reinforce APRA's discretion over whether or not to permit the use of 'bank' outside of the ADI sector, ensuring that this term is limited to APRA regulated entities except in very unusual cases.

Schedule 4 modernises the Banking Act by inserting an 'objects' provision. This clarifies APRA's mandate under the act, clearly setting out APRA's objectives to protect financial stability and depositors. It also makes clear that APRA can consider geographic and sectoral sources of system risks issues as appropriate and respond as appropriate.

Recent conditions have highlighted the fact that the Australian economy differs considerably from region to region. APRA has broad and flexible powers, but there is no clear statement in the Banking Act that APRA has a responsibility to take account of geographic or sectoral issues where appropriate. Government is putting APRA's powers and responsibilities to address these issues-in line with its prudential mandate-beyond doubt.

Schedule 5 of the bill implements a number of reforms to the credit card market to improve competition in the credit card market and protect vulnerable consumers from building up unsustainable credit card debts.

There are many benefits to the use of credit cards for consumers. However, for some consumers very high interest rates and a pattern of overborrowing and under-repayment can cause them to incur persistently high credit card interest charges. These consumers are often in households with low levels of income, with the lowest income households having credit card debt equal to four per cent of their annual disposable income, compared to two per cent for those in the highest income category.

For these consumers, inadequate competition on ongoing interest rates and insufficient protection in the current regulatory framework can contribute to substantial hardship.

Currently, credit card providers are only required to assess a credit card contract as unsuitable if the borrower cannot repay the loan without substantial hardship. This means that some credit card providers only assess whether a consumer can meet the minimum repayments when determining if a consumer can afford a credit limit. As a result, consumers can be granted excessive credit limits which can lead to cycles of debt.

In addition, the calculation of credit card interest can be overly complex and often does not match consumers' expectations or understanding.

Consumers can also face substantial barriers to switching credit cards or lowering credit limits due to onerous processes imposed by banks. These barriers have a substantial impact on competition in the credit card market.

Schedule 5 of this bill addresses these problems by implementing a reform package to reduce the incidence of consumers building up unsustainable credit card debt and to improve competition in the credit card market.

This is consistent with the government's commitment to implementing the first phase of reforms outlined in the government's response to the Senate inquiry into the credit card market.

Firstly, Schedule 5 will tighten responsible lending obligations for credit card providers by requiring affordability assessments to be based on whether a consumer can repay the full credit limit within a reasonable period. The bill will provide the Australian Securities and Investments Commission with the power to determine that reasonable period by legislative instrument.

This reform is not intended to unduly reduce consumers' access to credit. As such, ASIC is required to balance the need to prevent consumers from being in unsuitable credit card contracts with the need to ensure that reasonable access to credit is maintained when determining the reasonable conduct.

Secondly, schedule 5 will prohibit all unsolicited credit limit increase invitations including where a consumer has previously opted in to receiving these invitations.

The definition of a credit limit increase invitation has also been expanded to include all forms of communication (rather than only written communication), removing the loopholes to prevent credit card providers from circumventing the law and making unsolicited offers by phone or over an online portal.

Schedule 5 will put an end to the unfair and complex way that interest is calculated on credit cards and make it easier for consumers to understand and compare how credit card interest is calculated.

Credit card providers will no longer be able to charge backdated interest or interest on the balance that has already been repaid if a consumer does not fully repay their outstanding balance.

Finally, schedule 5 will require credit card providers to have online options for consumers to initiate a credit card cancellation or lower a credit limit. Consumers can face substantial barriers when trying to cancel a credit card and this reduces competition and limits how consumers can manage their credit card debt.

Schedule 5 requires credit card providers to facilitate any requests to cancel a credit card or lower a credit limit and prevents them from employing tactics to dissuade or impede consumers from cancelling a credit card or lowering a credit limit.

These reforms are a necessary and important step in reducing the incidence of consumers building up unmanageable credit card debts and improving competition in the credit card market.

The Turnbull government is taking action now to ensure a more accountable and unquestionably strong, fair and competitive banking system that does the right thing by Australians.

Debate adjourned.