The consumer watchdog is investigating several financial institutions over concerns that they may have breached responsible lending laws while marketing credit cards to customers.
Michael Sadaat, a senior executive with the Australian Securities and Investments Commission, told the senate committee inquiring into credit card interest rates that the regulator was examining the conduct of at least one lender and perhaps others.
“I can think of at least one I’m quite familiar with … but there may be others because ASIC receives complaints from the public,” Mr Sadaat told the committee.
When pressed by a member of the committee to identify the institutions under investigation, Mr Sadaat said he was not sure how many there were but would report those details to senators after conferring with other ASIC staff.
The New Daily later sought those details from the regulator but a spokesperson said the information could not be disclosed.
In recent years ASIC has taken enforcement action against three credit card issuers – GE Money, Commonwealth Bank and Westpac – for breaches of responsible lending laws.
Both Commonwealth Bank and Westpac were caught sending unsolicited invitations to credit card customers to raise their debt limits.
Such marketing tactics were prohibited under responsible lending reforms introduced in 2012.
Liberal senator Sean Edwards told Mr Sadaat that the benefits of credit cards including rewards programs and interest-free days were “all a fudge because behind it all was this insidious interest rate”.
Mr Sadaat responded by indicating that most credit card users who revolved debt were likely to pay more for using their cards.
“Consumers who pay interest on credit cars are unlikely to offset the costs with any of those benefits,” he told the committee.
CHOICE calls for reform
Peak consumer advocate CHOICE wants the government to introduce sweeping reforms, most of which would simplify the disclosure of credit card features and enable customers to switch out of uncompetitive products.
Campaigns manager Erin Turner told the committee that Choice research found that 64 per cent of credit cardholders did not know the interest rate charged on their card.
When the same survey was taken in 2013 only 48 per cent of credit card customers did not know the rate.
CHOICE CEO Alan Kirkland told the committee that credit card statements should be standardised across the industry so that customers could understand the cost of using their cards and compare pricing and features with other products.
Mr Kirkland said switching activity between card products was low because credit card issuers made it difficult for consumers to pinpoint the best deals in the market.
“What we have is a Confusopoly,” he told the committee.
“Making comparisons is impossible…there is need for comparison rates.”
Several high profile finance journalists including Channel 7 breakfast host, David Koch and Channel 9 finance expert, Ross Greenwood spoke before the committee.
Mr Greenwood said that the minimum monthly repayments on credit card debts should be raised so that cardholders were genuinely working down the principal each month and not just meeting servicing interest.
He also asked the committee to examine whether sales incentives offered to bank staff had led to inappropriate credit cards being issued to some consumers.
“Internally within financial institutions you get rewards for cross-selling products so staff are incentivized to market credit cards to customers,” he told the committee.
Mr Koch raised the prospect of banning credit card advertising to help curb the problem of “credit addicts”.
Consumer advocates split on reform
In a surprising development, leading consumer advocates appear to be divided on whether the Reserve Bank should lower interchange fees on credit card transactions.
When customers pay with a credit card the banks levy special fees on retailers known as a merchant service fees.
Some retailers then pass on the cost of such fees to customers as surcharges.
The RBA is believed to be working on a new fee regime that will lower the average merchant fee from 0.5 per cent of the value of credit card transactions to at least 0.3 per cent.
CHOICE’s Mr Kirkland is backing moves to reduce the fees, but a former CHOICE executive Christopher Zinn told senators that lowering the banks’ interchange revenue would result in customers paying higher interest rates and annual fees.
Mr Zinn warned that many credit unions now offering low interest cards would be forced to increase rates if interchange fees were reduced.
“Their (credit unions) business model relies on interchange fees to pay for low-rate cards,” he said.
Mr Kirkland said MasterCard and Visa have been setting higher interchange fees in recent years, most of which had been passed on to consumers.
“Lowering interchange will reduce costs across the payment system and should make using a credit or debit card cheaper for most consumers,” he said.