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The two key issues the banking royal commission must investigate

Credit cards are the most complained-about financial product in Australia.
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The banking royal commission gets underway a week from Monday, and if consumers are anything to go by, there are two clear areas that it must focus on: credit and insurance.

Credit products – above all credit cards, but also home loans and personal loans – are easily the most complained-about products offered by the financials services industry, according to the Financial Ombudsman Service.

By the same measure, the second-most complained about product is insurance.

Together, complaints about credit and insurance are way ahead of complaints about any other product type.

As the chart below shows, nothing – not bank deposits, not superannuation, not financial advice, not investment funds – comes close.

In fact, superannuation, which unlike insurance is explicitly listed in the terms of reference of the royal commission, does not even register in the FOS’s figures.

When it comes to the type of institutions we are complaining about, banks, lenders and insurance companies together account for more than 80 per cent of disputes.

And banks are way in front.

Credit

The FOS, a government-initiated body set up to resolve disputes between consumers and financial services providers, tells us that last year 43 per cent (10,973) of all the disputes it presided over related to credit-based products.

While a very small portion of that was business credit, the vast majority (nearly 90 per cent) of disputes related to consumer lending.

The number one disputed product was – surprise surprise – credit cards, accounting for 38 per cent of all disputes.

Home loans came in second, at 27 per cent, with personal loans (which include car loans) close behind at 21 per cent.

The number one reason for credit disputes was “financial difficulty” – ie people finding themselves unable to service their debt.

This picture was corroborated by the Consumer Action Law Centre, which in its recent submission to the royal commission listed “irresponsible lending” as the number one concern for the generally lower-income people it deals with.

The submission particularly singled out credit card lending.

“Poor lending practices in relation to credit cards are a significant issue,” the submission read.

“Lenders often do not properly assess a customer’s ability to repay a credit card limit, and offer credit card limit increases or balance transfer deals without properly assessing a customer’s current financial situation.”

Consumer Action put car finance high on its list of priorities for the royal commission, saying it received 1098 complaints about car loans last year.

“Consumer Action’s casework experience suggests there is systemic irresponsible lending in the car finance market, particularly for vehicle purchases by low-income and disadvantaged consumers,” the submission stated.

Commissioner Justice Kenneth Hayne will hold his first hearing on 12 February.
Commissioner Justice Kenneth Hayne will hold his first hearing on 12 February.

Insurance

Of the almost 9000 disputes over general insurance the FOS handled, 90 per cent related to domestic insurance.

Motor vehicle comprehensive insurance was number one at 33 per cent, followed by home building (30 per cent) and travel insurance (10 per cent).

When it came to life insurance, the majority of complaints (59 per cent) related to income stream cover – that is, insurance paid out to people who, through injury or ill health, are unable to work.

The remaining disputes were lump sum payments – which refer both to death benefits and to lump sum payments on total and permanent disability policies.

Consumer Action lists a number of concerns about life insurance, both individual life insurance sold through banks’ advisers as well as directly to consumers, and group life insurance sold through superannuation funds.

The group identified “exploitative advertising and marketing of direct life insurance” as an “area of high risk and concern for vulnerable consumers”.

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