Australia brings new law to ban unsolicited credit card limit increases
13 May 2018
Market Insights | Financial Services

To diminish the fraud, unfair and predatory practices and increase the more secured way of credit offerings, Australian parliament has passed a new bill that would crack down credit card providers’ unlawful practices and increase competition in the banking sector.

The key reforms introduced by the draft Bill are - narrowing responsible lending obligations for credit card contracts; banning unsolicited credit limit offers for credit card contracts; simplifying interest charge calculations; and requiring online methods for reducing credit limits and terminating credit card contracts.

It has been made mandatory that from July this year, all the banking and non-banking financial services providers in the country will be required to analyze affordability of a credit card based on consumer’s capability to repay the limit within a reasonable duration.

According to the Treasurer, these reforms are to “protect vulnerable Australians from predatory behavior which seeks to make a quick buck from people’s misfortune, and compound their financial hardship.”

Now for all the financial sectors to be prepared for the changes, all the credit card contract terms and conditions, responsible lending credit assessment processes, marketing processes, websites and IT systems must be revised by the credit card providers.

Sustainable hardship is going to play major role in deciding the right credit limits to the customers who can repay the amount within the agreed period. ASIC will work on this before issuing the credit limits to the customers. They undergo the protocol to verify the background of the consumer and issue the credit limit with time limit within which the customer has to repay the amount else the contract will be unsuitable.

ASIC will be empowered to set periods of time for this purpose and will be able to decide on various parameters which includes time periods, different classes of credit card contracts, different credit limits, and different rates of interest. It is now the responsibility of ASIC to ensure the right balance in achieving a reasonable balance between preventing consumers from being in unsuitable credit card contracts, and not preventing consumers from accessing credit.

The additional new reforms are being called by the new laws from January 2019, containing ban on unsolicited invites from banks to increase credit limit, and simplified credit card interest calculation. Added, the banks will be mandated to offer an option for cancelling cards or reducing their limit online.

A press statement from the office of Commonwealth of Australia Treasurer, Hon Scott Morrison read: “This legislation will protect vulnerable Australians from predatory behavior which seeks to make a quick buck from people’s misfortune, and compound their financial hardship.

“This is the first phase of reforms outlined in the Government’s response to the Senate Inquiry into the credit card market, which seeks to put more power in the hands of consumers.”

The new bill is also expected to rise competition in the country’s banking sector as it will allow even small lenders, which operate bricks and mortar branches or exclusively online, to call themselves banks.