A note from Consumer Action Law Centre

Written on the 16 June 2021 by Kelly Higgins

We have heard that there is a possibility that the Government could seek to 'split' the NCCP Amendment (Supporting Economic Recovery) Bill 2020 so as to remove schedule 1 relating to repealing the responsible lending framework, but retain the other schedules relating to small amount credit contracts (SACCs), consumer leases and other matters.

We consider that a split Bill removing schedule 1 should only proceed if:

• There is a commitment from the Government that the 10% protected earnings amount for SACCs and consumer leases apply to all borrowers, not just those whose predominant source of income is social security; and
• The Bill is amended to remove the ability of consumer lessors to charge an establishment fee of 20% of the amount borrowed, on top of the fee and interest cap.

The above changes would ensure the Bill was consistent with the Final Report of the 2016 Small Amount Credit Contract Review, the recommendations of which were previously accepted by Government.

That review said that the protected earnings amount was a core protection designed to ensure affordability and financial inclusion, and is needed for all borrowers. Many Australians rely on intermittent or very low incomes from wage or other sources, and do not have their predominant source of income from social security. Should protected earnings amounts not apply to these borrowers, they will be at a severe risk of a debt spiral as repayments will be uncapped. Moreover, the Government is currently proposing a 20% protected earnings amount, which is too high and inconsistent with the SACC Review Final Report.

On leases, the review said that the cap for fees and interest should be 4 percent of the base price of the goods per month, up to 48 months. It specifically rejected mirroring the 20 percent establishment fee for SACCs, as SACCs are generally short term while consumer leases are for longer terms (commonly up to 36-48 months), allowing lessors to recoup sufficient returns. The review found that some lessors already operated inside the recommended cap. We calculate that if the Bill proceeds as is, consumer lessors could charge effective equivalent annual interest rates of over 100%.

We note that the setting of the protected earnings requirement will be done by regulation should the RLO schedule be split off, this Bill should only proceed if the Government commits to aligning the relevant regulations with the recommendation of the SACC Review Final Report. The provisions allowing for consumer lessors to charge an establishment fee is in the Bill itself, at proposed section 175AA(4). Other suggested amendments to related provisions are outlined in the joint consumer submission to the Senate Inquiry into this Bill.

To be clear, we do not support passing this Bill without the above changes and recommend opposing it. This is because:
 

• Keeping the protected earnings amount at 20% will lead to financially vulnerable people losing very high amounts of their income in repayments, meaning that they are more vulnerable to a debt trap;
• Applying 20% protected earnings to each of SACCs and consumer leases could mean that low-income earners lose up to 40% of their income in repayments to high-cost credit providers, should the consumer have both products (which is not uncommon);

Consumer lessors would be able to charge equivalent interest rates of over 100%, which is simply extortionate and will contribute to financial distress;

The overall package of reforms would not delivery product safety for what a very high-risk financial products.