ASIC to lay credit cards on the table

The corporate regulator is set to release an extensive review of the $50bn credit card market this week.

Small banks loosened requirements to win more credit-card customers in the years following the recession, but now they face growing losses. PHOTO: ELISE AMENDOLA/ASSOCIATED PRESS

Strange as it may seem, not everything to do with financial services orbits around royal commissioner Ken Hayne.

The word on the street is that the Australian Securities & Investments Commission will release an extensive review of the $50 billion credit card market on Wednesday.

The review will feature a massive crunch of data, after the nation’s biggest lenders handed over relevant figures on their card portfolios dating back at least five years, including monthly repayment details on individual accounts.

The overriding concern, identified in a December 2015 report by a Senate committee, is that a large group of consumers get stuck in a debt trap, persistently paying high rates of interest because of inappropriate card selection and certain patterns of use.

This imposes a substantial burden on their financial wellbeing.

There are currently about 16 million credit and charge accounts in Australia, or about 1.8 cards per household, with about two-thirds of the outstanding debt accruing interest.

The available data indicates that the debt-servicing burden falls more heavily on households with relatively low levels of income and wealth.

Households in the lowest quintile hold credit-card debt that — on average — equals 4 per cent of their disposable income compared to 2 per cent for the highest income quintile.

Low-income households are also more likely to revolve their balances.

Promotions touting zero interest on balance transfers will be a particular focus of the ASIC review, given suggestions that banks deliberately target customers who are likely to take longer to repay their debts.

This will involve analysis of consumer behaviour when zero interest deals, which typically last for about 12 months, revert to rates as high as 20 per cent.

ASIC has previously said it would examine whether consumers used balance transfer deals to consolidate their debts, switch between banks, or if balances were carried for a long time across multiple cards.

A further concern has been the inflexibility of credit card interest rates to reductions in the official cash rate, which has prompted criticism over a lack of competition.

Analysis by the federal Treasury in 2015 showed that effective spreads earned by credit card providers increased over the previous decade, with generous spreads during the financial crisis remaining in place.

After the 2015 report by the Economics References Committee, the government proposed a series of reforms in a May 2016 consultation paper.

The first tranche of proposed reforms, which led to the ASIC review, was unveiled in the 2017 budget.

Last February, the parliament legislated to stamp out unfair and predatory bank practices.

Among the reforms is a requirement for affordability assessments to be based on a consumer’s ability to repay the credit limit within a reasonable period, effective from January next year, and a ban on unsolicited offers of credit limit increases, which came into effect on July 1.

The third reform, effective from next January, simplifies how credit card interest is calculated, and requires card providers to have online options to cancel cards or reduce limits.

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