Chapter 10
Unfair contract terms
10.1
This chapter examines how competition affects unfair terms that may be
included in banking contracts.
10.2
In 2009, the Senate Economics Legislation Committee inquired into the
provisions of the first tranche of the Australian Consumer Law (ACL). A key
provision of this bill was the banning of unfair terms in standard form
business‑to‑consumer contracts. Standard form contracts are
contracts that are not individually negotiated: they are often 'take it or
leave it' contracts.
10.3
The ACL provides that a term in a consumer contract will be considered
'unfair' if:
(a)
it causes a significant imbalance in the parties' rights and
responsibilities;
(b)
it is not 'reasonably necessary' to protect the 'legitimate interests'
of the supplier; and
(c) it would cause detriment (whether financial or otherwise) to a party if
it were to be applied or relied on.
10.4
A term is likely to be considered unfair if a supplier can vary any term
without the consumer's consent or if a supplier can cancel a contract without a
corresponding right for the consumer. If a term is found to be unfair, it is
void but the rest of the contract remains in effect.[1]
10.5
The ACL's unfair contract terms provisions covers banking and financial
services contracts as well as utility service contracts, internet and telephone
contracts and gym memberships.
10.6
The ACL's unfair contract terms provisions were introduced in July 2010
and are a schedule within the Competition and Consumer Act 2010. The
provisions relevant to financial products and services are legislated in the Australian
Securities and Investments Commission Act 2001.
10.7
The Senate Economics Legislation Committee's report into the unfair
contract provisions noted that the banking sector criticised the bill's impact
on business certainty and business costs. The Australian Bankers' Association
told that committee:
Central to our concerns is that the regime will create
uncertainty for banks...In practice the operation of this legislation is likely
to see customers agreeing on the terms and conditions for their banking
services before the customer accepts a financial product, only to later seek to
avoid their obligations by claiming a particular term is unfair.[2]
Competition and unfair contract terms
10.8
In theory, the more competitive the banking market is, the less likely
that the banks will offer 'unfair' standard form banking contracts. A healthy,
competitive banking market will lead to competitive and 'fair' standard form
contracts. After examining the issue of unfair contract terms in 2008, the
Productivity Commission noted:
If consumers value fair play by firms the question arises as
to why firms would not organise themselves to exploit the market advantages
that this behaviour would bestow.[3]
10.9
Another view was put by the Banking and Finance Consumer Support
Association. It argued that an over-supply of competitors can foster unfair
terms to be included in contracts and impact unfairly on the consumer, the
taxpayer, the shareholder and investors. The Association noted that if left
unchecked, as in low doc lending, the market becomes 'flooded with unacceptable
contracts and conduct which may take years to repair the damage'.[4]
10.10
The Financial Ombudsman Service argued that competition will only have a
limited impact on unfair terms in a contract. It noted that most products are
sold on the basis of price and that an unfair term is not likely to be brought
to the consumer's attention by the selling institution. The effect of
competition on unfair contract terms was therefore only likely to occur where a
competitor draws customers' attention to an institution's unfair term. Even in
this event, however, it argued that this publicity was most likely to be
focussed on the fee attached to the unfair term, which underlines that
competition is typically based on price.[5]
10.11
Choice noted that competition alone often does not guarantee the
elimination of unfair contract terms because they are routinely not adequately
disclosed and therefore not considered by consumers at the time of making
purchase or service decisions. It argued that while the application of the unfair
contract term provisions will provide significant benefits for consumers, it is
not a complete solution. Specifically, Choice observed that:
-
the regime only applies to consumer contracts;
-
there remains some ambiguity in applying the regime as to when a
term will be considered 'unfair', particularly when applying the second limb of
the unfairness test—whether it is 'reasonably necessary in order to protect the
legitimate interests' of the bank;
-
similarly there will be some doubt about whether particular terms
are part of the 'upfront price' (and therefore not covered by the regime) in
the context of a banking service
-
the regime does not prohibit particular unfair terms until such
time as a court has determined the term is unfair.[6]
10.12
Choice argued that the issue most likely to cause the most difficulty
for both consumers and the industry is the level at which terms should be
considered 'unfair'. It believes that the obvious and fair rule would be that
all fees should be based on the bank's cost of providing the service to which
the fee relates or the loss that is incurred as a result of a default. Choice
claimed that this is likely to enhance competition because it will make it more
difficult for institutions to offer artificially attractive interest rates
which are supplemented by fee income.[7]
10.13
The Committee received some evidence expressing concern that the recent
diminution of competition in the Australian banking sector will not protect
consumers from unfair contract terms and fees. Associate Professor Frank Zumbo
wrote in his submission to the Committee that:
...consumers are currently, and will continue to, face higher
interest rates and unfair contract terms and fees as a direct result of the
substantial reduction in the independent competition previously provided by St
George, BankWest, RAMS, Aussie Home Loans and Wizard.[8]
10.14
As a corollary of this argument, Associate Professor Zumbo claimed that
the threshold for enforcing the unfair contract terms provisions is too high.
He noted that while the threshold was not as high as 'unconscionable conduct',
it will nonetheless be difficult to prove and hard to enforce.[9]
Mortgage early exit fees and unfair contract terms
10.15
ASIC published a review of entry and exit fees applying to home
mortgages in April 2008, prepared at the request of the Treasurer. Following
from this, the National Consumer Credit Protection Act 2009 came into
force in July 2010. The National Credit Code, which is contained in Schedule 1
of that Act, contains provisions, administered by ASIC, to the effect that the
courts may review and annul unconscionable interest and other charges such as
exit fees.[10]
10.16
ASIC explained:
Under this legislation borrowers can challenge the validity
of early termination fees they think are unconscionable or unfair. Borrowers
may also complain to ASIC or to an external dispute resolution scheme. The
borrower or ASIC can seek review of fees by a court.[11]
10.17
While it might be unlikely that an individual consumer would undertake
the expense and risk of taking a bank to court to try to vary an exit fee, the
Code also allows for ASIC to bring such a case in the public interest.[12]
10.18
ASIC also noted that after a period of consultation, in November 2010
they published guidance for lenders about how ASIC proposed to administer the
unfair contract terms provisions in relation to exit fees:
The guidance spells out ASIC’s view on such matters as what
types of costs and losses might be included in an exit fee, the types of losses
that might not be recovered through exit fees and the limited circumstances under
which a lender might vary exit fees during the life of a mortgage.[13]
10.19
This document noted that ASIC no longer viewed ongoing loan
administration as a legitimate interest. It argued that ongoing loan
administration costs were recovered through other fees and charges, such as account
keeping fees, and do not need to be recovered through early exit fees. ASIC
also noted that it does not agree that it is legitimate for lenders to seek to
recover product and business development costs in an early exit fee. It argued
that it is more appropriate to recover these through other fees and charges (such
as ongoing fees or in a lender's margin on lending).[14]
10.20
There are doubts that the ASIC approach will prove effective:
While we do have laws dealing with unfair fees, I have to say
that ASIC has been very slow to enforce those laws, and suggestions that
individual consumers can go to ASIC and that that will lead to an investigation
are, I believe, once again naive. The reality is that agencies like APRA and
the ACCC have limited resources. If a single consumer were to raise an issue,
they would be likely to get back a form letter saying that it is not a priority
area, it is just an isolated instance and the consumer has the ability to
pursue private actions.[15]
10.21
The Consumer Action Law Centre noted in its submission that ASIC's
formal guidance on the issue of exit fees and 'deferred establishment fees':
...makes it clear that ASIC does consider that these fees
could fall foul of the new laws in certain circumstances and that ASIC could
potentially take action to enforce the new laws in the future if it considered
doing so was in the public interest.[16]
10.22
The Centre observed that given a policy goal of preventing the negative
effect of exit fees on competition in financial services markets, the need for
regulatory intervention was 'inevitable'.[17]
Nonetheless, it argued that the regulatory framework could be extended to 'clamp
down' on these fees.
10.23
The Centre noted the United Kingdom's lead of imposing disclosure
obligations on lenders in relation to these fees. This requires lenders to
disclose early exit fees upfront using easy to understand cash amounts. All
lenders are required to call this type of fee by the same name, so that consumers
do not have to compare the costs of early termination fees as opposed to deferred
establishment fees.
10.24
The Centre argued that the unfair contract terms provisions are
important to protect consumers once they have entered into a contract.
Disclosure is not protection against unfair or excessively high fee levels.
Accordingly, the Centre recommended that the unfair contract and consumer
credit law provisions be amended to clarify that that only costs directly related
to early termination can be recovered in an early exit fee. It noted that in
Victoria, there is already a model for regulating early termination fees in
this way.[18]
Unfair fees
10.25
An unfair fee might broadly be described as one where the fee payable
materially exceeds the reasonable cost to the financial institution of
undertaking the activity to which the fee relates.[19]
The ability of a bank to charge an 'unfair' fee reflects, in part, a lack of
competitive tension in the market. As Choice noted in its submission:
...unfair fees and charges are a symptom of an uncompetitive
market in Australia. CHOICE has welcomed the Government's recent moves against
excessive mortgage exit fees and unfair credit card terms. But it is notable
that consumers have been driven to taking collective legal action to recover
unfair fees.[20]
10.26
The Committee received some comment on the need for a tougher
legislative stance on banks' unfair fees. In his submission, Associate
Professor Zumbo recommended amending the definition of unfair term under the
ACL to expressly deal with unfair fees. He suggested amending the meaning of
'unfair' in section 24(2) of the ACL[21]
to state that:
(2) In determining whether a term of a consumer contract is
unfair under subsection (1), a court may take into account such matters as it
thinks relevant, but must take into account the following:
...in relation to a fee payable in connection with a financial
product, whether the fee materially exceeds the reasonable cost to the
financial institution of undertaking the activity to which the fee relates.[22]
10.27
The Consumer Action Law Centre argued that as the national unfair
contract terms laws have only recently been introduced and are specifically designed
to target unfair contractual terms, 'they should now be given a chance to work'
and 'regulators should be given an opportunity to monitor the market and enforce
the law'.[23]
Bank selling practices
10.28
The trade union covering bank workers is critical of some selling
practices:
It is common practice throughout the banking industry for
significant numbers of employees to have their wages and conditions outcomes and
in some cases their employment predicated on employer imposed sales targets associated
with the sale of products, very much including credit products...this encourages
a culture of product pushing onto consumers, with little regard for whether it
is the right product for consumers or their ability to afford it.[24]
10.29
A recent opinion poll showed that 59 per cent of customers were 'unaware
of bank workers' salaries being tied to the selling of debt products' and 79
per cent 'want sales targets of credit products delinked from wages for bank
workers'.[25]
10.30
Among the bank workers themselves, 43 per cent reported 'being placed
under pressure to sell credit/debit products to customers regardless of their
ability to afford them' and 81 per cent say such targets were not adjusted
during periods of economic difficulty.[26]
Committee view
10.31
The Committee believes that more intense competition will lead to fewer
rather than more instances of contracts with unfair terms. There is still a
role for some regulation to supplement the benefits of improving competition.
Regulations governing clear, simple and comparable disclosure would certainly
assist consumers in determining whether or not to sign a contract. As discussed
in Chapter 7, the Committee believes that bank exit fees should be allowed but
they should be related to the costs incurred by the lender, not set at a
prohibitive level where they act as a barrier to competition. As the unfair
contract term provisions have been in operation for less than a year, the Committee
believes it is prudent to wait to reserve judgment on their effectiveness.
10.32
As the Committee has noted in Chapter 7, public education to improve
financial literacy is an important component of ensuring that the full benefits
of a competitive financial system are available to all consumers.
Recommendation 17
10.33
The Committee recommends that the Government introduce regulation
of mortgage early exit fees (including deferred establishment fees), requiring
disclosure of these fees upfront in a simplified and comparable format.
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