It could result in increased risk for banks, higher costs for consumers and conflicts with the Government’s own best practice regulation guidelines.

The ABA has provided a submission to the Government on the draft provisions on unfair contract terms which raises the banking sector’s significant concerns about the regime.

A fundamental principle of contract law is certainty of contract. This principle is an essential element of all commercial transactions because it allows the parties to adequately allocate and price risk in these transactions.

The proposed regime affects standard form contracts which form the base of banks’ contractual arrangements to ensure certainty of compliance with laws affecting banks and management of risk, especially credit risk.

The new law which is to commence on 1 January, 2010, will apply to contracts with bank customers irrespective of whether the customer is a consumer or a business small, medium or large.

David Bell, Chief Executive of the ABA, said: “If the application of the proposed regime creates contractual uncertainty, this could lead to additional costs through the re-pricing of risk that will inevitably be passed on to end users of the credit markets – the very consumers this law is designed to protect – in the form of higher borrowing costs that build new economic inefficiencies and inflationary pressures in the system.”

“If this draft legislation is intended to indirectly regulate prices of banks’ products and services, then there is a risk to bank revenue streams. If this were to unfold, there could be impacts on profitability, shareholder returns and possible capital management issues.”  

“In practice, what we are likely to see is customers agreeing on the terms and conditions for their banking services, which importantly must be disclosed under various regulatory measures before the customer accepts the financial product, only to later seek to avoid their obligations by claiming a particular term is unfair.” 

“This regulatory approach is completely at odds with the Government’s and the financial services industry’s efforts to raise the financial literacy of Australian consumers because there is little or no incentive for consumers to familiarise themselves with their contractual responsibilities,” Mr Bell said.   

If banks have to review all their standard form contracts, this is a massive undertaking which will add costs into the system because there are millions in the marketplace at the current time.

To give a dimension to this proposed law and potential impacts on banks, there are:

• 10 million bank-issued credit cards (business and consumer) out of a total of 14 million credit card facilities;
• 1 million personal loans;
• 4.5 million home loans (includes owner occupied and investment); and
• 28 million accounts (consumer and business) with ATM access.

The ABA is unclear why this proposed law is necessary given other consumer protection laws such as unconscionable conduct and misleading and deceptive laws.

The proposal conflicts with the Government’s own best practice regulation guideline developed by the Council of Australian Governments (COAG) because a case has to be established before action is taken to address a problem. 

The ABA seriously questions that a case has been established based on a statement in the Government’s consultation paper that while there may be evidence of the prevalence of unfair contract terms “there is little information on the extent of consumer detriment associated with them”. 

David Bell concluded: “For such a major intervention into business contractual arrangements, the consultation process is being rushed, risking unforeseen outcomes coupled with an unreasonable period of time for banks to prepare for the new law.”

“The Government should consult more extensively to establish the case why Australia needs this type of intervention”.

“Banks are facing an extended period of increased costs, disruption and potential disputation over an indeterminate term, particularly when considering the rather unsubstantiated basis on which this law is being based.”

The ABA is unaware of any analysis or regulatory impact statement by the Federal Government showing how these laws, which overlay the national consumer credit draft legislation, will operate alone and together with the credit laws. It is important to understand how the two laws will interact before they are implemented.