On Wednesday, 18 May 2016, Consumer Action CEO Gerard Brody gave a speech to the CIO Dispute Resolution Conference. An edited transcript of the speech can be found below.
***CHECK AGAINST DELIVERY***
Thank you for the opportunity to speak.
For those that don’t know of Consumer Action Law Centre, we are a Melbourne-based consumer organisation. We provide free legal advice and representation to Victorian consumers, free financial counselling as part of the National Debt Helpline, and promote the consumer interest through policy and campaign activities.
Our mission is “Just outcomes, for and with consumers” – and our organisational goals include challenging business models and practices that disadvantage consumers, and ensuring that consumers, particularly vulnerable and disadvantaged consumers, benefit from fair and effective competition in consumer markets.
Today I would like to talk about the importance of business culture and how I see this impacting on the fair treatment of customers.
Culture is a bit of a hot topic, with ASIC focusing its conference on this topic this year, and it being consistently talked about in the finance papers. We’ve also had suggestions of a Royal Commission into the finance sector, and the banking sector has announced its own review of sales commissions and product-based payments, noting that there can be misalignment between industry incentives and customer outcomes.
For many, if not most, companies, doing what is in the customer interest makes sense.
However, at my centre, we still see too many business models and practices that disadvantage vulnerable consumers. Often the business models appear to rely on taking advantage of vulnerable groups.
As a consumer organisation that receives complaints from the public when things go wrong – we receive around 20,000 contacts from Victorians each year – it’s perhaps easier for us to identify what a poor culture looks like, rather than identifying the hallmarks of a good culture. Where my centre sees poor business culture, it generally is because of products or business practices that involve the maxim “where the business wins, the consumer loses”. I’ll return to this theme throughout todays’ address.
Before turning to some of the consumer issues affecting our clients today, I want to look back at some history relating to business culture and suggest that the concerns of regulators today probably aren’t that different from yester-year.
I also want to talk about some of the lessons from the broader banking sector, and how working with ombudsman services and consumer groups can encourage institutions to put consumers first.
I also want to reflect on the role of dispute resolution schemes, like the Credit & Investments Ombudsman, in not only providing individual redress but also being proactive on systemic issues. This is an important role that contribute to improving the culture of firms.
Before I finish, I want to make a few comments on perhaps a front-of-mind topic of today – the recently announced review of dispute resolution schemes in the financial services sector.
First, let’s look back. In 1988, the Victorian Credit Licensing Authority upheld a consumer objection to the licensing of a finance company, HFC Finance. This objection was made by a predecessor of my organisation. HFC were the major sponsor of the Hawthorn Football Club.
This business had been operating for some time, and its practices were considered by consumer groups to exploit customer in dishonest and unfair ways. There was a range of issues of concern, but they included practices relating to the bundling of consumer credit insurance with loans, real estate lending and balloon loans, and problematic collection practices. Unfortunately, these are the types of issues my centre still deals with today.
In that case, the Authority said that the extent of the dishonest and unfair conduct engaged in by HFC must have instilled in the minds of HFC staff a clear understanding that such conduct was not merely acceptable but expected. The authority said that it would be very difficult for new management of the company to detect and eliminate the poor culture, as it was embedded inside the firm.
Changing the culture of financial service providers – or any for-profit business enterprise – is a tall order. We should remember that in a free –market economy, the culture revolves around making money.
An in an economy built around competing businesses, the companies operate on behalf of their owners, the shareholders. The incentives here are strong and compelling. Our corporations’ law creates a duty to maximise shareholder value, and businesses are driven by the innate self-interest that motivates most human behaviour.
I am not saying that consumers and communities do not benefit from these incentives, when they operate appropriately. The availability of credit has improved the lives of many. Other financial products and services, including savings accounts, debit cards, online banking services and others, have benefited consumers. Consumers can benefit from a well-functioning free-market economy.
However, as I said at the outset, we still see products and practices that are driven by the maxim, “when the business wins, the consumer loses”. It is this sort of conduct that consumer protection and ombudsman services should be concerned about.
I want to now look back at some banking consumer reforms, and reflect how consumer complaints and the ombudsman service played key roles in identifying problematic practices.
In the 2000s, consumer groups commonly complained about credit card lending – and the practice by some credit card providers to send unsolicited limit increase offers. The concern was that people tended to optimistically (and mistakenly) believe that they could pay off the credit card limit by the end of the statement period. In reality, these limit increases resulted in significant and unmanageable debt for many.
In 2005 and 2006, the then Banking and Financial Services Ombudsman identified this as a potential systemic issue and issued guidance about how lenders should ensure that they were not breaching consumer protections. However, the practices continued and in fact grew in the years following.
In 2008, my centre published a report called Congratulations, You’re Pre-Approved, which examined the actual, unsolicited letters sent to customers by banks and store card providers encouraging the customer to take up a pre-approved offer to increase their existing credit card.
The report found that credit card providers were using psychological manipulations to persuade, encourage and convince customers to take up a credit card limit increase, against their better interest. Techniques such as offers being labelled as ‘for a limited time’, and the use of phrases such as ‘financial freedom’ meant that consumers were likely to overlook the implications on taking on larger debts.
The issues identified by consumer advocates and ombudsman schemes were not, unfortunately, acted upon by the credit card providers. As such, the government acted. In 2011, the law was changed to prohibit credit card issuers from making unsolicited offers to increase a consumer’s credit limit in written form, unless the issuer had sought and been granted the consumer’s prior consent.
This was a step forward, but unfortunately we did see some of the card issuers circumvent the spirit of the legislation by making unsolicited offers by other means, such as over the phone or via online banking portals. Sometimes consent to receive these offers was obtained without consumers being fully aware, for example, at the time of applying for a credit card.
Just last week, following a Senate Inquiry into credit cards, the Government announced a proposal to broaden the prohibition on unsolicited credit limit increase offers to all forms of communication, and to remove card issuers’ ability to seek consumers’ prior consent to receiving unsolicited offers.
This is an example of how industry could have been more proactive to respond systemic issues identified by consumer groups and ombudsman services.
Next, I want to turn to some consumer issues that involve or affect members of the Credit and Investments Ombudsman. I want to cover the following issues – some of which you will see are not too different to the issues identified in the HFC case in 1988. The issues I want to focus on are add-on insurance, fringe finance including vendor finance, payday lending and consumer leases, and debt-collection.
But before I do, I want to discuss one issue that I know affects many of your businesses, and also the ombudsman itself. And that issue is the debt management industry, or what the consumer movement calls “debt vultures”.
Rather than me tell you about this, I want to leave it to the folk at that excellent consumer show “The Checkout”.
Consumer Action and Financial Rights Legal Centre has recently worked with regulators, industry and ombudsman services to put the issue of debt management companies on the agenda. We hosted a roundtable in February this year, and produced a communique that was jointly signed by attendees at the roundtable.
The communique calls for a new regulatory framework to bring these businesses in line with other financial services in Australia, which currently need to obtain a licence from ASIC and abide by a range of consumer protections and regulatory obligations. The good news is that the call for regulatory consistency here is getting a hearing from government representatives – we understand that the NSW and Victorian consumer affairs departments have established a working group to advance this issue.
I want to commend the CIO for pursuing this issue. The CIO has been very alive to the risk these businesses create for effective dispute resolution.
The next issue I’ll mention is add-on insurance. In 2015, my centre released two reports relating to add-on products. The first, called ‘Donating Your Money to the Warranty Company’, looked at extended warranties, often sold with second hand cars.
This report found that these warranties were almost completely worthless. The first problem we identified was that warranties often have a ‘discretionary risk’ clause which allows the provider whether to pay our, even if the consumer is otherwise covered by the warranty. Since we’ve released the report, two of the major providers have removed this term.
The second problem identified in our report is the numerous complicated and confusing exclusions and sub-limits in the detail of these policies. We engaged an expert mechanic to provide advice. In his report, he said as follows:
“in the final analysis, virtually all claims are either pre-existing, caused by fair wear and tear which is excluded, or are the result of some other exclusion. These warranties have conditions that no purchaser of a used vehicle could possibly know, some even a dealer would not know, but they can be used to deny a claim”.
Our second report, titled ‘Junk Merchants’, looked at consumer credit insurance and gap insurance. Drawing on over 30 case studies, the report found that products are similarly poor value, providing little protection to consumers. We described the add-on sales process as ‘sneaky’, and our case studies demonstrate that many people who purchased these products didn’t even know that they were buying them. Large commissions and low claims ratios further confirmed that these products are poor value for customers.
While the issuers of these products are in the main members of the Financial Ombudsman Service rather than the Credit and Investments Ombudsman, I believe many of the lenders and brokers that are involved in the sales and distribution of these products are members of CIO.
Since the release of that report, we have launched our ‘Demand A Refund’ campaign. At the centre of this campaign is a website at which people who have bought these products can go to. The website is interactive and users are asked to answer some simple questions about the products they’ve purchased and the circumstances of the sale. The website then generates a complaint letter directly to the insurer or financier. The complaint will automatically references legal protections that are alleged to have been breached.
We released the website at the beginning of April. In response, we have had over a hundred thousand dollars’ worth of refunds sought through the site. We have got numerous reports of consumers being refunded their premiums. I hope you’ll agree that this is a good example of using limited legal assistance resources to benefit many in the community.
Next I want to talk about fringe finance. The HFC Finance case looked at real estate lending with large balloon payments. Unfortunately we are seeing some very similar conduct from vendor financiers and rent-to-own spruikers. In the next few months we will release a report looking into these deals.
To give you a little insight, under vendor terms deals (sometimes known as ‘instalment contracts’, ‘terms contracts’ or ‘vendor finance’ sales), you agree to a sale price then pay a deposit and regular instalment payments to the seller. Under rent-to-buy deals (sometimes known as ‘lease-to-own’ or ‘lease plus option’) you pay much more than market rent, or market rent plus an ‘option fee’ for a set rental period, then at the end of the lease you can choose to buy the property.
We understand that some of the promoters of these arrangements are members of the Credit & Investments Ombudsman.
The promise is that you will be able to access a mainstream mortgage after 3-5 years, to pay out the balloon repayment. Our forthcoming report will describe this promise as a big trick. This is because there are some obvious risks for buyers in these scenarios:
- First, buyers are not the legal owner of the property. Title will not pass until the buyer has paid the total price, being when the deal is refinanced through a mainstream mortgage.
- Second, the buyer could pay much more than the property is worth. In the matters we’ve dealt with, buyers end up locking in a purchase price that is much higher than the value or any expected capital growth – and they also have to pay for outgoings like council rats, home insurance, repairs and maintenance.
- And third, most importantly, buyers can lose a lot of money if they have difficulty making payments.
Our forthcoming report will put forward policy and regulatory proposals aimed to prevent the harm from these deals. It will look not only at financial and credit regulation, but also sales of land legislation in states and territories. We will question whether in fact these sorts of home purchase options are necessary when we have a well-developed deep mainstream mortgage market that provides a lot of choices to borrowers.
The other fringe finance products that continue to concern our centre are payday loans and consumer leases. The problems in these sectors have been well documented, so I don’t want to spend too much time on them. However, I will show a video of one of our clients’ experiences becoming addicted to payday loans.
Our Centre has welcomed the recent report of the Review of Small Amount Credit Contracts (SACC) and consumer leases. We particularly welcomed the proposal to impose a cap on the cost of consumer leases, and to strengthen responsible lending so that products are deemed unsuitable if repayments exceed a proportion of the borrower’s net income.
We also welcomed the proposal for payday lenders and consumer lease providers to disclose an annual percentage rate. Today, we have published on our website a new calculator that enables consumers and others to easily determine an APR for payday loans that charge the maximum fees and charges. For too long, this has been hidden from the general public.
Our position remains, however, that all credit should be capped at an annual percentage rate of 48 per cent. The SACC report acknowledged that payday lenders and consumer leases enjoyed a concession from the cap that applies to other finance, and we believe that a stronger cap would be the best protection for Australians who use these products. We’re looking forward to a response from the Government on these issues.
Lastly, I want to talk about debt collection. Our centre has seen some improvements in this sector in recent times. This has been confirmed by research from the Australian Competition and Consumer Commission last year, which found that many businesses in the industry take their compliance obligations seriously.
I think it’s important to reflect that improvement in this sector appears to be connected to, and perhaps even limited to, the fact that businesses collecting credit-regulated debt are required to be licensed. Of course with a licence, comes membership of an EDR scheme. From the information CIO has published about the systemic issues it investigates, a number of them relate to debt purchasers and collectors. I suspect that this has contributed to improvement in the sector.
There has also been the release of an industry code for debt collection which appears to include provisions that enhance consumer protection. For example, signatories to the code agree to not knowingly accept payment arrangements for an indefinite period which do not reduce the principal balance outstanding, and also to stop charging interest and fees in circumstances where they are unaffordable or have the effect of increasing the debt.
However, before I become too effusive in my compliments, I should say that we do still see problems, particularly where there is no consumer advocate or financial counsellor involved. A recent review of the complaints to our centre found that large debt collectors continue present problems for vulnerable debtors. Problems include incessantly contacting debtors (for example, two to three times a day) and debt collectors continue to contact people’s workplaces. We think this can constitute harassment. This is an area that I hope the systemic issue function of the ombudsman service can play a role to identify and stamp out poor practices.
Before I close, I wanted to take the opportunity to make a few comments about the recently announced Federal Government review into dispute resolution in the financial services sector.
The review, as I understand it, will look at the Financial Ombudsman Service, the Credit & Investments Ombudsman and the Superannuation Complaints Tribunal, noting the potential to create a one-stop shop. The terms of the review appear to be very broad, and it will look at the role, powers, governance and accountability of the existing dispute resolution and complaints framework.
Consumer groups have welcomed this review. At the beginning, I talked about products and systems that protect business interests above consumer interests. Unfortunately, I think that the current system for dispute resolution can be described as such a system.
If you disagree with me, please consider this. It is industry members which can choose which dispute resolution scheme to belong to. Consumers cannot choose which scheme to complain to.
In this system, we believe that competition works not to prioritise good consumer outcomes, but put industry preferences ahead. The system inevitably creates the risk of placing cost efficiencies above quality consumer outcomes.
It has been suggested that competition creates innovation between schemes when it comes to effective dispute resolution. For example, in the past the CIO was perhaps the first scheme to expand its decision making into financial hardship effectively. This may have created an impetus for FOS to improve in this area.
However, I think that the jurisdiction of schemes are unlikely to expand as they have in the past. There is much more consumers can gain from having access to a single, high quality dispute resolution service, that is not burdened by worrying it will lose members to the other scheme.
I note that the Australian and New Zealand Ombudsman Associations has long had a policy statement that states that competition between industry ombudsman is undesirable.
In that statement, ANZOA states that there are other appropriate mechanisms which provide a proxy for the benefits that can otherwise be derived from competing services. These mechanisms include appropriate governance arrangements, independent reviews, public reporting, effective self-regulatory or regulatory mechanisms, benchmarking, formal or informal peer reviews, and scrutiny through avenues such as ANZOA.
Consumer advocates support this reasoning.
I think there are likely to be benefits to CIO members from one scheme as well. For example, a larger scheme is likely to be better resourced and be able to take advantage of efficiencies gained from being of a larger size. I would encourage the CIO and its members to consider the benefits of a single dispute resolution scheme as part of this Federal Government review.
Probably the main reason that makes me think that consumers would be better off with one scheme is this. And I should preface this by saying that I’m reporting a fact here—take from it what you will.
At our weekly case intake meetings, lawyers meet to discuss which cases we should take on. The question is often asked – which scheme is this business a member of? When that answer is CIO, the comment is commonly made, “the consumer would get a better and quicker outcome if they were a member of FOS, perhaps they should consider going to court instead? It’d probably be quicker”.
In conclusion, today I have acknowledged that there are challenges for financial service providers in ensuring a good business culture, a culture that goes beyond compliance alone and is focused on doing what is in the consumer interest. These challenges include shareholder attitudes, competitive pressures, and other business pressures.
In light of all this pressure, you might ask why should you bother? Well, first, there is clearly regulatory risk if you don’t. My earlier discussion of credit card lending, and also what has happened in payday lending and consumer leases, suggests governments will seek to regulate if they don’t think a market is leading to good consumer outcomes.
If governments don’t act, then there is also the risk of consumer campaigns – our Demand A Refund campaign on add-on insurance has created a lot of interest, and I wouldn’t be surprised if similar campaigns and even claims management services popped up where there are instances of mis-selling.
Many institutions of course want to do the right thing. If institutions do not feel that they can steer a responsible course alone, an alternative for them is perhaps to lobby and support effective regulation.
In last year’s senate inquiry into banking, for example, we actually saw banks come out in support of better regulation of balance transfer cards. Perhaps surprisingly, we’ve also had debt collectors and even payday lenders seek to work with us to get a better framework for regulation of those sector. It would be nice if more businesses took this approach
Finally, however, I would hope that more businesses are focusing on good consumer outcomes because it is the right thing to do. With the ongoing focus on the finance sector, we may just have reached a point in our history where long term thinking comes back into vogue – for consumers, business and possibly even investors!