New laws will prevent banks from inviting credit card users to increase limits

New government reforms will prevent credit card providers from contacting users with offers to increase spending limits, in a measure that one expert believes will reduce the risk of credit card debt for small businesses owners.

The Treasury Laws Amendment (Banking Measures No. 1) Bill 2017 passed both houses on Thursday. The bill imposes a number of restrictions on credit card providers in the hopes of curbing spending and credit card debt among Australians.

Credit card providers will no longer be allowed to contact consumers to invite them to increase their limits from July this year. The new regulations also require credit card providers to provide consumers with the option to cancel credit cards or reduce spending limits online. The reforms apply to all issuers of credit cards in Australia.

The legislation will also prevent providers from adding interest charges retrospectively to a credit card balance, or a part of it, that has been enjoying an interest-free period. This restriction will apply to new and existing credit card agreements from January 1, 2019.

Credit card providers will also be required to establish an online means for customers to request to cancel cards or reduce their credit limits by January. This restriction applies to credit card agreements containing a credit limit reduction entitlement or a credit card termination requirement.

In the explanatory memorandum submitted to the federal Parliament, Treasury said it has committed to “[tightening] responsible lending obligations to require that the suitability of a credit card contract for a consumer is assessed on the consumer’s ability to repay the credit limit of the contract within a certain period”.

“Consumers can also face substantial barriers to switching credit cards or lowering credit limits due to onerous processes imposed by banks. These barriers have a substantial impact on competition in the credit card market,” Treasurer Scott Morrison said in a parliamentary speech.

These measures were announced in May 2017, as part of the 2017-2018 federal budget, and have been passed during the early days of the royal commission into financial institutions.

SmartCompany contacted the Department of Treasury to confirm whether the credit card reforms also apply business credit accounts but did not receive a response prior to publication.

Reforms could reduce risk of debt for SMEs

Neil Slonim, founder of independent banking advice website thebankdoctor.org, says the reforms come at a time when banks are moving away from practices that could be seen as not being in the interest of consumers.

“For some people, for instance those who might have problems managing finances, [increasing spending limits] can become problematic so clearly there’s a trend away from that kind of behaviour,” he says.

Slonim points to another recent situation in which the Australian Securities and Investments Commission referred Westpac to the Federal Court after allegedly contacting a number of bank customers and recommending they switch to Westpac’s superannuation fund without considering their financial interests.

In light of the credit card reforms and the royal commission into the financial service sector, Slonim says banks should tread lightly.

“Banks need to be real careful about selling products, be it credit cards or superannuation, particularly if they haven’t asked for that product,” says Slonim.

For small businesses, Slonim says the reforms will be highly beneficial given many SME operators, especially sole traders, can face similar financial pressures to households.

“Just because you’re a business doesn’t mean you have greater financial literacy than a consumer. It is to be hoped these reforms apply equally to small businesses who are, in effect, consumers who conducts affairs under a corporate structure.”

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