Consumer protection framework in financial services
Prudential regulation by APRA provides an important mechanism for protecting depositors, insurance policyholders and superannuation fund members, as discussed in the Stability chapter. Prudential regulation is a fundamental consumer protection mechanism, which operates as a preventative measure to promote sustainable financial institutions that can deliver on their financial promises.
The framework for non-prudential regulation of financial services consists of two tiers:
- Generic consumer regulation contained in the Australian Securities and Investments Commission Act 2001 (ASIC Act), which covers all financial products and services, including credit. The provisions of the ASIC Act reflect the relevant provisions of the Australian Consumer Law and give ASIC responsibility for administering these provisions.
- Industry-specific consumer regulation, which includes the licensing, conduct and disclosure regimes as set out in the Corporations Act 2001 and the National Consumer Credit Protection Act 2009.
This framework reflects the Wallis Inquiry’s view that ASIC should have exclusive responsibility for consumer protection (outside prudential regulation) in the financial sector. Industry-specific consumer regulation offers the benefit of preventing some consumer detriment on an ex-ante basis through licensing and positive conduct obligations, rather than simply providing remedies for dealing with misconduct after it has emerged.
There is a clear requirement for a balanced and effective consumer protection framework, including industry-specific consumer regulation in the financial sector. This is due to the: complexity of financial products; limitations of consumer financial literacy and engagement; significant (and often long-term) consequences of poor financial decisions; and propensity for consumer decision making to be biased or influenced by behavioural factors. Figure 6.1 shows the consumer protection regime in Australia as currently administered by ASIC.
Figure 6.1: The regulatory framework for consumer protection in financial services (non-prudential)
The Financial Services Reform (FSR) framework
The Wallis Inquiry intended the FSR framework to apply across the financial services industry,2 to both prudentially regulated and non-prudentially regulated entities. It was concerned about the impact of fragmented regulation on an industry that was consolidating across regulatory boundaries — and where product distinctions were blurring.
Since the FSR framework was introduced in 2001, changes have been made to the consumer protection regime, including:
- Ongoing attempts to improve the quality and usefulness of disclosure documents3
- Introducing the financial claims scheme (FCS) to protect depositors of authorised deposit-taking institutions (ADIs) and policyholders of general insurance companies from potential losses, should these institutions fail4
- Adding more sector-specific rules and exemptions through legislation, regulations, and ASIC’s exemption and modification powers
The National Consumer Credit framework
In 2010, the National Consumer Credit Protection Act 2009 (NCCP Act) commenced, which includes the National Credit Code (NCC) as Schedule 1 to the Act. The NCCP Act replaced the previous state-based consumer credit codes and the Uniform Consumer Credit Code. The NCCP Act, which is administered by ASIC, introduced licensing and responsible lending obligations where credit or credit assistance is provided for personal, domestic and household purposes and also for residential investment loans. Submissions support the introduction of this framework, saying it has improved lending and mortgage broking practices.
In 2013, the NCCP Act was amended to introduce enhanced financial hardship rules, additional obligations on small amount, or ‘payday’, lenders and interest rate caps on all loans where the credit provider is not an ADI.
3 For example, the Government recently introduced shorter product disclosure statements for superannuation, margin lending products and simple managed investment products
4 Note that the Financial Claims Scheme is discussed separately in the Stability chapter.