The Rudd Government will crack down on dodgy mortgage dealers and payday lenders under a $71 million action plan to modernise Australian financial services.
Other predatory lending practices, including unsolicited offers to extend credit card limits, could be targeted in the second phase of the four-year overhaul of consumer credit laws.
The two-stage plan was agreed to by Premiers and Chief Ministers at the Council of Australian Governments (COAG) meeting in Perth today.
With the global financial crisis threatening economic stability in other countries, the Rudd Government has moved to further protect consumers from unscrupulous lenders.
“These are difficult times and strong regulation is the best protection for all Australians,” Prime Minister Kevin Rudd said today.
“Australia's strong banking system and robust budget surplus put us in a strong position to see the economy through this global financial crisis.
“These new measures will protect consumers and cut red tape for business.”
Under the first phase of the plan, the Commonwealth will take responsibility for trustee companies, the existing key credit regulation, and the Uniform Consumer Credit Code (UNCC) by enacting it as federal law.
The UCCC already covers mortgages taken out to buy the family home. It will be extended to cover mortgages on investment properties to help stop borrowers racking up excessive levels of mortgage debt.
So-called payday lenders will also be targeted, bringing them under a national licensing regime for the first time and forcing them to lend responsibly, including assessing borrowers' capacity to repay loans.
Also known as deferred deposit lenders, payday lenders charge extortionate fees and charges on small loans and cash advances to some of the most financially vulnerable people in the community - those who would not normally qualify for credit from a bank or other financial institution.
For the first time, all finance brokers, advisers and credit providers will be covered by a national licensing scheme.
Lenders will be licensed by corporate watchdog the Australian Securities and Investment Commission (ASIC), which will be given extra powers to police the scheme.
In a further breakthrough, all borrowers will be able to appeal to an external dispute resolution body to which all licensed lenders must belong.
The Corporations Act will be extended to cover margin lending products, which will have to provide product disclosure statements similar to First Home Saver Accounts.
The first phase changes will be dealt with in Commonwealth, State and Territory legislation by the end of June 2009, with a two-year transition period for affected businesses.
The second phase of the action plan will look at possible further rules to stem predatory lending practices, such as a review of credit card limit extension offers, an examination of State approaches to interest rate caps and other fringe lending issues.
The Commonwealth may also look at regulating reverse mortgages to protect older Australians considering using the equity in their homes to gain access to credit.
Any second phase changes would become Commonwealth legislation in the first half of 2010.
The action plan follows the release of the Government's Financial Services and Credit Reform Green Paper in June and agreement at the March and July COAG meetings to transfer consumer credit regulation to the Commonwealth.
“The Rudd Government has consulted widely with industry through the Green Paper, which received more than 150 submissions,” Minister for Superannuation and Corporate Law Nick Sherry said.
“The previous Government sat on report after report, which all said today's actions were necessary, yet they did nothing. In just 10 months we have acted to see that our financial services will be regulated nationally and consumers will be better protected,” Minister Sherry said.