Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697633750982.pdf (Australia)
Chapter 2 Schedule 1—Reasonable fees or charges Current regulation of credit fees and charges There are two key pieces of legislation currently in place which are relevant to 2.1 fees or charges relating to credit contracts.

They are:   the National Consumer Credit Protection Act 2009 (NCCP Act); of particular relevance is the National Credit Code which is contained in Schedule 1 to that Act and the regulations made under the NCCP Act; and the Australian Consumer Law.
2.2 The Australian Securities and Investments Commission (ASIC), Australia's corporate, markets and financial services regulator, is responsible for administering and enforcing consumer credit matters covered by these laws.

National Credit Code 2.3 The National Credit Code (the Code) came into operation on 1 July 2010.
Its commencement gave effect to the Council of Australian Governments' (COAG) agreements of 26 March and 3 July 2008 to transfer responsibility for regulation of consumer credit, and a related cluster of additional financial services, from the states and territories to the Commonwealth.
The Code: … provides a consumer protection framework for consumer credit and related transactions … The Code regulates many aspects of the provision of certain including upfront and ongoing disclosure obligations, changes to the credit contract, advertising and marketing requirements, termination of the credit contract and penalties and remedies.
The Code also regulates consumer leases.1 types of credit, 2.4 Under section 78 of the Code, the court may annul or reduce:   a change to the annual percentage rate or rates under a consumer credit contract; or an establishment fee or charge, or a fee or charge payable on early termination of a consumer credit contract or for prepayment of an amount under a consumer credit contract; if the court is satisfied that it is unconscionable.
2.5 For establishment fees and charges, the court is to have regard to: 1 Explanatory Memorandum, National Consumer Credit Protection Bill 2009, p. 239.
Page 6 … whether the amount of the fee or charge is equal to the credit provider's reasonable costs of determining an application for credit and the initial administrative costs of providing the credit or is equal to the credit provider's average reasonable costs of those things in respect of that class of contract.2 2.6 An early termination fee is unconscionable: … if and only if it appears to the court that it exceeds a reasonable estimate of the credit provider's loss arising from the early termination or prepayment, reasonable administrative costs in respect of such a termination or prepayment.3 credit provider's including average the 2.7 Section 79 of the Code allows ASIC, if it considers that doing so is in the public interest, to make an application to the court regarding unconscionable interest and other charges.
2.8 ASIC has published guidance on its approach to enforcing the provisions regarding unconscionable fees and charges.

For instance, ASIC considers that for the early termination fees covered by section 78 of the Code, a credit provider's loss 'arises from the early termination of a loan only if it is caused by the early termination'.4 Australian Consumer Law 2.9 The Australian Consumer Law includes provisions related to unfair contract terms.
Although the bulk of the Australian Consumer Law commenced on 1 January 2011, the unfair terms provisions commenced on 1 July 2010.

ASIC is responsible for the enforcement of matters related to financial services—these aspects of the Australian Consumer Law are included in the Australian Securities and Investments Commission Act 2001 (ASIC Act).
2.10 In relation to consumer credit matters, the unfair contract terms provisions apply to 'standard form consumer contracts' for a financial product, or the supply or possible supply of financial services.
While the term standard form contract is not defined in the legislation, ASIC considers it typically would be one 'that has been prepared by one party to the contract and is not subject to negotiation between the parties—that is, it is offered on a "take it or leave it" basis'.5 2 3 4 National Credit Code, s. 78(3).

National Credit Code, s. 78(4).


Australian Investments and Securities Commission, Regulatory Guide 220—Early termination fees for residential loans: Unconscionable fees and unfair contract terms, November 2010, paragraph RG 220.30.

The guide also provides a non-exhaustive list of possible situations.

5 Commonwealth of Australia et al, A guide to the unfair contract terms law, 2010, p. 8.
Page 7 2.11 Under section 12BG of the ASIC Act, a term in a consumer contract is unfair if it:    would cause a significant imbalance in the parties' rights and obligations arising under the contract; and is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
2.12 In determining whether a term of a consumer contract is unfair a court must take into account the extent to which the term is transparent (that is, expressed in reasonably plain language, legible, presented clearly and readily available to all parties), and the contract as a whole.
2.13 The unfair contract terms provisions do not apply to terms that:    define the main subject matter of the contract; set the upfront price payable under the contract; or are required or expressly permitted by a law of the Commonwealth, state or territory.6 2.14 The 'upfront price' exclusion makes it clear that the principal and interest are excluded from the unfair contract terms provisions, however, other fees and charges are likely to be captured: … for example, terms that impose additional fees for a default or exit, over and above the price for the goods or services acquired.7 2.15 ASIC's guidance, contained in its Regulatory Guide 220, notes: An early termination fee that has the effect of penalising the consumer for terminating the loan is not likely to be reasonably necessary to protect the lender's legitimate interests.
We consider that it also likely to be unfair as the other elements of the test of unfairness are also likely to be satisfied, namely that the term creates a significant imbalance in the parties' rights and obligations and causes detriment.8 6 7 8 The unfair contract terms provisions also do not apply to insurance contracts regulated under the Insurance Contracts Act 1984, nor do they apply to constitutions of companies, managed investment schemes or other kinds of bodies.
Commonwealth of Australia et al, A guide to the unfair contract terms law, 2010, p. 10.

Australian Investments and Securities Commission, Regulatory Guide 220—Early termination fees for residential loans: Unconscionable fees and unfair contract terms, November 2010, paragraph RG 220.72.
Page 8 Ban on exit fees 2.16 As part of its Competitive and Sustainable Banking System package announced in December 2010, the Government stated it would ban exit fees outright for new variable home loans entered into after 1 July 2011.
2.17 After a consultation process undertaken between 15 February 2011 and 1 March 2011, amendments to the regulations related to the National Credit Code were made on 23 March 2011.9 The amendments were subjected to a disallowance motion in the Senate, which was negatived on 22 June 2011.

2.18 The ban on exit fees for variable home loans does not apply for existing mortgages.

In these cases, the provisions related to unconscionable fees in the Code remain relevant.
Treasury advised this is due to constitutional reasons because such a measure: … would be an acquisition of property.

The property is the property of the financial institution.
We took legal advice on that.10 The Government also noted the continued relevance of the provisions related 2.19 to unconscionable fees when it announced its intention to ban exit fees: If any bank seeks to simply re-badge their current mortgage exit fees as upfront entry fees—or recover exit fees through any other type of fee— … ASIC … has the power to pursue the bank if it appears that the fee is 'unconscionable' under the Government’s new National Credit Code, which applies to both existing and new mortgages.11 The provisions of Schedule 1 to the Bill Overview 2.20 Schedule 1 to the Bill will insert a new section 30B into the National Credit Code.
Subsection 30B(1) would require that any credit fee or charge payable by a debtor to a credit provider must be 'reasonable'.

The Explanatory Memorandum outlines how a reasonable fee or charge may be determined: Under this section, a credit fee or charge must be reasonable, which means that it must not materially exceed the credit provider's reasonable costs of undertaking the activity or service to which the fee relates, or the credit 9 National Consumer Credit Protection Amendment Regulations 2011 (No.
2) and the National Consumer Credit Protection Amendment Regulations 2011 (No.

3).

10 Mr Jim Murphy, Executive Director, Markets Group, Department of the Treasury, Senate Economics References Committee Hansard, Inquiry into competition in the Australian banking sector, 13 December 2010, p 41.

11 Australian Government, Competitive and Sustainable Banking System, December 2010, p. 7.
Page 9 provider's average reasonable costs of undertaking the activity or service to which the fee relates in respect of that class of contract.12 2.21 When assessing whether such a fee or charge is reasonable, the court must have regard to whether the amount of the credit fee or charge the subject of the application materially exceeds: (a) (b) the credit provider's reasonable costs of undertaking the activity or service to which the credit fee or charge relates; or the credit provider's average reasonable costs of undertaking the activity or service to which the credit fee or charge relates in respect of that class of contract.13 Submitters' views 2.22 The Mortgage and Finance Association of Australia (MFAA), the peak industry body for mortgage and finance brokers and non-bank lenders, supported the amendments in Schedule 1: … requiring that credit fees of charges must be reasonable viz must not materially exceed the credit provider’s reasonable costs of undertaking the activity or service to which the fee relates is consistent with ASICs RG 220 and would be supported by MFAA.14 2.23 Professor Milind Sathye, Professor of Banking and Finance at the University of Canberra, broadly supported Schedule 1 although he was of the opinion that some elements warranted further consideration.15 The Australian Bankers' Association, however, was not in favour of the 2.24 amendments: The ABA submits that the Bill would largely duplicate recently enacted law and add another layer to the regulation of credit fees and charges thereby creating uncertainty and potentially conflicting interpretations.16 Interaction with existing law related to credit fees and charges 2.25 It is apparent that the Schedule generally reflects the approach taken by ASIC's Regulatory Guide 220, which provides ASIC's view on when an early termination fee for a home loan or residential investment loan may be unconscionable 12 Explanatory Memorandum, Consumer Credit Protection Amendment (Fees) Bill 2011, p. 2.
13 Proposed subsection 30B(4) of the National Credit Code.

Also, proposed subsection (3) outlines what ASIC must have regard to when assessing an application from a debtor or guarantor.

14 Mortgage and Finance Association of Australia, Submission 1, p. 9.

15 Professor Milind Sathye, Submission 2.

16 Australian Bankers' Association, Submission 3, p. 2.

Page 10 under the National Credit Code or unfair under the Australian Consumer Law (see paragraphs 2.8 and 2.15).
2.26 A key difference, however, between the current provisions related to unconscionable fees or charges and the proposal in the Bill is the scope.

The Bill would apply to all credit fees or charges payable by a debtor to a credit provider whereas the unconscionable fee provisions in the National Credit Code only apply to the specific categories of fees or charges listed in subsection 78(1) of the Code (see paragraph 2.4).
2.27 The similarities between the amendment and the approach taken by Regulatory Guide 220 was one of the factors that resulted in submitters supporting the Schedule.17 The MFAA noted: RG 220 made good sense to MFAA and was supported by the industry generally.
In particular non-bank and other smaller lenders supported the regulatory guidance because it enabled them to continue to utilise reasonable exit fees ("deferred establishment fees") as a key tool in their competition with the larger banks and providing choice to borrowers.18 2.28 A possible complication, however, is how the Bill's requirement that a credit fee or charge must be reasonable would interact with the existing provisions which allow for challenges by debtors or ASIC transactions, such as unconscionable charges.
To put it another way, where is the line (or is there an overlap) between the provisions governing unconscionable fees and the requirement that a fee must be reasonable?
to unjust Whether a credit fee or charge is not 'reasonable' Cost recovery 2.29 The concept of a cost being required to be 'reasonable' is not unfamiliar to consumer credit law—for example, the courts are required to have regard to whether a fee or charge is equal to a credit provider's reasonable costs when determining whether an establishment fee or charge is unconscionable.19 2.30 While not itself law, ASIC's Regulatory Guide 220 also considers that in assessing if an early termination fee is unfair, whether the fee reflects the lender's reasonable costs directly arising from the early termination needs to be considered.20 17 Mortgage and Finance Association of Australia, Submission 1, p. 9; Professor Milind Sathye, Submission 2, p. 3.
18 Mortgage and Finance Association of Australia, Submission 1, p. 3.

19 National Credit Code, s. 78.

20 Australian Investments and Securities Commission, Regulatory Guide 220—Early termination fees for residential loans: Unconscionable fees and unfair contract terms, November 2010, paragraph RG 220.71-72.
2.31 For the purposes of determining whether a credit fee or charge is not reasonable, new subsections 30B(3) and (4) of the Code proposed by the Bill refer to the credit provider's reasonable costs and average reasonable costs associated with undertaking the activity or service to which the fee or charge relates.
The Australian Bankers' Association objected to fees being for cost recovery 2.32 purposes only: Page 11 The market and economic consequences of the proposed regulation of credit fees and charges, by linking it to cost recovery, do not appear to have been considered.

If credit providers are confined to charge fees on a cost recovery basis only, this would signal that income should be generated by interest rates only.
The implication that credit providers should only make money from interest is completely inappropriate, particularly in the cards space where a significant proportion of customers do not revolve balances.

By regulating the fees and charges that can be imposed issuers will inevitably increase interest rates and this will affect those that can least afford to pay higher interest.
In other words, those customers that do not pay off their balances each month would be subject to higher interest to subsidise all others, and the credit provider would not be able to earn any money from customers that pay their balances off.21 2.33 The Australian Bankers' Association further explained their objection to fees being considered to be unreasonable if they are not clearly linked to cost recovery, noting specific issues for credit card products: There are many valid instances where a fee is more than cost recovery but may still be reasonable and not excessive.
For example, the application of the Bill to "all credit fees and charges" would be particularly problematic for credit cards that carry an annual fee as annual fees appear to be captured under the definition of fees and charges.

Some lenders may charge annual fees for their highest tier of credit card that range above $500.

However, the card will most likely offer benefits and other reward points options that lower tier cards at a lower annual rate do not.
A consumer is always entirely free to choose a different product with a different and lower annual fee.

The annual fee is not currently tied to the exact cost to the lender of providing those benefits.
The Bill and the proposed linkage between all credit fees or charges and costs to the credit provider could therefore destroy innovation in the cards market.22 Determining credit providers' costs 2.34 A possible practical issue with the Schedule as it is currently drafted is how the credit provider's reasonable costs would be determined.

When the question of 21 Australian Bankers' Association, Submission 3, p. 2.

22 Australian Bankers' Association, Submission 3, p. 5.
Page 12 whether a cost is reasonable is currently considered under the National Credit Code or the NCCP Regulations, an allowance is made for an estimate of the cost to be used.

2.35 For example, although changes to the NCCP Regulations have banned exit fees, a credit provider may impose a discharge fee if it is based on reimbursing the credit provider for the reasonable administrative cost of terminating the credit contract.
For this purpose, the Regulations consider an administrative cost is reasonable only if it does not: … exceed a reasonable estimate of the average reasonable administrative cost to the credit provider of terminating that class of credit contract.23 (emphasis added) 2.36 Additionally, section 78(4) of the National Credit Code states: For the purposes of this section, a fee or charge payable on early termination of the contract or a prepayment of an amount under the credit contract is unconscionable if and only if it appears to the court that it exceeds a reasonable estimate of the credit provider's loss arising from the early termination or prepayment, including the credit provider's average reasonable administrative costs in respect of such a termination or prepayment.
24 (emphasis added) 2.37 On this basis, it may be appropriate to amend the Bill to allow for an estimate of the credit provider's reasonable costs and average reasonable costs to be used.
2.38 A related issue raised by Professor Sathye was the use of the phrase 'average reasonable costs of undertaking the activity or service' in the factors ASIC must have regard to (paragraph 30B(3)(b)) and the matters the court must have regard to (paragraph 30B(4)(b)) when determining whether the credit provider's fee or charge is not reasonable.
It was suggested that credit providers: … may be disadvantaged by this as lending decisions including fees and charges would be based on 'marginal cost' rather than average cost.

This is especially true in the banking world where cost of funds is quite volatile.
25 Whether a credit fee or charge 'materially' exceeds reasonable costs 2.39 The use of the word 'materially' in the proposed subsections 30B(3) and (4) implies there is some allowance for a credit fee or charge to exceed the credit provider's reasonable costs related to providing that activity or service.

The degree of tolerance, however, is unclear.

23 National Consumer Credit Protection Regulations 2010, r. 79A(4).

24 National Credit Code, s. 78(4).

25 Professor Milind Sathye, Submission 2, p. 3.
2.40 Professor Sathye noted: Page 13 The National Credit Code section 79(3) already provides that 'In determining whether an establishment fee or charge is unconscionable, the court is to have regard to whether the amount of the fee or charge is equal to the credit provider’s reasonable costs of determining an application for credit and the initial administrative costs of providing the credit or is equal to the credit provider’s average reasonable costs of those things in respect of that class of contract'.
The proposal uses the term 'materially exceeds' which may have a different meaning than unconscionable.

Materially exceeding charge may not be necessarily unconscionable (or oppressive) though the intention of the proposal it seems to me is to really do away opportunities for unconscionable conduct.26 2.41 Professor Sathye then suggested: The next question would be defining what 'materiality' in this context is.
If we apply the definition of materiality as used in the auditing context, then an amount equal or exceeding 10 per cent of the base amount is generally considered to be material.

The proposal is leaving this to the judgment of ASIC.

I would support this.27 2.42 As a definition is not supplied for the purposes of this provision, 'materially' would likely need to be interpreted by the courts.
Administration, enforcement and court orders 2.43 Proposed subsection 30B(2) provides that ASIC may, if satisfied on the application of a debtor or guarantor that a credit fee or charge is not reasonable, apply to the court for an order to annul or reduce the credit fee or charge, and for other ancillary orders.
Subsection (3) outlines what ASIC must have regard to when deciding whether to lodge an application and subsection (4) stipulates what the court must have regard to when considering an application from ASIC.

2.44 It is apparent that the proposed section is drafted differently to comparable existing sections in the Code.
Other sections that relate to orders by the court take a 'top down' approach—opening with the court being given the power to make certain orders, and then adding qualifications or matters that must/may be taken into account.

For example, section 78 of the Code28 states: The court may, if satisfied on the application of a debtor or guarantor that … [a fee or charge listed in the section] … is unconscionable, annul or reduce the change or fee or charge and may make ancillary or consequential orders.
26 Professor Milind Sathye, Submission 2, p. 2.

27 Professor Milind Sathye, Submission 2, p. 3.

28 This section provides for the court to make changes to obligations under credit contracts on grounds of hardship and unjust transactions, such as unconscionable interest and other charges.

Page 14 2.45 Section 79 of the Code then allows ASIC to make an application under that provision if it considers it is in the public interest.
The Bill does not include this explicit requirement (although ASIC would still have some discretion as the Bill only provides that ASIC 'may' apply to the court).

2.46 By diverging from the approach taken in drafting existing sections in the Code, some aspects appear less clear.
The proposed section 30B does not explicitly state that a debtor or guarantor may apply to the court for these types of orders themselves—the section outlines a process where a debtor or guarantor first applies to ASIC, which may then apply to the court.

Such an interpretation is supported by subsection (4) which only outlines what the court must have regard to when considering an application from ASIC.
The application process 2.47 The term 'application' is used in two different contexts within the Schedule.

The first context is the application made by a debtor or guarantor to ASIC, and the second is ASIC's application to the court for orders.

2.48 The meaning in the second context is clear, as it is linked back to subsection 30B(2) which uses the common legislative phrase of 'apply to the court'.
The first use may be more open to interpretation, as it is not clear how formal the application from the debtor or guarantor needs to be or what it needs to contain.

If it is intended that a formal application needs to be lodged, it is common in legislation that a provision be made for the regulations to clarify these arrangements and the circumstances in which an application is valid.29 2.49 In a practical sense, the need for both subsections (3) and (4) is not obvious.
Subsection (3) outlines what ASIC must have regard to when considering whether a fee or charge is not reasonable.

Subsection (4) then outlines what the court must have regard to when considering an application by ASIC which alleges that a fee or charge is not reasonable.
Ultimately, the key provision appears to be what the court must have regard to as it is reasonable to expect that ASIC would not lodge an application with the court if it did not think it had a reasonable prospect of satisfying the matters that the court is required to have regard to.30 2.50 Another possible issue with the drafting of the Schedule is that it does not appear that ASIC may apply to the court on its own initiative—the section only 29 A number of Acts require that for an application to be valid it must be in the form prescribed by the regulations and contain the information required by the form, be accompanied by any other information or documents prescribed by the regulations and be accompanied by the fee (if any) prescribed by the regulations.
30 Paragraph 4.7 of the Legal Services Directions 2005 requires that certain Commonwealth agencies such as ASIC not start court proceedings unless they have received written legal advice from lawyers whom the agency is allowed to use in the proceedings indicating that there are reasonable grounds for starting the proceedings.

Page 15 provides that ASIC may 'if satisfied on the application of a debtor or guarantor'.
Also, in the example of section 79 of the Code noted above, subsection (3) allows for ASIC to make an application that applies to one or more credit contracts and may apply to all or any class of credit contracts entered into by a credit provider during a specified period.

The Bill's proposal does not include this provision—as a result it appears that ASIC may only be able to act on individual applications lodged by affected parties.
2.51 Professor Sathye queried the period of time that proceedings under proposed section 30B could take, noting that the Bill does not provide a time limit for them to be resolved.
He suggested: It may help if a time limit of say one month from the date the complaint found acceptable by ASIC is put for submission of all relevant information by the concerned bank … If the case drags on the customer may not be able to take advantage of the competitive rates available from other providers.31 2.52 While such a proposal may have some attractive elements, a fixed statutory timeframe is generally more appropriate for when a statutory authority makes a binding determinations under legislation, rather than when it undertakes evidence gathering for potential legal proceedings.
A fixed statutory time limit also may not necessarily be helpful from ASIC's perspective.

Under Part 6-3 of the NCCP Act, ASIC has coercive information gathering powers which can require the production of books (a term that is broadly defined) relating to a credit activity engaged in by a person.

If ASIC determines it needs to use these powers, it would have useful flexibility regarding the type of documents required and the timeframe for the production of the documents.
2.53 Further, it is quite likely in most cases that the other stages of the enforcement process (such as ASIC's initial assessment of the allegations, the need to review any documents requested and provided, preparation for court and the legal proceedings themselves) would each contribute more to the total time taken for the matter to be resolved than delays in information being provided to ASIC by the banks.
Court orders 2.54 While subsection 30B(2) states that ASIC may apply to the court for an order annulling or reducing the credit fee or charge and for any other ancillary or consequential orders, it does not expressly state that the court may make those orders.

This diverges from the approach taken in the example of section 78 of the Code referred to earlier, in which it is expressly stated that the court may 'annul or reduce the change or fee or charge and may make ancillary or consequential orders'.
31 Professor Milind Sathye, Submission 2, p. 3.

Page 16 Technical issue—'determining' Subsection (3), which deals with ASIC's assessment of an application from a 2.55 debtor or guarantor, states that: In determining whether a credit fee or charge is not reasonable, ASIC must have regard to … 2.56 As ASIC's assessments are not binding and it is ultimately the courts that will determine the matter, it may be appropriate that the first sentence of subsection (3) be amended.
One possibility is the following: In determining whether it considers that a credit fee or charge is not reasonable, ASIC must have regard to … Drafting error 2.57 The heading of Schedule 1 is titled: Schedule 1—Amendment of the National Consumer Credit Protection Amendment (Fees) Bill 2011 This heading mistakenly refers to the name of the Bill, rather than the 2.58 legislation it seeks to amend.
Accordingly, the heading should be amended to read: Schedule 1—Amendment of the National Consumer Credit Protection Act 2009