The Australian Consumer Law Consultation on draft unfair contract terms provisions Competition and Consumer Policy Division Treasury Langton Crescent PARKES ACT 2600 australianconsumerlaw@treasury.gov.au 22 May 2009 Dear Sir/Madam, The Australian Consumer Law: draft provisions on unfair contract terms This submission is made on behalf of National Australia Bank Limited (NAB) in response to the draft unfair contract terms provisions of the Australian Consumer Law. NAB has also contributed to and supports the submission made by the Australian Bankers Association. National Australia Group is an international financial services organization that provides a comprehensive and integrated range of financial products and services. The Group is structured around regional banking and wealth management operations and an international capital markets and institutional banking business. The Group s businesses include: the National Australia Bank, MLC, the Bank of New Zealand, the Yorkshire and Clydesdale Banks in the UK and Great Western Bank in the US. NAB is supportive of balanced and proportionate regulation providing consumer protection to NAB s Australian customers (3.3 million), as this is in line with our stated aim to deliver high levels of consumer protection across a wide range of consumer credit products and services. However, we have concerns with a number of these provisions in their current form, and are mindful of potential adverse economic impacts, increased risks and costs of doing business. These changes are proposed at a time when the banking sector faces a considerable amount of regulatory change during less certain economic conditions, including proposals to regulate consumer credit, margin lending, privacy reforms and Personal Property Securities legislation. Credit markets, in particular, remain challenging on both the supply and demand side, given global conditions. Accordingly, as well as being balanced and proportionate, regulatory change in this area should be made with proper consultation and introduced with an appropriate transition timetable. We have outlined a number of key areas of concern, highlighting possible solutions (see table below). In summary, our views are: Consultation We are concerned that the draft provisions have been released with limited time allowed for the necessary consultation with industry and other stakeholders. The Federal Treasury process for consultation with industry stakeholders has been insufficient to allow for a proper consideration of this major legislative change. That said, NAB was invited to attend an informal meeting with Treasury officials in late April as part of an ABA delegation, which was appreciated.
We strongly recommend that a consultation process, with industry directly involved, be commenced as soon as possible, Timing The impacts of the proposals on our business is significant.. The majority of our contracts are likely to be considered standard form (although this definition remains unclear), requiring us to review and potentially amend up to 2000 contracts across our businesses. The following figures from one segment of our business highlights some of the documents that will need to be included in any document review arising from the proposed legislative changes: Commercial Credit cards - 20 letter templates/10 stationary items and a small number of servicing letters. Consumer Credit cards - 3 Welcome Letter templates, 20 stationary items plus approximately 400 servicing letters Personal Loans - 10 system generated contracts, 1 stationary items, plus servicing letters Mortgages - 230 documents and servicing letters Overdrafts - 10 system generated templates Deposits - T&C/ PDS brochures (stationary items) and maintenance letters will also need to be reviewed. Fees and Charges booklets (stationary items) This gives some idea of the task before us. Exercises of a similar magnitude will be required for various segments across our business streams which will amount to hundreds of thousands of dollars in direct compliance costs. A proposed implementation date of 1 January 2010 is therefore unachievable. Given the clear links with the wider credit reforms, we would echo the recommendation we have made in our submission to those proposals. Namely, that industry should have 24 months to complete transition to the new provisions. Regulatory overreach The extension of the legislation to business standard form contracts is unwarranted. In our view, the scope of any unfair contracts terms legislation should be limited to genuine consumer contracts in line with its stated objectives - improving consumer protection As discussed with Treasury, there is little evidence for the claim that businesses need this level of protection. In our experience, businesses have the commercial acumen, skills and resources to understand standard form contracts and manage the risks associated with them. Businesses are used to negotiating price relating to these contracts and are familiar with the set of standard provisions used in these documents. The view that this level of protection is only warranted for contracts with genuine consumers is in line with the approach taken in the Victorian legislation. If however, it is felt that protection is required for small business customers, the legislation, like some other legislative schemes (for instance s51ac of the Trade Practices Act), should cover contracts up to a monetary threshold. National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 2
Presumption of unfairness We do not support the presumption of unfairness that underpins these draft provisions. This provision is untested and undermines fundamental principles of contract law. It will deny the parties contractual certainty and will thereby attract an unacceptable level of commercial risk for suppliers. For example, this will mean that: it will be uncertain whether mortgages will be enforceable, creating considerable ongoing doubt as to the enforceability of mortgage and other credit contracts it will be uncertain whether suppliers will be able to recover reimbursement of third party contingent fees, making it difficult to administer systems run by those third parties, such as payment systems; and it will be uncertain whether suppliers can protect their revenue streams. For instance, under a fixed rate loan, a lender sets the rate on the understanding that it has certain income during the fixed rate period. If the break cost is challenged, the basis for the calculation of the fixed rate is undermined. Risk/uncertainty A number of other issues identified point to the potential for greater risk and uncertainty as a result of these provisions. A key issue is that, contrary to the recommendations of the Productivity Commission, the definition of an unfair term does not include the requirement for material detriment. The requirement for material detriment is a reasonably clear test for unfairness, which is capable of objective demonstration. Against this, the suggested concept of substantial likelihood of causing detriment is a lower threshold which will introduce considerable uncertainty and will invite a wealth of legal challenge by consumers. We therefore recommend removing the concept of substantial likelihood of causing detriment, in favour of an unfairness test that relies on material financial detriment. Consistency As we have flagged with the Federal Government, we had understood that the Federal activity in relation to unfair terms would freeze state-based activity. This would be consistent with the COAG agreement on a need for nationally consistent consumer protection outcomes. Therefore, we remain concerned that one jurisdiction (Victoria) has been able to continue plans to extend its Fair Trading Act s unfair contract terms provisions to credit in advance of national legislation. We would welcome the opportunity to explain any of the detail of our submission with you or your team. For further enquires, please contact Steven Mϋnchenberg (t: 0418 597 917). Sincerely, Glenn Mescher Executive General Manager Group Regulatory Affairs, Operational Risk & Compliance National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 3
Submissions relating to unfair contracts terms provisions Trade Practices Amendment (Australian Consumer Law) Bill 2009 In addition to the commercial issues raised in the attached letter, NAB has specific concerns about the drafting of the legislation. These concerns fall into the following 3 areas: the presumption in subsection 3(4) and the power to prescribe terms as prohibited terms will result in contractual uncertainty for suppliers which, in turn, will lead to an unacceptable level of commercial risk; the scope of the legislation is unclear as a number of key provisions in the draft have not been adequately explained; and the scope of the legislation is too broad, going further than what was envisaged by the Productivity Commission and further than existing unfair contracts terms provisions. We have set out below details relating to our concerns. (1) Concerns about contractual uncertainty Details of our concern Presumption of unfairness Subsection 3(4) is a presumption that a term in a standard form contract is not reasonably necessary to protect the legitimate interests of the supplier. In effect, it is a presumption that the term is unfair. Solution Remove subsection 3(4) This is a novel approach that: is not used in existing unfair contracts terms legislation (for example, this approach is not used in the Victorian or UK legislation); was not recommended by the Productivity Commission; and is not supported by any research. This provision is not only untested but because it undermines contract law, will deny the parties contractual certainty and will thereby attract an unacceptable level of commercial risk for suppliers. Prescribing terms as prohibited terms Section 6 provides it is an offence to include prohibited terms in a standard form contract and that a prohibited term may be prescribed by regulation. Omit section 6. If terms are prescribed, suppliers will immediately breach the legislation and may not have adequate time to change their documents. If terms in key documents are declared prohibited, this will case additional doubt over the enforceability of credit arrangements. For example National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 4
if a mortgage contains prohibited terms, it may be unenforceable or may require a further mortgage to be registered. If a further mortgage is required, how will priority issues be resolved. (2) Concerns about the uncertain scope of the legislation Details of our concern Legitimate interests Subsection 3(1) provides that a term is unfair if it would cause significant imbalance and it is not reasonably necessary to protect the legitimate interests of the party advantaged by the term. What is meant by legitimate interests is unclear. Suppliers do not have sufficient certainty if the matter is left to be resolved in guidance notes. The legislation itself should at least include a grey list of examples of actions necessary to protect legitimate interests. Impact on securitization and debt factoring Subjection 4(j) will potentially undermine securitization and debt factoring arrangements. These facilities are vital to a healthy economy. Solution Amend section 3 to include a grey list of examples of actions necessary to protect legitimate interests. These examples should at least address the following: the profitable operation of the party s business, having due regard to commercial risk and prudential considerations, including the maintenance of its financial stability and risk management activities; accommodating changes in legislation, codes or government determinations and policies which need to be reflected in changes to contracts; maintaining the party s business reputation; addressing material changes in economic activity; accommodating technological change; maintaining effective business practices, for example to accommodate: improvements to products and services; the supplier s corporate structure and changes to that structure; disposing of interests to other organizations; and acquiring interests in other organisations Subsection 4(j) should be amended to expressly carve out securitization and debt factoring arrangements, e.g. a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party s consent (unless the assignment is made in relation to the prudent management of the party s capital, for example in pursuing an asset securitization program or in connection with writing off a debt). As Treasury has conceded that the legislation is not intended to restrict securitization, terms relating to a securitization assignment should be included in subsection 5(1) (as terms that are not subject to the legislation). National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 5
Presumption relating to standard form contracts Subsection 7(1) provides that there is a presumption that all contracts are standard form contracts (that are subject to the legislation) but does not explain what a standard form contract is. The presumption (like the presumption in subsection 3(4)) is unwarranted to contribute to uncertainty in properly applying the legislation. The presumption should be omitted and the legislation should explain what a standard form contract is so that supplies understand whether contracts are subject to the legislation or not. Subsection 7(1) should be omitted and the legislation should be amended to include a definition of standard form contract. We suggest that an appropriate definition would be something along the following lines. A standard form contract means a contract which: substantially comprises terms and conditions similar to other contracts entered into by the supplier for similar goods or services; and meets the following requirements: [set out the factors that currently appear in subsection 7(2)]. Transparency Subsection 3(2) provides that, in the process of assessing whether a term is unfair, a court must have regard to whether the term is transparent. Subsection 3(3) provides that to be transparent, the information needs to be in plain language, presented clearly, be legible and readily available. Amend subsection 3(3) to provide that a term is transparent where it is disclosed in a legible manner. This raises the question as to how much information will be required to establish that a term is transparent. For instance, in relation to an early exit fee or economic costs, would it be sufficient to disclose the amount or does the customer need the underlying calculation. Contracts of service A definition is required. Section 8 provides that the legislation does not apply to contracts of service but does not explain what they are. National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 6
(3) Concerns about the overreach of the legislation Details of our concern Regulation of business transactions The proposed legislation will regulate all standard form contracts, including all business transactions. As illustrated in our other submissions (on the commercial issues), there will be substantial compliance costs across the entire economy in complying with this. Solution Like the corresponding Victorian legislation, this legislation should be amended to provide that it only applies to contracts with genuine consumers. If it is felt that protection is required for small business, introduce a monetary threshold for contracts to which the legislation will apply. This is another novel and untested, approach. It was not recommended by the Productivity Commission. The existing Victorian unfair contracts legislation does not cover business transactions. Further, the concept was not flagged in the earlier versions of the Commentary relating to this legislation. Treasury was previously considering a definition of consumer which could cover small business participants. Businesses (whether suppliers or buyers of goods or services) benefit from the certainty that they derive from these familiar provisions. They also save costs because the standard form nature of the contracts: reduce the need for negotiation; reduce the need for staff training and compliance monitoring (because staff are familiar with the provisions). This generally allows for an efficient and cheaper process. Users (business or retail) also benefit from standard form contracts as it allows them to make comparisons. Ideally, like the Victorian legislation, this legislation should only apply to genuine consumer contracts, given that businesses (particularly big businesses) have the acumen to manage their involvement with standard form contracts. If it is thought that small businesses need protection, it is suggested that what is required is a monetary threshold ie that the legislation applies to all contracts up to a particular threshold. This approach is used in existing consumer protection legislation and industry codes, such as in section 51AC of the Trade Practices Act. National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 7
Definition of unfairness/causing detriment/substantial likelihood of causing detriment Subsection 3(1) does not refer to a detriment in the definition what is an unfair term. Amend subsection 3(1) to provide that a material detriment is another requirement for the test of unfairness. Omit subsection 3(2)(a). Subsection 3(2) provides that a court must take account of particular factors in determining whether a provision is unfair. Subsection 3(2)(a) provides that the court must consider the extent to which the term causes detriment or a substantial likelihood of detriment. The Productivity Commission s recommendation was that there should be a requirement for material detriment in the test for unfairness. Section 3 should be amended to reflect this. Retrospectivity Section 8 provides that the new law would apply to a contract that exists prior to the commencement of the law if the contract is renewed or varied. Amend section 8 to provide that the legislation will only apply to a varied term (not the whole of the varied contract). This goes much further than the Victorian unfair terms legislation which provides that the legislation only applies to the term as varied. This provision will have an adverse impact on product migrations. Product migrations are often done to try to improve and rationalise products. For instance, uncertainty associated with the legislation is likely to constrict and discourage product variations to rationalise and improve existing contracts. Terms that are unaffected Subsection 5(1)(c) provides that the legislation does not apply to terms required or permitted by law. This carve out is insufficient. It should also apply to industry codes (such as the EFT Code and the Code of Banking Practice. Amend subsection 5(1)(c) to apply to industry codes as well as laws. National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 8
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