According to a study by the Brotherhood of St Laurence and Griffith University, Governments should reduce reliance on disclosure of credit-contract terms as a means of protecting consumers who borrow from banks and other lenders because contracts are too long and obscurely written for borrowers to understand them.
The study released yesterday, titled Coming to grips with credit contracts: Steps to protect vulnerable borrowers, finds that disclosure does not enable borrowers to make an informed choice, and is not adequate to protect vulnerable consumers, who would have to resort to legal action – out of reach for many – to vary an unfair contract.
Tony Nicholson, Executive Director of the Brotherhood of St Laurence, said: “Our survey focused on extremely vulnerable people but many Australians would not have the legal and financial knowledge to fully understand what is being signed up to without expert advice. As we enter an economic downturn it’s even more important that there are strong safeguards in place.”
“We welcome the forthcoming consumer-credit regime that’s been signed off by the Council of Australian Governments, which will transfer responsibility for consumer credit legislation from states to the Federal Government. This will be a chance for the Government to remedy many of the deficiencies of the existing Uniform Consumer Credit Code.”
Griffith University Law School Senior Lecturer Therese Wilson said: “The Uniform Consumer Credit Code aims to protect consumers in two main ways, through disclosure and safety net provisions. It relies heavily on lenders disclosing contract terms, to inform consumers and enable them to shop around. In this way, disclosure is supposed to encourage competition among credit providers.”
“However the study found that many of the people in the survey did not have the literacy skills, experience in financial markets or access to advice to understand what they were signing. The current emphasis on disclosure and access to courts doesn’t protect vulnerable consumers. Legislation needs to be put in place to create a safe consumer-credit market.”
The study, led by the Brotherhood of St Laurence and Griffith’s Socio-Legal Research Centre, surveyed 30 people on low-incomes who had recently signed credit contracts, and found they were overwhelmed by the complicated language and considerable length of such documents.
The study’s recommendations include:
- Contract summaries should be in plain English. Government consumer agencies should “road test” them on consumers to help ensure that they understand their rights and responsibilities.
- Governments should reduce their reliance on discourse of contract terms as a measure for protecting consumers.
- All government consumer agencies should be given the power to act on behalf of borrowers to enforce consumer protection – this is currently the case only in Victoria.
- The Australian Government should introduce a national unfair-contract law that applies to consumer credit contracts, in conjunction with a regulatory unit that ensures the terms of loans are fair
Said one participant in the study: “It’s sort of like mumbo jumbo, a lot of it … I understand there’s got to be laws and that, but I think they should be so everybody can understand them.”
The study also found that some signed contracts they realised were unfair because of their limited options.
One study participant who borrowed from a fringe lender said: “I’ve got a lot of reservations with the loan, and I’ve explored other options, but the pension doesn’t count as an income to banks so we’re stuck in the
mud-hole at the moment.”