Consumer Protection Laws -­‐ Access to Justice for Vulnerable Consumers A paper delivered to the LawAsia Conference, New Delhi, November 2010, 1
by Elizabeth Shearer, BA, LLB(Hons), MLM, Principal Consultant, Managing Justice , Australia 1. Introduction On 1 January 2011, the Australian Consumer Law commences. This follows the National Consumer Credit Protection Act which took effect from 1 July 2010, and completes a busy period of consumer and credit law reform in Australia. This paper provides an overview of these new laws from the perspective of the vulnerable consumer. As part of this overview, the paper highlights the issues facing vulnerable consumers and suggests that access to justice for vulnerable consumers must be a feature of an economy seeking inclusive growth. Finally the paper proposes six key elements of a system of consumer protection that seeks to address the needs of vulnerable consumers. 2. Who are vulnerable consumers? Consumers in a modern market economy often experience information asymmetry and a significant imbalance of bargaining power. They have limited freedom to choose the conditions upon which they contract to purchase goods and services. Even sophisticated consumers, who can read and understand the fine print, have little opportunity to change it. So who are vulnerable or disadvantaged consumers? The Australian Productivity Commission considered this question in its 2008 review of Australia’s consumer policy framework. Disadvantage can be seen as reflecting a set of individual traits — such as poverty, low education, disability, or poor English proficiency — that increase the risk of a consumer experiencing detriment or/and intensify the adverse consequences of that detriment. Disadvantage is typically persistent and hard to change, particularly through consumer policy. Vulnerability is a broader term relating to a particular susceptibility of consumers to detriment based on both their personal characteristics (including, but not limited to disadvantage) and the specific context in which they find themselves (market features, product qualities, the nature of the transaction, the regulatory environment). Disadvantage and vulnerability often overlap, but they can be distinct. For instance, in markets where the quality of services is hard to discern and convey to consumers, many will be vulnerable, despite not being disadvantaged. Conversely, for straightforward purchases, it is possible that someone who might be categorised as disadvantaged would not be particularly vulnerable, much of the time — many people on low incomes are very careful and astute consumers and have learned strategies that reduce future susceptibility in a repeat situation. 1
Managing Justice provides management consultancy to law firms and management, development and policy consultancy to government and non-­‐government agencies in the Access to Justice sector. For further information see www.managingjustice.com.au . Access to justice for vulnerable consumers 1 More broadly, all transactions carry some risk. But, it is generally understood in consumer policy discussions that the term ‘vulnerable and disadvantaged’ consumers delineates a narrower group encompassing those at significant risk of being misled or making poor 2
purchasing decisions, either generally or in specific situations. In my time working in legal aid, I observed again and again that people living in poverty often make consumption choices in circumstances of desperation. They participate in markets, or sections of markets, that other consumers avoid. Perhaps this is best illustrated by a real life example:3 A family lived in an outer suburban area of a large city. There was limited public transport in their area. One family member had a chronic medical condition and the family relied on their car to get to hospital for medical treatment and to take a child to school. The car registration bill arrived, and they did not have the money to pay it. Their choice was to drive the car unregistered and risk criminal prosecution or find the money to pay the registration. They borrowed $500 from a “pay day” lender. This loan was at the interest rate of 20% per month compounding. Then a family member living some distance away died, and the family borrowed another $300 so that they could attend the funeral. They made regular repayments on their loans. After several months they had paid back almost twice the amount they had borrowed, but then they fell into arrears with the loan repayments. The lender took steps to repossess the car. At that time, the lender asserted the family still owed almost twice the amount that they had borrowed. Clearly this was a disadvantaged family experiencing considerable hardship from entering into an unwise consumer contract . The family, due to financial difficulty in the past were locked out of the mainstream market for credit and forced to the fringe of the market. The lack of any alternative means of providing for the necessities of life (in this case a car) was the motivation for the transaction. The fringe credit market has grown up in response to such circumstances of desperation. The effect is to entrench people in poverty as they struggle to pay very high rates of interest. The Australian Productivity Commission acknowledged the vulnerability of some consumers in Australian credit markets as multi-­‐faceted issue reflecting: •
•
•
•
the financial and legal complexity of some products; these consumers’ exclusion from the mainstream credit market and therefore exposure to more unscrupulous operators; the difficulty that those on low incomes often face in affording the basic necessities of life; and 4
lack of awareness about rights and redress. While at legal aid, I also saw many examples of vulnerable consumers falling prey to “aspirational” products or services5 aimed at exploiting their vulnerability. For example, many parents, with low education themselves, succumb to high-­‐pressure sales tactics from 2
Productivity Commission 2008, Review of Australia’s Consumer Policy Framework, Final Report, Volume 2 Canberra, at p295. This report contained recommendations which have now been implemented by the Australian Consumer Law. 3
Case work example provided by Legal Aid Queensland in its submission to the Australian Productivity Commission Review of Australia’s Consumer Protection Framework available at http://www.pc.gov.au/__data/assets/pdf_file/0009/88974/sub051.pdf 4
Productivity Commission 2008, Review of Australia’s Consumer Policy Framework, Final Report, Volume 2 Canberra, at p297. 5
Further examples can be found in the submission referred to in footnote 3 2 Access to justice for vulnerable consumers salespeople who come to their homes and persuade them to buy “educational systems” to help their children with their schoolwork. Often these “systems” are no more than a basic computer program or DVD set, but they cost thousands of dollars and are linked to long-­‐
term credit contracts. My direct experience in providing assistance to and advocacy on behalf of disadvantaged and vulnerable consumers is confined to Australia. I am aware that the context in many countries in Asia is very different and that Australians living in poverty may still enjoy a standard of living that is not possible for many in other parts of the world. Nevertheless, disadvantaged and vulnerable consumers in Australia lack access to two of the instrumental freedoms identified by the Nobel Prize winning economist Amartya Sen, namely “Economic facilities” and “Transparency guarantees”.6 This “economic unfreedom”, again in the words of Amartya Sen, “can make a person helpless prey in the violation of other kinds of freedom”.7 3. Recent reforms in Australia I will now turn to look at the Australian Consumer Law and the National Consumer Credit Act, both of which follow from the recommendations of the Productivity Commission Review. The perspective I bring to this examination, however, is not that of a dispassionate policy maker, but of an advocate for vulnerable and disadvantaged consumers. From this perspective, more regulation is not necessarily better. Over-­‐regulation poses risks for vulnerable and disadvantaged consumers. As the Alliance for Financial Inclusion points out: over-­‐regulation occurs when the cost of ensuring equality of information for both provider and consumer reduces the availability of products and services in the market and/or drives prices higher than can be afforded by poor, unsophisticated consumers. Ultimately, over-­‐regulation 8
reduces the size of the market, pushing buyers and sellers to the informal sector. Legislative intervention to secure the rights of consumers is not new. From the nineteenth century in industrialised economies, the common law maxim of caveat emptor, or buyer beware, proved insufficient to strike an appropriate balance between the interests of buyers and sellers. As markets developed and information asymmetry between buyers and sellers widened, a legislative response by government was required. In my home jurisdiction of Queensland, legislative intervention began as long ago as 1896 when the Sale of Goods Act created implied statutory warranties of fitness for purpose and merchantable quality. The National Consumer Credit Protection Act and the Australian Consumer Law are much more ambitious. They apply uniformly across Australia replacing a raft of State and Territory laws. This consolidation of laws into a single national regime has been estimated to provide benefits to the Australian community of between 1.5 and 4.5 billion dollars per year9. In the time available, I can do no more than provide an overview of these new laws and then highlight some features of particular relevance to vulnerable and disadvantaged consumers. 6
Sen, A., 1999, Development as Freedom, Alfred A Knopf Inc, New York, at pp 38-­‐40 Ibid, at p. 8 8
Alliance for financial inclusion, 2010, Consumer Protection Leveling the playing field in financial inclusion viewed at http://www.afi-­‐global.net/policy-­‐areas-­‐consumer-­‐protection.htm 9
Commonwealth of Australia, 2010, The Australian Consumer Law – An Introduction, Canberra, at p. 1 7
Access to justice for vulnerable consumers 3 3.1 The Australian Consumer Law The essential elements of the Australian Consumer Law are: •
A restatement of statutory warranties that have been in place for many years, namely o
the supplier has the right to sell the goods; o
the goods are of acceptable quality; o
the goods match their description; o
the goods are fit for any purpose that the consumer makes known to the supplier; o
the repairs and spare parts are reasonably available; o
the services are carried out with reasonable care and skill; an o
the services are completed within a reasonable time. •
A restatement of general provisions which prohibit “misleading and deceptive conduct” and “unconscionable conduct” •
Provisions dealing with some specific transactions, including o
Prohibiting bait advertising and pyramid selling schemes o
Governing the offer of prizes and gifts o
Regulating contracts for unsolicited goods and services including door-­‐to-­‐door sales and tele-­‐marketing •
The introduction of a national unfair contracts provisions •
National product safety standards •
National enforcement and remedy scheme. 3.2 The National Consumer Credit Law The essential elements of the National Consumer Credit Law are: •
A comprehensive licensing scheme for all providers of consumer credit and credit assistance •
All credit licensees must be a member of an external dispute resolution scheme •
Responsible lending provisions – an obligation not to provide credit unsuitable to a consumer’s needs and not to provide credit a consumer cannot afford to repay •
Mandatory pre contractual disclosure in a specified form •
Capacity to apply for hardship variations •
Prohibition of some predatory lending practices such as “blackmail securities” •
The introduction of unfair contracts provisions •
National enforcement and remedy scheme. 3.3 Unfair contracts Both the Australian Consumer Law and the National Consumer Credit law consolidate, in one place, many laws that have previously applied. The significant new law that will now apply across Australia is the law in relation to unfair contracts. The unfair contracts provisions apply to standard form contracts – typically those used by larger businesses for a range of common consumer transactions. The law applies to all standard consumer contracts in all forms from those entered into by signing a paper contract with fine print on the back, by clicking “agree” on a website, or by talking to someone over the phone. A contract term is unfair if: • It would cause a significant imbalance in the rights of the parties to the contract, and • It is not reasonably necessary to protect the legitimate interests of the business, and • It would cause detriment to the consumer if it were to be relied upon. 4 Access to justice for vulnerable consumers The legislation does not apply to terms that define the main subject matter of the contract or set the upfront price. Examples are given in the legislation of terms that may be unfair, although it is always a matter for a court to determine whether, in a particular case, a term is unfair. These examples include: • A term that allows one party, but not the other to avoid or limit performance of the contract, terminate the contract, or vary the contract • A term that allows one party to vary the price or the characteristic of the goods or services • A term that allows one party to limit their vicarious liability for their agents. When determining whether the term is unfair or not, a court must have regard to the transparency of the term. A term is transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to the party affected. So terms in legalistic language in fine print on the back of a contract form, are not likely to be transparent. The court must also have regard to the contract as a whole when considering whether the term is unfair. The law provides that consumers can take their own action to have a term declared unfair, but the real benefit to vulnerable consumers of this legislation is likely to be felt only if the regulatory authority is active in reviewing and taking action in relation to unfair terms in standard form contracts. 3.4 Credit licensing Credit licensing is likely to benefit vulnerable and disadvantaged consumers in two respects. Firstly, short term or “pay day” lenders are required to be licensed. With licensing comes the obligation to be part of an approved External Dispute Resolution (EDR) scheme. This will provide redress for disadvantaged consumers who access pay day loans. Secondly, people providing credit assistance are now required to be licensed. Until now, there has not been a comprehensive requirement for licensing of financial advisors and brokers. This has allowed predatory practices to flourish in some sections of this market. For example, I saw a case where a finance broker contacted a family and offered to review their current loans and recommend better options – basically to assist with refinancing. As part of the refinance transaction, the broker claimed a fee of some thousands of dollars (usually this is borrowed as part of the refinance package), but the new refinancing arrangements were far less favourable than the consumer’s original arrangement. Again, the obligation of a licence holder to be part of an EDR scheme, means that a consumer can seek redress more easily. In addition clearly predatory behaviour can be referred to the licensing authority. 3.5 Responsible lending The responsible lending provisions will assist disadvantaged and vulnerable consumers by preventing asset stripping. I have seen many cases where loans were made to consumers who clearly had no capacity to pay the loan, but who entered into the transaction in desperation, believing it would be short term. Access to justice for vulnerable consumers 5 In one case, a man who had fallen behind in his mortgage payments due to his inability to work because of ill health, entered into a mortgage borrowing around $200,000 with an interest rate of 96% per annum. The first couple of repayments were borrowed with the advance, and the man was advised that this was just a short term option and the finance broker would be able to get him a better deal by the time the next repayment was due. The impact of this was that the equity that he previously had in his home of over $100,000 was soon gone. These sorts of transactions will be prohibited under the new laws. 3.5 External dispute resolution External dispute resolution (EDR) has been very successful in providing consumers with an accessible and low cost mechanism to resolve their disputes. The key features of the schemes are: • They are funded by industry • They are generally governed by a board representative of industry and consumers • There is no cost to the consumer • Court action is stayed while matters are before the scheme • When resolving disputes the scheme can have regard to the law but also to notions of fairness and good industry practice • A consumer is not bound by a decision of the scheme and can seek further redress in the courts if they wish. The new laws mean that more credit providers will have to be part of these schemes, which provide accessible dispute resolution to more consumers. In addition some matters that could not previously be dealt with by the schemes, including applications to vary the terms of a loan on the basis of hardship, will be able to be dealt with. 3.6 General versus specific provisions The new laws contain a mixture of general provisions (such as the prohibition on unconscionable conduct) and specific provisions (such as the provisions around the sale of unsolicited goods which contain precise contractual requirements and allow for a 10 day cooling off period). In my time at legal aid, our success rate was much higher when we were able to rely upon specific legislation, than when we could have recourse only to more general provisions. Where there are specific rules and those rules are breached, the case is clear. Where allegations of unconscionable conduct are made, the case if far less clear. The Australian Government is still considering the issue of one very specific law as part of the next phase or reform; that is the imposition of a cap on interest rates. Consumer advocates are lobbying for an interest rate cap and sections of industry, particularly the short-­‐term lenders, are implacably opposed. The arguments have been summarised in a Green Paper prepared by the government and include: In favour of a cap: •
The presence of a cap makes it easier to seek remedies as proof of breach of a cap is relatively easy (that is, it is not necessary to prove that the interest rate is unconscionable). •
Disclosure of costs is not sufficient protection for vulnerable, desperate consumers who will take up credit irrespective of the cost. 6 Access to justice for vulnerable consumers •
Competition is not an effective price control mechanism in this market. Annualised interest rates in excess of 1,000 per cent have been seen in jurisdictions without an interest rate cap. Against a cap: •
The fixed costs and risk associated with small-­‐amount, short-­‐term loans are higher than other forms of credit, therefore it is appropriate that the interest rates are higher. Limiting the cost that can be passed on to the consumer may discourage lenders from offering the product, as they are not viable. •
An annualised percentage rate may not appropriately reflect the cost of a short-­‐term loan. •
Introducing an interest rate cap may see lenders of short-­‐term, small-­‐amount loans leave the market. This would reduce the supply of these products and could result in the exclusion from the credit market of low-­‐income earners or those with poor credit ratings. As a result, they may resort to other sources of credit, including unregulated sources.10 The controversy about whether governments should impose a limit on interest rates charged in the market is not new. It was a point of contention between Adam Smith and Jeremy Bentham in 178711. While Queensland now has a cap on the interest that can be charged of 48% (including fees), this is a relatively new. In my time as a legal aid lawyer, I saw many cases where the lender was imposing an interest rate that was, in my view, unconscionable. But in the absence of a specific law, these cases had to proceed through the courts. In the case I mentioned above of the $200,000 loan at 96%, this case proceeded in the courts for some time, before it was settled. We believed that our client had strong prospects based on a range of factors, including an argument that the interest rate was unconscionable. However, a law that provided a cap on interest rates of 48% would have made the court proceedings unnecessary. In my first example of the family who borrowed $800 and paid back $1,600 within the space of months, an interest rate cap of 48% instead of the 240% compounding would have meant that they were debt free within months rather than faced with a demand for a further $1,600. It is my belief that the interests of disadvantaged and vulnerable consumers are well served by a cap on interest rates. 4. Providing access to justice for vulnerable consumers The recent Australian reforms do, in my view, enhance access to justice for vulnerable and disadvantaged consumers, particularly in relation to consumer credit. However the legislative base is just the beginning. I acknowledge that there is no one best model for consumer protection that holds true for all contexts. Much has been written about consumer protection in emerging economies.12 10
Commonwealth of Australia, 2010, Green paper: National credit reform, enhancing confidence and fairness in Australia’s credit law, at pp. 64-­‐5 11
recounted in Sen, A., 1999, Development as Freedom, Alfred A Knopf Inc, New York, at pp 124-­‐5 12
See, for example, United Nations, 2003, Guidelines for Consumer Protection, The World Bank, 2009, The Case for financial literacy in developing countries, promoting access to finance by empowering consumers, The World Access to justice for vulnerable consumers 7 Factors such as stage of market development, the products and providers used by unsophisticated and vulnerable consumers, and the existence of viable alternatives to regulation will all be relevant to choices that countries make about how to protect vulnerable consumers.13 However, emboldened by the conference theme of “the opportunities and challenges of inclusive growth” I propose to take this opportunity to offer my own prescription for how to ensure vulnerable consumers are able to be included as participants in, and beneficiaries of, economic growth. I propose six elements that are, in my experience, an essential part of a consumer protection system that seeks to provide vulnerable and disadvantaged consumers with access to justice. 4.1 Laws that are fair The law defines the rights and responsibilities of parties, and it is essential that the law is fair, that is, it strikes an appropriate balance between the interests of consumers and traders. The law needs to step in to level the playing field, and overcome information asymmetry and inequality of bargaining power in consumer markets. 4.2 Laws that tip the balance in favour of consumers where there is an unacceptable risk of predatory behaviour Where there is evidence of predatory behaviour with serious consequences for vulnerable consumers, the law needs to go further. It needs to tip the balance in favour of consumers. Examples range from simple things like including cooling off periods for contracts for unsolicited goods and services, or a cap on interest rates through to more complex examples like licensing regimes and unfair contracts laws. 4.3 A clear role and adequate resources for the regulator Vulnerable and disadvantaged consumers will rarely have the capacity to take court action to enforce their rights. An adequately resourced regulator that takes action to address systemic issues plays an important part in deterring predatory behaviour and addressing it when it occurs. 4.4 Accessible low cost forums to resolve disputes The traditional court system is not well equipped to deal with consumer disputes. The money value of transactions involving vulnerable and disadvantaged consumers is often low is absolute terms, even though it is a significant sum to that consumer. An effective dispute resolution system should be low cost and relatively easy for most consumers to navigate without the need for expert assistance. Bank, 2010, Good Practices for Consumer Protection and Financial Literacy in Europe and Central Asia: A Diagnostic Tool 13
Alliance for financial inclusion, 2010, Consumer Protection Leveling the playing field in financial inclusion viewed at http://www.afi-­‐global.net/policy-­‐areas-­‐consumer-­‐protection.htm 8 Access to justice for vulnerable consumers 4.5 Access to financial counselling and legal assistance Many vulnerable and disadvantaged consumers will need access to expert assistance. This should include financial counselling to assist them to work through debt problems and build their financial capacity for the future. Legal assistance will also be required in some cases to provide advice about rights and responsibilities, and assistance with negotiation and action in dispute resolution forums. 4.6 Affordable credit programs In this respect, Australia has a lot to learn from the micro-­‐credit programs operating across much of Asia. The debate continues about whether access to credit should be regarded as a human right as asserted by Nobel Peace Prize recipient, Muhammad Yunus.14 However, it is indisputable that availability and access to finance is, as asserted by that other Nobel Prize winner Amartya Sen, “a crucial influence on the economic entitlements that economic agents are practically able to secure”.15 Access to credit on just terms ends debt spirals and allows people to build their financial capacity and participate more effectively in the economy and the community. This is an essential element of social justice and financial inclusion, strengthening the capability of individuals to meet the challenges and take advantage of the opportunities offered by economic growth. 14
http://muhammadyunus.org/About-­‐Professor-­‐Yunus/about-­‐professor-­‐yunus-­‐vision/ 15
Sen, A., 1999, Development as Freedom, Alfred A Knopf Inc, New York, at p 39 Access to justice for vulnerable consumers 9