AFSA’s recent announcement that bankruptcy administrations had dropped to a 24 year low during the first quarter of 2019 came as no surprise to some within the industry.
Rather than one underlying cause for the decline in personal insolvencies, it’s more likely to be the result of numerous factors.
Consumer Credit Reform & the Royal Banking Commission
Reforms to the National Consumer Credit Protection Act 2009 targeting credit cards kicked off on 1 July 2018 with a ban on credit card limit increase invitations. As of 1 January 2019, further reforms around credit card limit assessments, online card cancellations and a ban on back-dated interest charges also came into effect.
Data released by the Reserve Bank of Australia during January 2019 showed 15.97 million credit card accounts as of November 2018, the lowest number since 2015. The RBA also reported a decline in credit card balances with $52.1 billion owing – down from $52.2 billion just 12 months ago.
While responsible lending laws already required providers to assess a consumer’s ability to pay and to enter into hardship arrangements, the Royal Banking Commission has resulted in a shake-up of standards when it comes to consumers experiencing financial hardship.
The new Banking Code amendments come into effect on 1 July 2019 and will introduce additional guidelines regarding debt waivers where a customer is in financial hardship and the waiver is granted based on compassionate grounds.
Credit Reporting Standards
Australia’s credit reporting system has shifted from negative to positive reporting in recent years. As of 1 July 2018, comprehensive credit reporting (CCR) or “positive credit reporting” became mandatory for the big 4 banks in Australia. Since 2018, major banks have been working towards the 100% compliance deadline date of 1 July 2019.
Under the old “negative” reporting system, credit reports contained limited information.
Aside from personal details like name, date of birth, prior addresses and employment history, the reporting of financial data was restricted to the prior 5 years’ worth of:
- Credit enquiries
- Court judgments
- Personal Insolvency Administrations and;
- Any other serious credit infringements
Under the new “positive” system, credit reports now display additional information including the past 2 years of repayment history for:
- Any existing credit accounts
- When credit accounts were opened or closed
- The different types of credit you have access to
- The name of your credit providers
- Current credit limits and;
- Any overdue accounts
This shift in reporting standards presents multiple outcomes for consumers. As an example, a one-off default listing from a prolonged period of unemployment may be viewed less harshly by a prospective lender. The added payment history now available can help lenders distinguish between a temporary “hiccup” due to extenuating circumstances vs long term financial trouble.
Another important outcome is the need for major banks to disclose all existing credit facilities as this will provide more transparency for prospective lenders. Gone are the days when a credit application can be submitted without disclosing all existing debts. Ultimately, this will work to limit the number of people becoming over-extended on unsecured debt facilities such as credit cards, unsecured personal loans and overdrafts.
Millennial Financial Trends
When you look at AFSA’s statistics regarding the age of people entering into insolvency administrations, an interesting trend emerges. Around 68% of all people utilising the Bankruptcy Act tend to be aged 30 years and over. This statistic on its own isn’t extraordinary when you consider that younger people, in the fledgling stages of adult life, are likely to be less encumbered by debt. Where the stats become more curious is when they’re accompanied by recent research around Millennials and their finances.
Millennials reportedly have 30 per cent more in savings and are 45 per cent less likely to have a credit card when compared to older generations. If those stats are truly reflective of the generation at large, there will be a significant number of Millennials abstaining from the acquisition of unsecured credit card debts, many of whom will also have cash reserves.
With the eldest of the Millennials now approaching 34, it’ll be interesting to see if there are any noticeable differences in age trends and personal insolvency administrations over the coming years.
Generational trends aside, it’s clear that strict new credit regulations and reforms, teamed with higher levels of transparency in credit reporting are ultimately making it harder for people to incur unsecured debts like credit cards.
While I don’t think the stats necessarily reflect a decline in the number of people experiencing financial difficulty, it seems the decline in personal insolvencies are likely to be indicative of more protection and options being made available to consumers compared to just 5 years ago, let alone 24.
Andrew Aravanis is the founder and Principal Registered Bankruptcy Trustee at Australian bankruptcy trustee firm Aravanis.