University of Western Sydney Law Review
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FRANCES GIBSON[∗] AND FRANCINE ROCHFORD[†]
The capacity of older persons[1] to enjoy a reasonable quality of life in retirement is dependent, to a significant extent, on their financial position. In addition to the means to procure shelter and food, having access to private health insurance or pharmaceuticals is a significant advantage in this demographic, and the means to access social support structures can enhance well-being.[2] The financial position of an older person is of critical importance because, as Preece notes, ‘one’s ability to improve it is very limited’.[3] After retirement there is no capacity for income generation through employment or through running a business,[4] any inheritances that are likely to be received have been received, and ‘safety of money invested in superannuation is paramount once retirement has occurred and in the years leading up to retirement as there is no ability at that stage to repair losses through bad investment or other cause.’[5] Since the recent market reversals, the position of many near retirees has worsened,[6] and future reversals will also impact more critically on older persons as reliance on superannuation replaces state pension schemes as the primary income source.[7]
As a result of these financial pressures, credit issues resonate with particular force on elderly people. The degree to which this vulnerable group is disadvantaged by credit issues was the subject of a joint project between La Trobe University and the Loddon-Campaspe Community Legal Centre in central Victoria. A survey of the relevant literature and interviews with consumer advocates, financial counsellors, community workers, bank officers and lawyers indicated that, whereas consumer credit for older persons had not raised significant concerns in the past, a range of societal and economic shifts mean that older people in Australia are now more likely to face significant consumer credit issues. Reverse mortgages, credit card debts, economic crimes, intergenerational debt and access to and use of technology are all issues facing older Australians; and particularly those in regional and rural communities.[8]
The increasing degree to which this vulnerable part of the community is now exposed to credit issues gives rise to a need for closer scrutiny of regulations governing lending practices in financial institutions. It also demonstrates a need for greater emphasis on compliance training to ensure sensitivity to the particular needs of older consumers of credit. It underlines the importance of the development of specialised services to provide assistance to older Australians facing consumer credit issues.
Population ageing has been called the quiet transformation, because it is gradual, but also unremitting and ultimately pervasive. Population ageing will accelerate over the next few decades in Australia, with far-reaching economic implications. It will slow Australia’s workforce and economic growth, at the very time that burgeoning demands are placed on Australia’s health and aged care systems. … Population ageing will require new policy approaches at all levels of government.[9]
On Census Night, 2006, there were over 3,600,000 people in Australia aged 60 and over, among the total population.[10] This is not a balanced demographic shift: women of all cultural backgrounds in Australia tend to live longer than do men and make up a greater proportion (56%) of older Australians. Generally the population in rural and remote areas is expected to age at a greater rate than the population in metropolitan areas.[11] It is estimated that 30% of people who live in rural and remote areas of Australia are aged 65 and over compared with 28% of the Australian population.[12] There are a high proportion of older people amongst Australian farmers.[13] By 2046 over a quarter of Australia’s population will be 65 years or over.[14] This figure constitutes a major demographic shift in Australia, attributable to both increasing life expectancy[15] and reduced fertility.[16]
It presents major policy issues for governments,[17] but it also represents an increasing sub-class of vulnerable consumers.
II. FINANCIAL ISSUES: INCOME AND EXPENDITURE
The main financial problem faced by older people is the fact that many older people simply do not have sufficient income to live on. As David Tennant, Director of Care Inc, Financial Counselling Service states, for many retired older people ‘their income streams do not meet their expenses.’[18] The main source of income for around 75% of people over 65 is pensions and government benefits. In 2005, there were nearly two million people in receipt of the Age Pension.[19]
However, this benefit is meant primarily for poverty alleviation and is set well below average weekly earnings.[20]
Superannuation is a source of income for 8% of older people, many of whom were not working during the period which saw the growth of superannuation as an alternative to a pension. Earned income is the main source for 5%. Eleven per cent of elderly people obtain income from property, shares and other sources of wealth.[21]
Whilst research has found that the income poverty rate is lowest amongst people aged 65 and over (11.2% in 2000), Saunders[22] finds that older households appear to be much worse off when expenditure is considered rather than income. This finding is confirmed by other studies.[23] Eight per cent of people who went bankrupt in Australia in 2005 were over 60.[24] These figures suggest that there is a systemic disparity between income and expenditure in this demographic.
People have no money to pay for unexpected expenses, medical bills, drugs, or urgent house maintenance or repairs. There is really going to be a lag in the availability of sufficient superannuation over two or three generations and it is difficult to live on a pension. Australians do not have life plans that allow people to develop and maintain financial security through life.[25]
For self-funded retirees the recent stock market downturn[26] has had the result that some retirees have been unable to access their investment income. Some mortgage funds have frozen investors’ savings as a result of the recent federal Government decision to guarantee bank deposits, and a consequent run on investment funds as retirees attempted to move their investments into guaranteed deposits.[27] Self-funded retirees who have been denied access to their funds may not be eligible for Centrelink payments because of eligibility rules which ‘generally expected people to draw on their own resources before receiving payments.’[28]
Reports show that even where people have access to superannuation, record numbers of applications are being made and approved for early access to super funds to pay off debts.[29]
The cycle of indebtedness for elderly people may arise particularly upon retirement, upon which income drops significantly, often people have little superannuation. In many cases people may not own their homes and they may have loans still owed from pre retirement and they can only afford to pay the interest’.[30] Significant problems also arise when one partner in a couple dies or moves into a nursing home and Centrelink household payments drop 40%.[31]
The Council on the Ageing (‘COTA’) noted in a submission to the Victorian Consumer Credit Review 2005 that a
critical impetus for seeking a reverse mortgage loan is to supplement income for daily living. Our staff has noted an increase in the number of calls from people who are struggling to cover necessary expenses, including rates, winter energy bills, keeping a car running, home and/or health insurance, home maintenance or ongoing pharmaceutical bills. These callers talk about the difficulty of having enough money to go out for coffee or buy their grandchildren birthday presents.[32]
Older people in rural areas face greater economic disadvantage. Many older Australians obtain their wealth from owning their house and being debt free. However,
the increase in farm debt and concomitant financial hardship for ageing farmers and their families along with the decline in the value of farm properties and housing in many rural areas stands in stark contrast to the general picture of relative wealth of older Australians.[33]
Financial literacy can be defined as ‘the ability to make informed judgements and to take effective decisions regarding the use and management of money.’[34] In the case of older people, financial literacy is becoming increasingly important:
Diversification of sources of income, with increasing mixes of public, occupational and private pensions, investments and savings, the nature of the investment environment and the complicated intersection of systems of taxation, pension entitlements and user charges for community and residential services mean that the assets of older people will require careful financial planning and management.[35]
Research by the ANZ bank in 2003 found that although Australian society is mostly financially literate, there are certain groups that have particular challenges. The lowest levels of financial literacy were associated with low education, those not working, or in unskilled work; those with household incomes under $20,000; those with savings levels under $5,000; single people and people at both extremes of the age profile (aged 18–24 years and 70 years and over).[36] There is a move in Australia to improve financial literacy especially for vulnerable groups.[37] However, the policy imperatives necessitating financial literacy amongst the vulnerable older demographic – ‘the use of assets to fund retirement income and pay fees for health care, community care and aged care facilities,’[38]
compete with ‘cultural expectations of exchange of assets in families, interests in inheritance and a general view that assets should not be dissipated to pay for care.’[39] The result is an increased potential for conflict of interest in the provision of financial advice by carers, and increasing vulnerability of older people. A national survey of carer involvement in asset management demonstrated family, friend or neighbour involvement in asset management of an older person was as high as one in every four respondents.[40]
The Redcliffe Asset Management Community Research Project report to the Queensland Government in April 2007 found that
lack of knowledge and understanding on the part of both the older person and the asset manager can add to the risk of mismanagement or abusive practices occurring, including the improper acquisition of another person’s assets, misuse of ATMs, credit cards and bank accounts. Concerns about this risk are underscored by data from the Elder Abuse Prevention Unit in Queensland indicating that reports of financial abuse are increasing, with this form of elder abuse being noted in over 44% of all the elder abuse reports received from November 1999 to January 2005.[41]
Abuse of financial decision-making by professional advisors raises quite different issues from that arising from abuse of financial decision-making powers by a carer. In both cases, however, issues of conflict of interest arise. Consumer organizations have been in favour of initiatives aimed at improving financial literacy but warn that consumer credit problems often resulted from exploitative practices of financial providers who profited from advertising and marketing goods and services that would harm people of low income.[42] Financial counsellors report that often contracts are not thoroughly explained to consumers before signing and borrowers are not really clear on the terms of the contract they are entering into.[43] Credit is very easily available and heavily marketed through such media as television advertisements.[44]
However, in the case of professional advisors some remedial measures are available. Although data is not collected on the age of complainants, the most common issues raised by older complainants to the Financial Industry Complaints Service appear to be complaints about inappropriate financial advice, particularly in relation to superannuation, and complaints about denial of claims for life insurance benefits.[45]
Older people can be victims of fraudulent practices by strangers or may run into difficulties where financial abuse occurs in their dealings with others – often family members who are involved in managing the older person’s affairs. While both types of situations may amount to a crime there is often a difference in the likelihood of the abuse coming to light. In the case of financial elder abuse[46] perpetrated by a family member or friend,
[p]oor practices will only come to attention if the older person or another family member complains, financial institutions’ protocols detect financial abuse or the older person accesses health, residential care or community care services where poor practice might be revealed. Centrelink, which tests income and assets for Age Pension eligibility and has an ongoing monitoring role on income/ assets, may also be alerted by changes in assets.[47]
Financial abuse can also include theft, loss of jewellery, bank books or personal property, unprecedented funds transfers, unpaid bills where a third party has been entrusted to pay them.[48]
There may also be significant differences in the way the older person may wish the issue to be dealt with. In the case of family or friend, the ongoing relationship, the likelihood of a power imbalance in that relationship, and the reliance of the older person on the family member – in fact the factors which led to the capacity for abuse – also result in an unwillingness or incapacity to act on that abuse. The environment in which elder abuse occurs also contributes to a debate about ‘whether elder abuse should be considered a social-service or a criminal-justice problem.’[49] The victim’s own cultural expectations about inter-generational transfer – the likelihood that the perpetrator will, in fact, eventually be entitled to the estate – may mitigate the perpetrator’s conduct in the victim’s mind. Similarly, some commentators have speculated that in this context ‘the distinction between honest and dishonest activity can be blurred.’[50]
A. Stranger Frauds
Consumer scams and fraud are prevalent throughout the world and can be a significant problem for individuals.[51] The NSW Office of Fair Trading Reports that over 100,000 Australians lost money in fraudulent and illegal investments in the last 10 years.[52] However, unpacking these figures to determine the extent of the issue in relation to older consumers is difficult. The Australian Institute of Criminology point out that there is no national reporting mechanism to allow clear information on the prevalence of fraud committed against older Australians in official crime statistics.[53] ‘Coordinated Australia-wide data is lacking; no statistical analysis of cases has been assembled’.[54] Many older people have considerable savings or assets that render them vulnerable to crimes such as consumer fraud, financial mismanagement and matters associated with powers of attorney and guardianship.[55]
Moreover, a person who has been a victim of consumer fraud once may be likely to become a repeat victim.[56]
Conversely, people 65 and older are less likely to report being fraud victims, the probability that the recipient of a fraud attempt will succumb cannot be predicted by any demographic variable, including age,[57] and most older people never become victims of exploitation. However, as a demographic one characteristic increasing the vulnerability of older people to opportunistic fraud is social isolation[58] which
decreases the number of interpersonal contacts individuals have, thus increasing their reliance on impersonal modes of information. Second, because social isolation is often associated with loneliness, isolated persons may be more receptive to overtures from swindlers, simply for the opportunity to interact with someone.[59]
Central Victorian police officer Sergeant Turner reports that abuse of older people happens for a number of reasons. He says older people tend to give things away and can easily be befriended by those intending to take advantage of them. They are often lonely and in need of company. He also feels there may be a cultural barrier for some older people regarding contacting the police in cases of financial abuse. They may not call to make a complaint as they do not view the police service as a friend.[60]
B. Asset Management Problems and Powers of Attorney
One potential source of vulnerability is the tendency of some older people to receive aid in the management of their financial affairs. This may be professional advice from an independent financial advisor or through Centrelink, but frequently financial advice will be provided or supplemented by family, friends or neighbours.[61]
The involvement of a non-professional advisor may arise pursuant to a formal arrangement, such as a power of attorney, enduring power of attorney or formal guardianship, a semi-formal arrangement or an informal arrangement such as allowing another access to bank accounts.[62] About 11 per cent of Australians have an enduring power of attorney in place and the figure is even higher for those in rural and regional areas.[63] Abuse of enduring powers of attorney is a well-recognised example of elder financial abuse.[64]
The higher level of formality does ‘not necessarily protect older people from financial abuse.’[65]
Powers of attorney can be made without proper informed consent or under coercion, without relevant conditions on the power, and can be abused after they are made.[66]
Sergeant Turner sees the abuse of powers of attorney as the biggest fraud problem facing older people in our community at the present time and says that community education would help individuals recognise financial abuse. Cases relating to powers of attorney are often not investigated by the police as this crime is mostly found within families and the problem is usually dealt with privately. The crimes remain hidden.[67]
Again, the underreporting of crimes in this demographic arises from the complexity of dealing with inter-family issues, but it also derives from definitional issues. Older people themselves may not perceive financial abuse as a major problem, although overseas studies suggest that financial exploitation is the most common form of abuse encountered.[68]
Sergeant Turner believes the legislation relating to powers of attorney[69] should be reviewed to include further safeguards for individuals and a higher level of responsibility for those people setting up powers of attorney.[70]
However, this needs to be carefully balanced to ensure that the obligations of the carer do not become too onerous. Setterland notes:
[i]t would be counterproductive … if new protective measures discouraged family members from assisting older people with their financial affairs, or if ageist attitudes were promoted rather than challenged by such interventions.[71]
An increase in the level of safeguards may need to be supplemented by training for carers to improve their financial literacy and to raise their awareness of their obligations.[72] Existing legislation is confusing and inconsistent across Australia, and the Older People and the Law report recommends uniform and consistent legislation.[73]
Legal practitioners need to be careful to recognise the ‘risks of advising clients who seek to transfer assets to a specific family member to the exclusion of all others prior to death or children trying to transfer property to themselves under powers of attorney.’[74]
However, although interest in elder law is increasing in the legal profession in Australia it is a relatively new field, and there are few specialists.[75]
Commentators have suggested that police should be specially trained to recognise and deal with this type of crime.[76]
Similarly, banks and other financial institutions should be trained in best practice in the monitoring of older people’s finances.[77]
The elder abuse project run by the Bendigo Bank, Clayton Utz and the Loddon Campaspe Community Legal Centre[78] is designed to deliver this outcome. This project aims at improving the levels of understanding and training within banks of the circumstances that give rise to elder financial abuse and to develop better procedures and internal protocols for the bank to take steps to protect the older customer from financial abuse. The project brief refers to the co-operative schemes of reporting financial abuse in most United States jurisdictions.[79] The project aims to investigate overseas initiatives and produce training materials aimed at teaching bank staff how to recognize vulnerability in customers and what to do about it, understanding the common profile of vulnerable customers and of potential abuses and strategies for detecting lack of capacity of a customer.
Credit is provided when the payment of a debt is deferred thereby enabling the consumer to obtain commodities without the immediate payment of the cash price.[80] Credit is now marketed as a commodity, and has become the foundation for most activity in the economy. The demand for credit has been stimulated by marketing, and this has contributed to lifestyle changes taking the standard of living of most people to above subsistence level. Credit products have undergone extensive diversification in recent years.[81] Consumer Affairs Victoria reports show that in the early 1980s there were about 36 housing loan products and now there are more than 23,000.[82] New finance companies with extensive franchise operations have appeared in many cities and towns.[83]
People are much more likely to use credit and charge cards. Household credit in Australia has increased at an annual rate of 14 per cent in the last decade.[84]
Between 1990 and 2003 ‘household debt (as a share of household income) has reached historically high levels … the ratio of household debt to disposable income more than doubled from 49.9 per cent to 143 per cent.’[85]
Credit is often offered in retail stores to pay for furniture, white goods, electronic equipment with special promotions such as interest free periods. The increasing availability and utilisation of credit products has inevitably increased the capacity for problems,[86] particularly at the lower end of the market, where the consumer has little choice as to credit terms and will typically submit to a standard form contract.
This is not necessarily a problem that translates to the older demographic, as their borrowing habits may be more conservative. The life-cycle model of consumption, which ‘posits that younger households should borrow to consume in advance of future income, repay their debt and save through the middle years, and draw down their savings after retirement’[87]
suggests that older people are less likely to be indebted, and this appears to be borne out by the evidence.[88] Interviewees in this study report that in their experience, compared with the general population, older people do not have many credit problems and that in general, older people are usually good with credit repayments. One reason offered for this is their upbringing. A number of financial counsellors believe that as many older clients went through the depression and world wars they are more able to make do without credit. However, since cash-constraint is measured by an incapacity to pay bills, this tendency to ‘go without’ may also conceal problems:
It may be that today’s older people, as a result of the experiences they had when growing up, especially during World War II, go cold and eat less when they have liquidity problems, but rarely get behind on payments or seek assistance (or admit to it). It follows that they will be less likely to be cash constrained according to our measure.[89]
A. Credit cards and store cards - continuing credit contracts
Continuing credit contracts are contracts for the provision of revolving credit.[90] This type of contract includes a range of cards – many of which are linked to retail stores such as furniture and appliance retailers, department stores and supermarkets. Credit card debt had an average annual growth in the five years to 2002 - at 20.9% the highest of any category of household credit[91]
- and Australians had credit card debts amounting to approximately $40 billion at the beginning of 2007.[92] This has implications for the quality of life of elderly consumers of credit: studies have linked credit card debt and stress regarding debt to health.[93]
However, the financial fragility of consumers depends on factors other than the amount of debt. Older consumers may well have had higher incomes prior to retirement and have accumulated assets. Difficulties arise when older people use credit cards to make essential purchases that they cannot otherwise afford.[94] Anecdotal evidence from the NSW Consumer Credit Legal Centre is that increasing numbers of older people are running into credit card problems. The Centre attributes this to irresponsible lending by banks.[95]
A report by AFFCRA states that ‘Financial counsellors see increasing numbers of older people with significant debts due to unsolicited credit card and limit increase offers with this debt often accumulated to meet the increasing cost of living.’[96] This impression is reinforced by developments in the USA. Average credit card debts for Americans between the ages of 65 and 69 rose 217% between 1992 and 2001.[97] It is likely we will see similar developments in Australia. Particular problems arise with store cards where when the interest-free period expires. If they fail to repay the full amount consumers interest rates of up to 30 per cent are payable on the outstanding amount.[98]
Whilst there is no clear information available as to the extent of credit card problems faced by older people, it is those older people living on low incomes that are most likely to have difficulties. Financial counsellors report older people struggling with credit card debts. One elderly man who sought assistance from a financial counsellor had 3 credit cards each with a debt of $3 - 4,000. He finally decided to file for bankruptcy with a debt of about $12,000. Another man in his 80s who had a $12-15,000 credit card debt, had been paying off interest only for the previous 5 years before he realised he could never pay it off and chose bankruptcy. Carolyn Bond, co-CEO of the Victorian Consumer Action Law Centre tells of a couple in their 80s who accepted numerous offers to increase their credit card limit. The company did no investigation into their means.[99] As she says ‘older people are being offered credit cards they cannot afford and can end up with their families bailing them out’[100]. One financial counsellor said that ‘many older clients think they can be jailed for non-payment of debt. They are therefore more likely to sign up for unaffordable payment plans due to this fear’.[101]
Banks generally offer credit limit increases on a system of behavioural scoring that takes into account a range of factors in assessing risk. In the case of credit limit increases however this often excludes consideration of current income (because if the consumer hasn’t applied for the increase, they have not been asked about their current income). Some banks are now taking steps to address this, such as considering the status and operation of other accounts held with the same institution, or by attempting to ‘flag’ social security recipients so that they do not inadvertently offer such customers credit limit increases as a result of a steady repayment history. Most, however, argue it would be too expensive to seek updated income information in relation to every offer.[102] Any assessment that doesn’t take into account current income can result in serious over-commitment for some individuals.
Regulations exist in all jurisdictions to provide protection to consumers of debt. The Uniform Consumer Credit Code was intended to provide a system of uniform protection to consumers of debt, regardless of their geographical location, the category of consumer transaction, or the identity of the credit provider.[103] It relies primarily on market forces, by empowering consumers through transparency and comparability in credit transactions. The Code regulates unjust transactions – s 70 of the Code states that the court can reopen unjust transactions and that in determining whether the contract was unjust the court can consider
whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship.
Karen Cox from the NSW Consumer Credit Legal Centre says that this section should be a stand-alone section with a penalty adequate to drive change. The current provisions are helpful in individual negotiations but they do not appear to provide a sufficient disincentive for credit providers to adjust their systems and procedures going forward.[104]
Commentators have noted that the Code provides only ‘illusory’ protection against financial over-commitment:
Unfortunately, while s 71 is very broad in its description of the powers available to the Court in the event that a transaction is reopened as unjust, it provides little practical guidance as to how those powers will or should be exercised. The courts have consistently suggested that even where a transaction is impugned on the grounds that it is unjust, the debtor must ‘bring to account the benefit received’.[105]
Section 70 is also limited in that it only addresses procedural, rather than substantive unfairness. In addition there are significant gaps in the Code: it does not apply where the credit is for a business purpose, and the creditor can avoid the application of the Code by the use of a business purpose declaration.[106]
More effective protection exists in the more recently enacted Fair Trading Act 1992 (ACT) s 28A that requires banks to check income and capacity before offering increases in credit limits. Such a provision could assist to avoid problems such as outlined above.[107] If banks breach this provision, the banks can be liable for damages.
Some banks won’t offer credit limit increases. They will wait until a customer advises them that they want it to be increased.[108] Consumer credit advocates have argued that credit card increases should only be available when requested by the customer and credit providers need to develop an efficient system covering all transactions that achieves an outcome of ensuring capacity to pay. In some cases older people with credit card debts have even been encouraged by credit providers to turn this debt into a reverse mortgage.[109]
B. Loans, Small Loans, Payday lending, Predatory Lending
Older poor people find it difficult to get small loans in a way that is affordable, convenient, fast and understandable and maintains their dignity. Older people may need loans for house and car repairs or unexpected bills. There have been examples in US literature of predatory lenders seeking out houses needing repair and directly approaching owners to take out loans.[110] As Loonin points out,
elders as a group are … sitting on a large amount of home equity. The predatory market is a ‘push’ market in which the lenders shop for the homeowners, whereas in most markets homeowners actively shop for loans.[111]
Many credit providers are not averse to providing finance to older people who are not working however; at least some of these lenders specialise in higher risk loans and may require security.[112]
Financially excluded people may not have a bank account and are either unable to obtain money to smooth out consumption patterns (eg, at times of crisis) or they are unable to use mainstream facilities … and are forced to purchase money from loan sharks. These credit providers may charge far higher interest rates. So low income people have to pay far more for their finance than those who are better off.[113]
As David Tennant says, older people who are not well off can ‘generally only access credit that is dangerous’.[114]
Older people who are able to access loans are also disadvantaged because some financial institutions do not take their age into account when lending, nor do they incorporate a strategy for repayment that takes into account the likelihood that their income will decrease upon retirement. This is particularly important if the consumer will be reliant on the age pension for a significant portion of their income when they retire. John Mumford says
[w]e should be encouraging financial institutions and consumers to reduce debt as they approach retirement as, if they do not do this, it is likely they will experience financial difficulty or hardship. Unfortunately, this is not happening which has negative impacts on both the consumer and financial institution when the consumer is unable to pay and there is nothing effective the financial institution can do.[115]
There are alternatives to commercial credit. The Pension Loans Scheme[116] from Centrelink allows people of age pension age or partners who can’t get a full pension because of their assets to get a loan paid fortnightly up to the amount of the pension on the security of their real estate. Interest compounds and the total loan can be repaid from the estate after death. However, many people are not aware of this scheme, and data is not readily available on recipients of these initiatives so it is difficult to assess what proportion of recipients are older Australians.
C. Mortgages and Reverse Mortgages – Equity Stripping
Many older people have one asset – their house – and little money by way of income. In the past older people would generally have paid off any mortgages by the time they retired. The US experience is now however, that older people are now increasingly likely to hold mortgages later in life.[117]
Putnam Investments’ survey of US ‘working retired’ – that is people who have returned to some form of work after retirement, showed that at 65 years and over, 51 per cent still had a mortgage debt with an average 12 years repayment required.[118] Increasing house prices in cities and regional areas and correspondingly increasing mortgages, indicate that it is likely that this trend will become apparent in Australia in the next few years.
Indeed, following on from the increased availability of credit as a result of the deregulation of financial markets, the last few years have seen what has been described as a ‘frenzy in lending’.[119]
Loans are being given to people in their 60s that are for 30 year terms. There is a range of products coming onto the market that have the effect of ‘equity stripping’. These have complicated and variable terms.[120]
There are two main types of loans marketed to older people; reverse mortgages and home reversion schemes.
Reverse mortgages allow you to borrow money against the value of your home. You usually don’t have to repay the loan until you leave and move into care, sell your home, or die. Instead your debt and interest (and any fees and charges you don’t pay up front) build up (or compound) over time. When the loan ends you, or your estate, must repay what’s owing (usually out of the proceeds of the sale of your home). Home reversion schemes allow you to sell all or part of your home at a discounted price – usually between 35% and 60% of what your home is worth. But you have the right to keep living in your home until you die or decide you want to move. In most cases you will need to be at least 60 years old and own your home outright (or use the equity release money to pay off any existing loans) to be eligible.[121]
There is a rapidly developing market in Australia for new products based on equity in housing. Seniors Australian Equity Release Association of Lenders (SEQUAL) found that there were over 31,500 reverse mortgages on issue in Australia[122] with an average loan size of $57,350. The market grew 43% in the 12 months to June 2007. Over 30% of new loans are coming from regional areas and the average age of new borrowers was 73.[123] Markets for reverse mortgages are expected to grow as people find it difficult to make their superannuation payments and pensions sufficient for living expenses. There is significant room for the introduction of legislatively prescribed protective provisions in these types of mortgage. In the UK lenders are required to offer fixed rates on these types of loans to provide consumers greater security[124] and loans must contain conditions that the lender cannot evict the borrower, but the lender must cover any loss if loan amount exceeds property value.[125]
So far there have not been significant numbers of older clients presenting to financial counsellors with credit problems relating to mortgage products.[126]
David Tennant notes that at this stage,
the notion that older people are taking up new credit is not as common as older people living appalling lifestyles because they won’t borrow against their house. There are ‘rate’ deferral options available to pensioners which allow repayment of rates when their property is sold. It is extraordinary how many older people will not take that option up - they want to leave the house to their children intact.[127]
However, it is anticipated that these products will present significant issues in the future. They are usually aimed at people over 60 and generally have a maximum loan limit up to 40%.[128]
The Australian Security and Investment Commission’s 2007 survey of people who had taken out reverse mortgages found that very few of the borrowers had done long-term planning about how their financial needs might change over the next 10-15 years. Borrowers thought their needs would not change or said they had thought about their future needs, but were only looking 2–3 years ahead. Very few had considered their longer-term future needs (such as aged-care accommodation, inheritance for their children or other health needs).[129]
There are a number of reasons given for utilisation of these mortgage products. In many cases people were trying, on reduced incomes, to maintain the living standards they had enjoyed before they stopped working. One financial counsellor suggests that where older Australians have a mortgage this may be as a result of health related matters. He describes a case where a 62 year old man contracted cancer and had to go on Centrelink payments. He had planned to work until 65 and pay off the mortgage but was unable to do so on Centrelink payments.[130]
Older people also face pressure to get children or grandchildren into the expensive housing market by means of loans against property. Family guarantee mortgages allow borrowers to avoid the deposit requirement by using the equity in a family member’s home as collateral. Another trend that is likely to appear is parents wanting to assist children with education costs given that university degrees in Australia can now cost over $100,000.
Whereas it is rare for older people to face home repossession, it would present a real problem for older clients. As Hermanson notes, ‘[f]or an older person, a foreclosure can mean losing a retirement nest egg as well as a lifetime of memories without the ability to ever recover’.[131]
Carolyn Bond reports that the Consumer Law Action centre rarely saves a house in these situations.[132]
Usually the best they can do is gain time (for example to allow the borrowers to sell the home) or a better result (for example a reduction in fees).
Other issues arise where the mortgage is mediated through brokers. US research indicates that older mortgage borrowers with broker originated loans reported more broker initiated contact, more reliance on the broker to find the best loan and a higher response to advertisements that guaranteed loan approvals.[133] This level of reliance results in greater vulnerability if the advice is poor, or incomplete. A survey undertaken 2007 by the Council on the Ageing Victoria found ‘the majority of retirees surveyed had a ‘very poor’ understanding of the concept of borrowing against the equity in their home and were potentially vulnerable to the ‘hard sell’ by brokers and lenders.’[134]
Carolyn Bond says that there is a lack of advice about financial products and brokers are not giving people full advice. There is a need for transparency about the nature and level of commissions enjoyed by brokers on reverse mortgages. Consumers also need to be given more information about the nature of the sales pitch and understand the ways in which brokers and lenders may take advantage of their vulnerability.[135]
Borrowers need to understand that brokers are not necessarily getting them the best loan and that ‘revenue for the mortgage broker is not related to the performance of the loan, but to the sale alone and possibly to the level of interest rate on the loan’.[136]
The deregulated market for consumer credit is premised on market forces to force lenders to deliver attractive, competitive products in response to consumer demand. However, comparability of loan products is hampered by confusing, incomplete or inappropriate sales advice. Choice[137] conducted a ‘shadow shop’ in which ten people aged 65 who owned property were sent out to try and obtain $60,000 through a reverse mortgage. They found that there is generally a poor standard of product information and advice:
[t]he majority of brokers and salespeople encouraged borrowers to take the maximum possible loan instead of the requested amount … Most brokers and salespeople didn’t give consumers all the information they need to make an informed decision … Some mortgage brokers were offering very risky ‘asset loans’, to people … which could put them in danger of losing their home.[138]
The Finance Broking Bill 2007[139] proposes regulation of the conduct of brokers to ensure consumers of credit have proper information about loans. It outlines a scheme for the national regulation of finance and mortgage brokers and contains provisions such as
• licensing and probity checks for brokers;
• mandatory skills and ongoing professional development for brokers;
• mandatory membership of an ASIC-approved external dispute resolution scheme to enable affordable access to redress;
• a requirement that the broker provide specified disclosures about costs and services before negotiating a broking agreement with the client;
• a requirement that brokers make sufficient enquiries about the consumer’s financial status to ensure they can afford the product recommended;
• redress for losses when a consumer enters into an inappropriate credit product on the broker’s recommendation.[140]
The draft legislation also requires that a finance broker who is arranging a reverse mortgage must give mandatory minimum advice and information, such as a range of estimates of the future debt and future value of the house and a range of estimates as to when the consumer’s equity will be less than required to pay for future expenses such as aged care. Failure to comply with the Bill may result in disciplinary action, the repayment of fees, the imposition of a fine or suspension or cancellation of the broker’s licence.
The mandatory adoption of Plain English contracts would allow comparison of terms, The introduction of standard protective provisions in reverse mortgages would obviate some of the deficiencies in broker advice. Choice advocates a set of five minimum standards:
• No fixed term
• Repayments cannot be required during loan term
• Borrower must get independent legal advice
• ASIC approved external Alternative Dispute Resolution scheme
• Unconditional no negative equity guarantee apart from fraud or misrepresentation.[141]
The insertion of standardised terms would also facilitate comparison of products, particularly if it were coupled with a standardised format.
It must be recognised, however, that ‘disclosures simply cannot compensate for the sophistication it takes to sift through all the information and assess the possible risk … the professional in the transaction must be responsible for making appropriate loan offers.’[142]
In the United States of America, people applying for home equity conversion mortgages insured by the Federal Housing Administration are required to speak with a counsellor approved by US Department of Housing and Urban Development.[143]
This model could be developed in Australia in relation to reverse mortgages by requiring banks to ensure applicants receive independent legal and financial advice from their lawyer or consumer affairs officers or other appropriate service.
Given the complexity and range of modern lending products, lawyers and financial counsellors should receive adequate ongoing training on reverse mortgage issues. Competent advice may include a discussion of alternatives to a loan, such as a smaller home or financial assistance from children, advice on how the mortgage could affect pension entitlements and taxation obligations and how it may limit future options such as going into an aged care facility.[144] Clients should be advised not to enter any contract that does not have a ‘no negative equity’ guarantee to ensure they cannot end up owing money to the credit provider. Default event clauses must be carefully scrutinized.
ASIC is working closely with industry, including SEQUAL, to promote best practice and reduce the risks for consumers. SEQUAL has lists of accredited reverse mortgage consultants who adhere to codes of conduct which include requiring borrowers to get legal advice.[145] One suggestion from consumer credit advocates is that it would be useful to fund a specialist organisation such as NICRI, the National Information Centre on Retirement Investments - who already run a phone advice service giving general advice - to give general advice about reverse mortgages.[146]
D. Guarantors
It seems clear that the current law does not adequately protect older people who agree to go guarantor for others.[147] To obtain equitable relief for unconscionable conduct, the guarantor has to show that they suffer a special disability and that the lender knew of the disability and took advantage of it. Older people may be dependent on caregivers, or may suffer psychological or physical conditions, which may impair decision-making. Whereas some legal doctrines provide redress when the older person suffers a ‘special disability’ of which the bank is aware[148] these features are not typical of guarantees provided by older people to family members. Rather, the guarantee may be the result of subtle pressure by children, or a feeling of obligation, and the lender itself is innocent of wrongdoing. Statutory reforms suffer from some of the same defects of the common law.[149] It can be difficult to show that the lender itself was unconscionable, even under the less restrictive terms of the statute.
Often older people go guarantor for adult children’s business where they have little information about the viability of the business they are supporting.[150] They may rely on the information provided to them by their children, rather than obtaining independent advice. Older people may suffer from significant vulnerabilities, which may mean that they are less able than other guarantors to protect themselves.[151] The piecemeal development of the common law in this area is problematic, and there is scope for legislative reform to ensure that special protection be given to older people in these circumstances, and that lending practices be altered. This may entail extending the protection now afforded by the equity in cases involving ‘emotionally transmitted debt’.[152] These cases, to date almost entirely restricted to spouses guaranteeing their partner’s debts, could theoretically be extended to protect parents. Whilst courts have offered only tenuous support for this proposition, courts have noted that legislation would provide better protection; although, as Madgwick J noted in Watt v State Bank of New South Wales:
Even with such a reform there would still be sad cases. For example, not a few parents will (as George Bernard Shaw claimed of the women of his day), if shown an opportunity to martyr themselves, kill you in the rush. At least in such cases, there would be no arguable inequity in the law’s giving effect to people’s choice to risk their financial security.[153]
It the protection afforded to spouses was unreservedly made available to elderly parents, the measures that could be taken would include insisting on professional independent advice in the absence of the debtor.[154] It would also require the lender to give full information; depending on the circumstances the guarantor may require independent advice or the Bank must explain nature of transaction or get solicitor to do so. This would require that the lender take steps to explain the purport and effect of the guarantee or must reasonably believe that its purport and effect have been explained by a competent, independent and disinterested stranger.[155] In the United Kingdom a ‘bright line’ rule was developed judicially in Royal Bank of Scotland v Etridge (No 2)[156] which set out the role of the ‘disinterested’ solicitor. In Australia, some indications have been provided by McNamara v Commonwealth Trading Bank of Australia.[157] However, the use of solicitors to attest to the capacity and understanding of the guarantor, particularly as they are not licensed to provide financial advice, has been seen as a device to shift responsibility from lenders to solicitors, rather than a real attempt to ensure that the guarantor receives the best advice.[158] More appropriate alternatives, which place the onus on the lender, may involve requiring the lender to inform itself of the guarantor’s social and familial position, and restricting the use of family home as security for debts of a third party.[159]
Financial counsellors report fewer problems with guarantee issues since consumer campaigns in the 1990’s on this issue.[160]
They do however see cases where elderly parents have gone guarantor for their children and note that children can exert considerable pressure on parents to assist them by going guarantor.[161]
Karen Cox, Solicitor from Consumer Credit Legal Centre (‘CCLC’) confirms that ‘the housing affordability problems have brought guarantors back into the picture.’[162] Lenders are offering a range of ways in which family can assist younger people purchase a home – but this often involves various forms of guarantee. The key problem with any guarantee is that it shifts the risk from the lender to the guarantor.[163]
In their submission to the Older People and the Law inquiry held by the Australian Parliament House Standing Committee on Legal and Constitutional Affairs the CCLC said
mortgage brokers and the person receiving the benefit structure the transaction for the older person to receive a benefit even though they did not want the benefit. There are also products where the children and the parents sign agreements indicating a ‘benefit’ was received. When a benefit is received it is much harder to show that the transaction was unjust.[164]
Karen Cox points out that another variation on the theme is cross-collateralisation – where the parents still have a loan, the whole family become co-borrowers for everything with both houses as collateral for the lot.
What borrowers/co-borrowers often don’t realise in all of these arrangements is that the credit provider will sell first whichever house suits them best. For example, if the kids’ house is in negative equity (which is a problem in parts of Western Sydney at the moment), the bank won’t waste money selling it first if they can recover more from the parents’ house. It is our opinion that the kids’ house should be sold first and the parents given the opportunity to meet the shortfall through some other means before their house is sold, but this is neither the practice nor the law.[165]
Older people in Australia are more likely to face significant consumer credit and financial issues than in the past. There has been a lack of specialised services for older people particularly in regional and remote areas.[166] In recognition of this need new specialist legal services for older people are being established to provide a focus for older people to obtain assistance, such as the Seniors Advocacy, Information and Legal Service (Caxton Legal Centre, Queensland), and Seniors Rights Victoria established in 2008.
In the many areas where older people may face problems with financial matters further research must be undertaken to point the way forward to innovative policy proposals. There needs to be consideration of how credit providers and brokers can be regulated and encouraged to change practices to ensure disadvantaged older people are not at risk. This is a fundamental step in the development of a socially inclusive society that does not leave significant numbers of older people at financial risk.
[∗] BA LLB (ANU) Dip Crim (Syd), Senior Lecturer, School of Law, La Trobe University, Australia. A previous version of this paper formed part of a report prepared for the Loddon Campaspe Community Legal Centre, ‘Financial & Consumer Credit Issues for Older Consumers in Central Victoria’ April 2008, funding for which was provided from the Consumer Credit Fund on the approval of the Minister for Consumer Affairs, Victoria. We wish to thank Leonie Davis, Matt Andrea and Claudia Pirvu for their assistance in the preparation of the report.
[†] BA LLM PhD (Melb), Senior Lecturer, School of Law, La Trobe University, Australia.
[1] This is not a term of art; we have defined ‘older person’ as a person over 60.
[2] Some commentators note the link between poverty and social exclusion: see, for instance, Kay Cook and Tim Marjoribanks, ‘Low-income Women’s Experiences of Social Citizenship and Social Exclusion’ [2005] 38 Just Policy: A Journal of Australian Social Policy 12-19.
[3] Alun A Preece, ‘The aged, their finances and the law – an Australian survey with international comparisons’ (2002) <http://ssrn.com/abstract=299576> .
[4] ‘People over 55 years have significantly lower labour force participation rates than younger people … overall participation raters are projected to drop from around 63.5 per cent in 2003-04 to 56.3 per cent by 2044-45.’ Australian Government: Productivity Commission, Economic Implications of an Ageing Australia, Research Report (2005) xii.
[5] Ibid 2.
[6] Peter Ryan, ‘Millions brace for bad news on superannuation’ ABC News, 29 July 2008, <http://www.abc.net.au/news/stories/2008/07/29/2317356.htm> at 15 October 2008.
[7] The Federal government has pursued a policy of encouraging investment in superannuation to meet the challenges of an ageing population. It was facilitated through use of tax incentives to encourage private savings, and dates back to the Income Tax Assessment Act 1915 (Cth). In 1992 the Superannuation Guarantee Levy was introduced, with the consequent obligation on employers to contribute 9% for compulsory minimum coverage of employees: Superannuation Guarantee (Administration Act) 1992 (Cth). From 60 years of age, a person can draw benefits after leaving the employer: Superannuation Industry (Supervision) Act 1993 (Cth).
[8] Income levels vary markedly between metropolitan areas, which are more closely linked to the global economy, and non-metropolitan areas, which have been affected by ongoing structural change: B Birrell and E Healy, ‘Baby-boomer Affluence - Myth or Reality?’ [2005] Issue 37, Just Policy: A Journal of Australian Social Policy; 32-40, 36 <http://search.informit.com.au/documentSummary;dn=178354208096656;res=IELHSS> at 20 October 2008.
[9] Productivity Commission, above n 4
, xiii.
[10] Australian Bureau of Statistics Census of Population and Housing Age by Sex for Time Series (2006) Cat No 2068.0.
[11] Australian Government, Australian Institute of Health and Welfare, Older Australians at A Glance, 5, (2002)
<http://www.aihw.gov.au/publications/index.cfm/title/7968> .
[12] Ibid 30.
[13] R Foskey, ‘Ageing in small rural communities’. Paper presented at the 6th Australian Institute of Family Studies Conference, Melbourne, November 1998, 3.
[14] Standing Committee Legal and Constitutional Affairs, Parliament of Australia, Inquiry into Older People and the Law (2007) [1.1].
[15] Australian Government, Australian Institute of Health and Welfare <http://www.aihw.gov.au/mortality/data/life_expectancy.cfm> at 20 October 2008.
[16] Productivity Commission, above n 4
, 24. This has been attributed to rising workforce participation and education rates, but some commentators stress the ‘socio-psychological experiences of childbearing and childrearing’: Lareen Newman, ‘Family size and fertility gaps in Australia: the influence of men’s and women’s experiences of conception, pregnancy, birth and early parenthood’ (Paper prepared for the 12th Biennial Conference of the Australian Population Association: Population and Society: issues, research, policy, Canberra, 15-17 September 2004) <http://www.apa.org.au/upload/2004-2A_Newman.pdf> . However, recent figures indicate a recent increase in Australia’s fertility rate: the estimated total fertility rate for 2007 was at the highest level since the early 1980s, although still below the peak of fertility in 1961: Ralph Lattimore, and Clinton Pobke, Recent Trends in Australian Fertility, Productivity Commission Staff Working Paper, (2008) 7 <http://www.pc.gov.au/__data/assets/pdf_file/0004/82372/01-preliminaries.pdf> .
[17] Productivity Commission, above n 4
.
[18] Interview with David Tennant Director of CARE ACT (Canberra, ACT) 23 July 2007.
[19] Carlos Carcach, Adam Graycar & Glenn Muscat, ‘The Victimisation of Older Australians’ (2001) No 212, Trends and Issues in Crime and Criminal Justice, 2. See also Parliament of Australia, above n 142.
[20] Birrell and Healy, above n 8, 37.
[21] Australian Government, Australian Institute of Health and Welfare, above n 11 , 27.
[22] P Saunders ‘Using Budget Standards to Assess the Well-being of Families’, (Discussion Paper No 93, Social Policy Research Centre, University of New South Wales, Sydney, 1998).
[23] P Saunders, ‘Towards a Credible Poverty Framework: From Income Poverty to Deprivation’ (Discussion Paper No 131, Social Policy Research Centre, University of New South Wales, 2004).
[24] Insolvency and Trustees Service Australia Profile of Debtors 2005
<http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/about+us-%3Epublications-%3Edebtor+profiles?opendocument> at 12 November 2007, 4.
[26] S Murdoch, ‘Recession fears weigh on financial markets’ The Australian, 27 October 2008, reporting that ‘[f]inancial markets are assessing the global outlook amid fears the worldwide recession could be more damaging than expected.’
[27] T Blue, ‘Funds sector hit hard by deposit guarantee’ The Australian, 24 October 2008.
[28] D Harrison, ‘Asset test limits retirees’ Centrelink claims’ WAtoday.com.au, 24 October 2008 <http://www.watoday.com.au/national/asset-test-limits-retirees-centrelink-claims-20081024-58d9.html> citing Hank Jongen [27 October 2008]. See also N Berkovic, ‘Pensions could rise with test of assets’ The Australian, 25 October 2008.
[29] ‘Debt Crisis forces mass super raid’ Sunday Age, 17 June 2007, 1. Generally superannuation is ‘preserved’, and cannot be withdrawn before age 55. However, the preservation rules are subject to exemptions in cases of extreme hardship.
[30] Interview with Warren Rowbottom, Team Leader Financial Counsellors St Luke’s Anglicare (Bendigo, 31 July 2007).
[31] Interview with John Mumford, financial counsellor from the Family Resource Centre, Bass Coast Regional Health, (Telephone interview, 14 August 2007).
[32] Sue Hendy, COTA Submission to Consumer Credit Review Victoria July 2005 6
<www.consumer.vic.gov.au/.../Lookup/CAV_Credit_Review_Submissions/$file/18CouncilOntheAgeingVictoria.doc> at 1 November 2007.
[33] C Tilse, et al, ‘Managing older people’s assets: Does rurality make a difference?’ (2006) 16 Rural Society, 169, 172.
[34] S Schagen, ‘The Evaluation of NatWest Face 2 Face With Finance’, National Foundation for Eductional Research, 1997.
[35] C Tilse, et al, ‘Older people’s assets: a contested site’ (2005) 24 Supplement Australasian Journal on Ageing S51, 51.
[36] ANZ Report on Financial Exclusion (2004)
<www.anz.com/aus/aboutanz/community/programs/pdf/FinancialExclusion-FinalReport.pdf> at 23 January 2007, 125
[37] A C Worthington, ‘Predicting Financial Literacy in Australia’ (2006) 15(1) Financial Services Review 59, 61.
[38] Tilse, et al, above n 33 , 51.
[39] Ibid.
[40] Tilse, et al, above n 35 , 53.
[41] Redcliffe Asset Management Community Research Project, Final Report to the Queensland Department of Communities, April 2007.
[42] Supriya Singh, et al, ‘Literature Review on Personal Credit and Debt in Australia’, (2005) RMIT University, 29.
[43] Interview with Glenda Holmes, financial counsellor, St Luke’s Anglicare Kyneton (Telephone interview, 31 July 2007).
[44] Interview with Angela Williams Consumer Affairs Victoria (Bendigo, 14 August 2007).
[45] Email from Geraldine Joyce, Financial Industries Complaints Service, to author 11 January 2007.
[46] This term is used to connote ‘the illegal or improper use of a person’s finances or property by another person with whom they have a relationship implying trust.’ This definition of elder abuse was endorsed by all Australian states and territories through the Healthy Ageing Taskforce on 8 December 2000. For details, visit the Elder Abuse Prevention Unit website on <http://www.eapu.com.au/> .
[47] Tilse, et al, above n 35 , 55.
[48] Elder Abuse Prevention Unit, <http://www.eapu.com.au> at 11 December 2007.
[49] D Setterlung, et al, ‘Financial elder abuse in families: the potential of routine activities theory’ (2007) 27 Ageing & Society 599-614, 601
[50] Ibid 604.
[51] J Schacter, ‘Enforcement and education impact Consumer fraud’ (1996) Credit World 30, 32.
[52] NSW Office of Fair Trading, The Seniors Guide (2006) <www.fairtrading.nsw.gov.au> at 20 December 2006.
[53] A Graycar, & M Jones, ‘Older People and Consumer Fraud’ Australian Institute of Criminology (Paper presented at the 4th National Outlook Symposium on Crime in Australia New Crime or New Responses, Canberra, 21-22 June 2001), 5.
[54] D Davis, ‘Protecting Elderly Victims of Economic Crime’ (2007) Law Institute Journal 47.
[56] R Titus, ‘The Victimology of Fraud’ (Paper presented at the Restoration for Victims of Crime Conference convened by the Australian Institute of Criminology in conjunction with Victims Referral and Assistance Service and held in Melbourne, September 1999), 6.
[57] Ibid.
[58] Social isolation is a considerable problem. A recent Australian Bureau of Statistics report shows that people over the age of 65 years with moderate and severe disabilities spend 85% of their waking time alone: M Hillier, Brotherhood of St Laurence Report Rebuilding connections ‘Creating opportunities for socially isolated older Australians’ 2007, vi.
[60] Interview with Sergeant Douglas Turner, Bendigo Police Station (Bendigo, 24 July 2007).
[61] Tilse, et al, above n 35 51.
[62] Ibid 54.
[63] House Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Older People and the Law (2007), Submission 59 of the Consumer Credit Legal Centre (NSW) 70. This Report contains details of situations where abuse may arise and also recommendations relating to education campaigns about powers of attorney, suggestions for a national approach to the issue and ideas on regulation.
[65] Tilse, et al, above n 35 , 54.
[66] Ibid.
[67] Interview with Sergeant Turner, above n 60 .
[68] E Helmes and M Cuevas, ‘Perceptions of elder abuse among Australian older adults and general practitioners’ (2007) 26(3) Australasian Journal on Ageing 120,123.
[69] For example the Instruments Act 1958 (Vic), Part XI-XII
[70] Interview with Sergeant Turner, above n 60 .
[71] Setterland, et al, above n 49 , 612.
[72] Ibid.
[73] ‘Advance planning for the advancing years’, About the House, June 2008 <http://www.aph.gov.au/house/news/magazine/ATH33_Old.pdf> at 27 October 2008. See Older people and the law, above n 63 , recommendation 16.
[75] Submission 78 by the Law Institute of Victoria to the Older people and the law report, above n 63 .
[77] Setterland, et al, above n 49 , 612.
[78] <http://www.communitylaw.org.au/loddoncampaspe/> .
[79] Beginning in the 1990s, in the USA, a number of states and local communities developed projects designed to train bank employees to recognize and report unusual banking activity by elderly customers that might signal elder abuse.
[80] C W Hare, ‘Issues in Consumer Credit Reform’, cited in A J Duggan and L W Darvall (eds), Consumer Protection Law and Theory (1980) 105.
[81] The deregulation of the Australian financial system in the 1980s gave foreign banks access to the Australian markets. This resulted in a less restrictive credit market as local banks fought to retain market shares, with the ‘unintended consequence’ that ‘levels of personal and business debt doubled as a proportion of GDP in the 1980s.’ M Steketee, ‘Safe to bank on a nasty surprise’ The Australian, October 22, 2008, 7. See also G La Cava, and J Simon, ‘Household debt and financial constraints in Australia’ (2005) 38 The Australian Economic Review 40, 42.
[82] Consumer Affairs Victoria, ‘The Report of the Consumer Credit Review’ (2006), 36.
[83] Consumer Credit Review, above n 82 , 33.
[84] Singh, et al, above n 42 , 11.
[85] La Cava and Simon, above n 81 , 40.
[86] Credit in Australia has been subjected to a number of reviews; the regulation of uniform hire purchase agreements as a result of agreement between State and Federal governments occurred between 1959 and 1961. Subsequently, in 1966 the newly established Standing Committee of State and Commonwealth Attorneys-General referred the subject of consumer credit and money lending to the Adelaide Law School and a Committee, chaired by Professor Arthur Rogerson was formed. It presented its report in February 1969 recommending the enactment of national laws to cover consumer transactions. However, the goal of uniform consumer credit laws was not achieved until the passage of the Consumer Credit Code, facilitated by the Australian Uniform Credit Laws Agreement 1993 and the adoption of uniform credit laws in each state, based on template legislation passed in Queensland Parliament.
[87] La Cava and Simon, above n 81 , 46.
[88] Ibid. Reported cash flow problems tend to fall as the household head gets older, and that among households with debt the youngest households have the highest debt: ibid 47.
[89] La Cava and Simon, above n 81 , 48.
[90] The uniform Consumer Credit Code defines a continuing credit contract at s 5. It has two characteristics: multiple advances of credit are contemplated under the agreement, and the amount of available credit increases as the amount of credit is reduced.
[91] Singh, et al, above n 42 , 12.
[92] ‘Credit Card Troubles Creep Up on Retirees’, Sunday Age (Melbourne), 31 December 2006, 7.
[93] P Drentea and P J Lavrakas, ‘Over the limit: the association among health, race and debt’ Social Science and Medicine (2000) 50, 517–529, cited in J J Xiao, B Sorhaindo and E T Garman, ‘Financial behaviours of consumers in credit counselling’ (2006) 30 International Journal of Consumer Studies, 108 – 121, 109.
[94] D Loonin, and E Renuart, ‘Symposium: the middle class crunch: The life and debt cycle: ‘The growing debt burdens of older consumers and related policy recommendations’’ (2007) 44 Harvard Journal of Legislation 167, 168.
[95] ‘Credit Card Troubles Creep Up on Retirees’ above n 92 , 7.
[96] Jan Pentland, ‘The Changing Landscape of Financial Counselling’ (Paper presented to the Financial & Consumer Rights Council Conference, Canberra, October 2004) 20.
[97] Heather Mcghee, and Tamara Draut, Retiring in the Red: The Growth of Debt Among Older Americans 3 (2005) Demos - A Network for Ideas and Action, <http://www.demos.org/pub101.cfm> at 13 August 2007.
[98] J de Silva, ‘‘Tis the season to find yourself in a sea of bills’, The Age (Melbourne), 10 December 2006.
[99] Interview with Carolyn Bond, Chief Executive Officer, Consumer Law Action Centre (18 July 2007).
[100] Ibid.
[101] Interview with John Mumford, above n 31 .
[102] Interview with Karen Cox, Principal Solicitor Consumer Credit Legal Centre (NSW) (19 November 2007).
[103] The objectives of the Consumer Credit Code, as stated in the Explanatory Memorandum of the Queensland Act, are as follows:
To provide laws which apply equally to all forms of consumer lending and to all credit providers, and which are uniform in all jurisdictions in Australia.
The legislation is based on the principle of truth-in-lending that will allow borrowers to make informed choices when purchasing credit.
The Code applies rules that regulate the credit provider’s conduct throughout the life of the loan, but without restricting product flexibility and consumer choice.
The policy of the legislation is to rely generally on competitive forces to provide price restraint but to provide significant redress mechanisms for borrowers in the event that credit providers fail to comply with the legislation.
The Credit Code is designed to apply in a deregulated credit market and provide standards for the provision of credit that will not be overtaken by changes in the financial marketplace.
[104] Interview with Karen Cox, above n 102 .
[105] David Niven, and Tim Gough, ‘The operation of the Uniform Consumer Credit Code’ (2004) Consumer Credit Legal Service 24
<http://www.consumeraction.org.au/downloads/DL60.pdf> at 22 October 2008, citing Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413, and Esanda Finance Corporation Ltd v Murphy (1989) ASC 55-703.
[106] Niven and Gough, ibid.
[107] Section 28A Fair Trading Act 1992 (ACT) states:
28A Credit card contracts and increases in credit card limits
(1) A credit provider must not enter into a continuing credit contract for a credit card with a debtor unless the credit provider has carried out a satisfactory assessment process.
(2) A credit provider must not increase the amount of credit available under a continuing credit contract for a credit card unless—
(a) the debtor has requested the increase in writing, or the credit provider has offered the debtor the increase and the debtor has accepted the offer in writing; and
(b) the credit provider has carried out a satisfactory assessment process.
(3) For this section, a satisfactory assessment process, in relation to a debtor, is an assessment of the debtor’s financial situation sufficient to satisfy a diligent and prudent credit provider that the debtor has a reasonable ability to repay the amount of credit provided or to be provided.
(4) Without limiting subsection (3), an assessment process is a satisfactory assessment process only if the credit provider—
(a) asks the debtor for a statement of the debtor’s financial situation, including—
(i) income; and
(ii) all credit accounts and applicable limits and balances; and
(iii) repayment commitments; and
(b) takes the statement into account in making the assessment.
[108] Interview with Dion Gooderham, Head of Legal Services (Bendigo Bank, 28 August 2007).
[109] Interview with Karen Cox, above n 102 .
[110] K Engel, and P A McCoy ‘A Tale of Three Markets: The Law and Economics of Predatory Lending’ (2002) 80 Texas Law Review 1255, 1584.
[111] Loonin and Renuart, above n 94 , 180.
[112] Information provided to Leonie Davis by Xenium, City Finance, Cash Converters, G2 Finance Bendigo Bank will lend on the basis of an aged pension providing the person applying has adequate income to support the new debt together with any debts that they may already have. (Interview with Sean Goggin (Bendigo Bank, 2 September 2007). Note that credit providers Cash Doctors, Easy Loans said they would not lend to pensioners.
[113] O Valins, ‘When Debt becomes a Problem,’ (2004) Ministry of Social Development New Zealand.
[114] Interview with David Tennant, above n 18 .
[115] Email from John Mumford to Frances Gibson, 15 November 2007.
[116] <http://www.centrelink.gov.au/Internet/internet.nsf/payments/ pension_loans.htm> .
[117] Loonin, above n 94 , 171.
[118] Putnam Investments ‘Retirement Only a Breather’
<https://content.mercerhrs.com/shared/pdf/press_working_retired.pdf> at 2 September 2007.
[119] Interview with Karen Cox, above n 102 .
[120] S Hermanson, ‘The Subprime Market: Wealth Building or Wealth Stripping for Older Person’ (2007)
<http://www.aarp.org/research/frauds-scams/predatory/m_6_mortgage.html> at 20 August 2007.
[121] ASIC Equity release <http://www.fido.asic.gov.au/fido/fido.nsf/byheadline/Equity+release?openDocument> at 20 August 2007.
[122] ‘SEQUAL Trowbridge Deloitte Research Report June 2007‘, (Senior Australians Equity Release Association of Lenders, 2007)
<http://www.sequal.com.au/content/view/53/> at 31 October 2007.
[123] Ibid.
[124] C Wolthuizen, ‘Putting it into Reverse’ (2005) Consuming Interest 12, 13.
[125] Ibid 13.
[126] Interview with David Tennant, above n 18 .
[127] Ibid.
[128] Wolthuizen, above n 124 .
[129] Australian Securities and Investment Commission, ‘All we have is this house’, Report 109 (2007) 7.
[130] Interview with John Mumford, above n 31 .
[131] Hermanson, above n 120 at 2.
[132] Interview Carolyn Bond, above n 99 .
[133] Kelly Kim Sung et al, Experiences of Older Refinance Mortgage Loam Borrowers: Broker and Lender Originated Loans, (2003), AARP Public Policy Institute:
<http://www.aarp.org/research/credit-debt/mortgages/experiences_of_older_refinance_mortgage_loan_borro.html> at 1 November 2007.
[134] Richard Baker, ‘Age Retirees vulnerable to reverse mortgage push’, The Age (Melbourne), 6 October 2007.
[135] Interview with Carolyn Bond, above n 99 .
[136] Hermanson, above, n 120 at 2.
[137] <http://www.choice.com.au> .
[138] Choice Reverse Mortgage Shadow Shop
<http://www.choice.com.au/viewArticle.aspx?id=105198 & catId=100296 & tid=100008> at 31 October 2007.
[139] A consultation package is available at
<http://www.consumer.gov.au/html/download/Exposure%20Bill%20package_Nov07.pdf> at 27 October 2008. Submissions on the Bill closed on 15 February 2008, however there are a number of contentious aspects of the Bill, and the timelines for passage of the Act are not clear.
[140] Wednesday, 28 November 2007 Media Release Linda Burney MP (NSW) ‘Minister seeks public comment on national finance broking bill’.
[141] Rich and Dellar, above n 144
[142] Hermanson, above n 120 , 3.
[143] Loonin, above n 111 , 33.
[144] Nicole Rich and Kieran Dell, SEQUAL, ‘Reverse Mortgages and Other Equity Release Products Financial Freedom or Abuse’, (Paper delivered at 2007 Law Institute of Victoria Elder Law Conference, 25 May 2007).
[145] SEQUAL Code of Conduct <http://www.sequal.com.au/content/view/21/38/> at 31 October 2007.
SEQUAL Code of Conduct.
Each Member of SEQUAL agrees its equity release product(s) will adhere to, and be measured against the following Code of Conduct in dealing with Senior Australians their families and advisers. As a minimum, Members of SEQUAL shall:
Treat all Borrowers with respect and dignity
Participate in an ASIC approved External Dispute Resolution Scheme
Ensure that all products carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the Borrower(s) will never owe more than the net realisable value of their property, provided the terms and conditions of the loan have been met
Strongly encourage Borrower(s) to discuss the transaction with family members and to seek independent financial advice from a qualified financial adviser
Strongly encourage Borrower(s) to discuss the transaction with Centrelink to ensure they fully understand the impact, if any, on their Centrelink entitlements
Ensure that the Borrower(s) obtains independent legal advice performed by the solicitor of their choice. Prior to the completion of the transaction, the Borrower(s) or their solicitor will be provided with full details of the benefits the Borrower(s) will receive, and the obligations they are entering into
Clearly and accurately identify all costs to the Borrower(s) that are associated with the transaction
Not assert or imply to a Borrower(s) that the Borrower(s) is obligated to purchase any other product or service offered by the Member or any other company in order to enter into an equity release product
Provide in writing, a fair and complete package of equity release documents, covering the benefits and obligations of the product. This will include making available to the Borrower(s) and their advisers a tool illustrating the potential effect of future house values, interest rates and the capitalisation of interest on the loan.
Ensure that all loans are written under the Uniform Consumer Credit Code (UCCC), irrespective of the use of proceeds from the loan
All Members will comply with the Privacy Act, Trade Practices Act any other relevant Code or Regulation at law.
[146] <http://www.nicri.org.au/> .
[147] Protection for guarantors in the case of unconscionable conduct by lenders can arise through equity: cases such as Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 and Commercial Bank of Australia v Amadio [1983] HCA 14; (1983) 151 CLR 447 have developed limited principles where the guarantor suffers a disability (which may be age or infirmity) and the lender, knowing of the disability, takes advantage of it. Other doctrines, such as undue influence, do not typically protect the parent unless an ad hoc relationship of influence could be established, and again would not allow the guarantee to be set aside, unless the bank is the one in the position of influence.
[148] As in Commercial Bank of Australia v Amadio [1983] HCA 14; (1983) 151 CLR 447, where the parent guarantors had limited English and relied on their son for financial advice – and the bank knew of this fact and took advantage of it to protect their own loan by obtaining security in the parents’ house.
[149] Unconsionability provisions contained in the Trade Practices Act 1974 (Cth) s 51AB, (which does not apply to financial transactions, because the ASIC Act (below) has undertaken that jurisdiction), the Fair Trading Act 1999 (Vic) ss 7 and 8, and the Australian Securities and Investments Commission Act 2001 (Cth) ss 12CB, 12BB, 12CC, 12CA, 12GF, 12GM contain a range of protective provisions which might assist a guarantor to overturn a guarantee.
[150] J Millbank, and J Lovric, ‘Darling please sign this form’, (2003) 28 (6) Alternative Law Journal 282, 286. Unlike contracts of insurance, which are contracts uberimmae fidae and thus require utmost good faith, guarantees do not require full disclosure of all material facts. A guarantee only requires the creditor to disclose ‘unusual facts’ in certain circumstances.
[151] F Burns, ‘Legally regulating intergenerationally transmitted debt’ (2005) 24 Australasian Journal on Ageing, S46.
[152] The ‘wives’ special equity’ was developed in Yerkey v Jones [1939] HCA 3; (1940) 63 CLR 649 and subsequently affirmed, with some modification, in Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 155 ALR 614. It has been applied to protect parents guaranteeing their children’s debt in State Bank of New South Wales v Layoun [2001] NSWSC 113 but other courts have been unwilling to extend protection: note the judgment of Higgins CJ and Crispin P in Watt v State Bank of New South Wales [2003] ACTCA 7 (Unreported, Supreme Court of the ACT, Court of Appeal, Higgins CJ, Crispin P and Madgwick J, 13 March 2003) [21]–[22]. See E Stone, ‘The Distinctiveness of Garcia’ (2006) 22 Journal of Contract Law.
[153] Watt v State Bank of New South Wales [2003] ACTCA 7 (Unreported, Supreme Court of the ACT, Court of Appeal, Higgins CJ, Crispin P and Madgwick J, 13 March 2003).
[154] F Burns, ‘Undue influence inter vivos and the elderly’ [2002] MelbULawRw 27; (2002) 26 Melbourne University Law Review 499, 533.
[155] Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 155 ALR 614.
[156] [2001] UKHL 44; [2001] 3 WLR 1021.
[158] J Millbank and J Lovric, ‘Relationship Debt and guarantees: best practice v real practice’ (2004) 15 Journal of Banking and finance Law 89.
[159] L J Cummins, ‘Relationship debt and the aged’ (2002) 27 (2) Alternative Law Journal 63, 66.
[160] Interview with David Tennant, above n 18 .
[161] Interview with John Mumford, above n 31
. Where the parent is not a volunteer, or is listed on the loan as a borrower, the Garcia principles do not apply: see, for example, Liu v Adamson [2003] NSWSC 74 (Unreported, Supreme Court of NSW, Master Macready, 21 February 2003).
[162] Email from Karen Cox, 22 November 2007.
[163] Ibid.
[164] House Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Inquiry into Older People and the Law (2007): Submission 59 of the Consumer Credit Legal Centre (NSW)
<http://www.aph.gov.au/house/committee/LACA/olderpeople/subs.htm> at 18 November 2007.
[165] Email from Karen Cox, above n 162 .
[166] Sarah Ellison, et al, The Legal Needs of Older People in NSW (2004), Law and Justice Foundation of NSW, 59.
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