Although new laws effective 1 January 2011 are intended to protect consumers from unfair contract terms, including those governing credit cards, their scope as yet is undefined and potentially limited, warn legal experts.

The new national consumer protection law will impose more severe sanctions against companies, including banks and other financial institutions issuing credit cards, which engage in contractual activities deemed unfair. However, the process required to decide which activities merit that ruling depends upon the application of a fairness test, and that’s what’s got legal experts uncertain.

At issue are practices such as Westpac’s recent decision to begin charging interest on the interest and fees applied to credit card balances. That practice is widely implemented within the financial services industry. But according to Nicole Rich, policy and campaigns director for the Consumer Action Law Centre, raising credit card rates and fees was a “surrogate for raising the interest rate.”

Recently, consumer group Choice studied the practices of 20 banks and financial institutions that issue credit cards. All but three of them (Bendigo Bank, Heritage Building Society, and Teachers Credit Union) charge interest on interest, although not necessarily on fees.

And unless that practice failed the fairness test, it would not be banned within the credit card market.

“The law allows you to challenge unfair contract terms,” said Ms. Rich. “But the law isn’t entirely clear about whether this sort of thing is an unfair term.”

Steven Munchenberg, representing the Australian Bankers Association, said banks had the right to increase rates and fees when necessary.

“[W]hen people put money in the bank they earn interest,” said Mr. Munchenberg, “and all Westpac is saying is that we will take the same kind of approach.”

The fairness of this practice, and that of all credit card fees and charges, will be tested by the new law once it goes into effect.

Source: http://www.smh.com.au/business/new-credit-card-laws-wont-stop-gouging-by-companies-20100323-quat.html